SADC Financial Systems: Structures, Policies and Markets
October 2015
Disclaimer
This report has been prepared from information produced by the SADC central banks and all efforts have been made to ensure the accuracy of the information contained herein. However, the Secretariat of the Committee of Central Bank Governors does not warrant the correctness of, and shall not be held responsible for any errors or omissions contained in the information received.
This report has been prepared by the Secretariat of the Committee of Central Bank Governors with information made available as at 14 October 2015.
Foreword
Early in 1995, the Finance and Investment Sector of the Southern African Development Community (SADC) was created and the co-ordination of this new sector was allocated to South Africa. Within this sector, two independent but interrelated committees were established, namely the Committee of Treasury Officials to attend to fiscal issues, and the Committee of Central Bank Governors to attend to monetary policy issues.
At its inaugural meeting on 24 November 1995, the Committee of Central Bank Governors in SADC (CCBG) identified the need for greater knowledge of the structures and policies of central banks as well as the financial markets of member states as a prerequisite for future co-operation in the area of monetary policy. To this end, a project was launched to establish an information base on central banks in the region. In July 1996, the Ministers of Finance of the twelve member states approved this initiative as an official project of SADC.
A comprehensive questionnaire was developed, based on a similar survey done by the Bank for International Settlements on central banks in Eastern Europe. All central banks in SADC completed this questionnaire in detail.
It is hoped that the information contained in this report will provide a basis for closer co- operation in the area of central banking in the region.
Any comments or enquiries can be directed to:
The Secretariat of the Committee of Central Bank Governors in SADC South African Reserve Bank P.O. Box 427, Pretoria 0001 SOUTH AFRICA Tel. +27 12 313-3928 Fax. +27 12 313-4177 E-Mail: [email protected]
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TABLE OF CONTENTS
Banco Nacional de Angola ...... 1 1. History ...... 1 2. Relationship with government ...... 2 3. Design and conduct of monetary policy ...... 4 4. Structure of the financial markets ...... 5 5. External payment arrangements ...... 8 6. Currency convertibility and exchange control ...... 8 7. The central bank and external debt ...... 10 8. Supervision of financial institutions ...... 11 9. National payment, clearing and settlement system ...... 14 10. Currency in use ...... 16 11. Other activities of the central bank not covered above ...... 17 12. The position of the central bank in SADC ...... 17 13. Publications ...... 17
Bank of Botswana ...... 19 1. History ...... 19 2. Relationship with government ...... 19 3. Structure...... 20 4. Design and conduct of monetary policy ...... 20 5. Structure of the financial markets ...... 21 6. External payment arrangements ...... 23 7. Currency convertibility and exchange control ...... 24 8. The central bank and external debt ...... 25 9. Supervision of financial institutions ...... 26 10. National payment, clearing and settlement system ...... 31 11. Currency in use ...... 34 12. Other activities of the central bank not covered above ...... 34 13. The position of the central bank in SADC ...... 34 14. Publications ...... 35
Banque Centrale du Congo…...…….…………………………………………………..……..37 1. Background ...... 37 2. Relationship with government ...... 38 3. Determination and implementation of monetary policy...... 39 4. Structure of the financial markets ...... 43 5. Supervision of financial institutions ...... 45 6. National payment, clearing and settlement system ...... 46
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Central Bank of Lesotho ...... 49 1. History ...... 49 2. Relationship with government ...... 49 3. Design and conduct of monetary policy ...... 50 4. Structure of the financial markets ...... 52 5. External payment arrangements ...... 53 6. Currency convertibility and exchange control ...... 53 7. The central bank and external debt ...... 54 8. Supervision of financial institutions ...... 55 9. National payment, clearing and settlement system ...... 59 10. Currency in use ...... 61 11. Other activities of central banks not covered above ...... 61 12. The position of the central bank in SADC ...... 61 13. Publications ...... 61
Banque Centrale de Madagascar ...... 63 1. History ...... 63 2. Relationship with government ...... 64 3. Design and conduct of monetary policy ...... 65 4. Structure of the financial markets ...... 66 5. External payment arrangements ...... 70 6. Currency convertibility and exchange control ...... 71 7. The central bank and external debt ...... 72 8. Supervision of financial institutions ...... 72 9. National payment, clearing and settlement system ...... 84 10. Currency in use ...... 89 11. Other activities of central banks not covered above ...... 89 12. The position of the central bank in SADC ...... 89 13. Publications ...... 90
Reserve Bank of Malawi ...... 91 1. History ...... 91 2. Relationship with government ...... 91 3. Structure...... 92 4. Design and conduct of monetary policy ...... 92 5. Structure of the financial markets ...... 93 6. External payment arrangements ...... 98 7. Currency convertibility and exchange control ...... 99 8. The central bank and external debt ...... 99
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9. Supervision of financial institutions ...... 100 10. National payment, clearing and settlement system ...... 104 11. Currency in use ...... 105 12. Other activities of the central bank not covered above...... 106 13. The position of the central bank in SADC ...... 106 14. Publications ...... 106
Bank of Mauritius ...... 107 1. History ...... 107 2. Relationship with government ...... 107 3. Structure...... 108 4. Design and conduct of monetary policy ...... 108 5. Structure of the financial markets ...... 111 6. External payment arrangements ...... 114 7. Currency convertibility and exchange control ...... 115 8. The central bank and external debt ...... 115 9. Supervision of financial institutions ...... 116 10. National payment, clearing and settlement system ...... 134 11. Currency in use ...... 138 12. Other activities of central banks not covered above ...... 138 13. The position of the central bank in SADC ...... 139 14. Publications ...... 139
Banco de Moçambique ...... 141 1. History ...... 141 2. Relationship with government ...... 141 3. Structure...... 142 4. Design and conduct of monetary policy ...... 142 5. Structure of the financial markets ...... 143 6. External payment arrangements ...... 144 7. Currency convertibility and exchange control ...... 146 8. The central bank and external debt ...... 147 9. Supervision of financial institutions ...... 148 10. National payment, clearing and settlement system ...... 151 11. Currency in use ...... 153 12. The position of the central bank in SADC ...... 154 13. Publications ...... 154
Bank of Namibia ...... 155 1. History ...... 155 2. Relationship with government ...... 155
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3. Design and conduct of monetary policy ...... 156 4. Structure of the financial markets ...... 157 5. External payment arrangements ...... 158 6. Currency convertibility and exchange control ...... 159 7. The central bank and external debt ...... 160 8. Supervision of financial institutions ...... 161 9. National payment, clearing and settlement system ...... 164 10. Currency in use ...... 167 11. Other activities of the central bank...... 167 12. The position of the central bank in SADC ...... 167 13. Publications ...... 169
Central Bank of Seychelles 1. History ...... 171 2. Relationship with government ...... 171 3. Structure...... 172 4. Design and conduct of monetary policy ...... 173 5. Structure of the financial markets ...... 173 6. External payment arrangements ...... 174 7. Currency convertibility and exchange control…………………………………….. 175 8. The central bank and external debt ...... 175 9. Supervision of financial institutions ...... 175 10. National payment, clearing and settlement system ...... 184 11. Currency in use ...... 188 12. The position of the central bank in SADC ...... 188 13. Publications ...... 188
South African Reserve Bank ...... 189 1. History ...... 189 2. Relationship with government ...... 189 3. Structure...... 197 4. Design and conduct of monetary policy ...... 197 3. Structure of the money and capital markets ...... 201 6. External payment arrangements ...... 204 7. Currency convertibility and exchange control ...... 204 8. The central bank and external debt ...... 205 9. Supervision of financial institutions ...... 206 10. National payment, clearing and settlement system ...... 216 11. Currency in use ...... 219 12. Other activities of the central bank not covered above...... 219
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13. The position of the central bank in SADC ...... 220 14. Publications ...... 220
Central Bank of Swaziland ...... 223 1. History ...... 223 2. Relationship with government ...... 223 3. Design and conduct of monetary policy ...... 224 4. Structure of the financial markets ...... 225 5. External payment arrangements ...... 226 6. Currency convertibility and exchange control ...... 227 7. The central bank and external debt ...... 227 8. Supervision of financial institutions ...... 227 9. National payment, clearing and settlement system ...... 232 10. Currency in use ...... 234 11. Other activities of the central bank...... 234 12. The position of the central bank in SADC ...... 235 13. Publications ...... 235
Bank of Tanzania ...... 237 1. History ...... 237 2. Relationship with government ...... 237 3. Formulation and implementation of monetary policy ...... 239 4. Structure of the financial markets ...... 243 5. External payment arrangements ...... 246 6. Currency convertibility and exchange control ...... 247 7. Management of the county's debt ...... 248 8. Supervision of financial institutions ...... 249 9. National payment, clearing and settlement system ...... 250 10. Currency in use ...... 254 11. Other activities of the central bank...... 255 12. The position of the central Bank in SADC ...... 255 13. Publications ...... 256
Bank of Zambia ...... 257 1. History ...... 257 2. Relationship with government ...... 257 3. Design and conduct of monetary policy ...... 257 4. Structure of the financial markets ...... 259 5. External payment arrangements ...... 262 6. Currency convertibility and exchange control ...... 263
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7. The central bank and external debt ...... 263 8. Supervision of financial institutions ...... 263 9. National payment, clearing and settlement system ...... 269 10. Currency in use ...... 272 11. Other activities of the central bank not covered above...... 272 12. The position of the central bank in SADC ...... 272 13. Publications ...... 272
Reserve Bank of Zimbabwe ...... 273 1. History ...... 273 2. Relationship with government ...... 273 3. Structure...... 274 4. Design and conduct of monetary policy ...... 274 5. Structure of the financial markets ...... 276 6. External payment arrangements ...... 280 7. Currency convertibility and exchange control ...... 281 8. The central bank and external debt ...... 282 9. Supervision of financial institutions ...... 283 10. National payment, clearing and settlement system ...... 294 11. Currency in use ...... 302 12. The position of the central bank in SADC ...... 302 13. Publications ...... 302
ANNEXURE A: Organisational Structures of Member Central Banks
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Banco Nacional de Angola
Banco Nacional de Angola Avenida 4 de Fevereiro 151 CP nº 1243 Luanda, República de Angola Fax: + 244 222 390579 Tel: + 244 222 339934/336664
1. History
After Angola gained independence in 1975, the banking sector was nationalized and two major Angolan banks, namely Banco de Angola and Banco Commercial de Angola, changed their names to Banco Nacional de Angola (BNA) and Banco Popular de Angola (BPA) respectively. The BNA, according to the Organic Law 69/76, inherited the responsibilities of a central bank, bank of issue and commercial bank, as well as of being the only legal holder of foreign currency and responsible for all foreign transactions. In 1988, the government introduced a programme to transform the socialist centralized economy into a market-oriented economy. These changes also required the transformation of the banking sector, including the restriction of the BNA's role to being solely responsible for monetary policy and acting as issuing bank, banker of the Government and reserve bank. This was achieved by promulgating the new Organic Law 4/91, of 20 April, which transformed the BNA into a central bank.
The opening of the economy for a liberal system of market, had induced to the necessity of deep alterations in the functional philosophy of the BNA, on the other hand, and of the economic Management of the country, on the other hand, from there elapsing, a redefinition of the functional and executive attributions of the BNA while Central banking, Bank of issue and exchange authority of the country. In the scope of the reorganization of the banking system, the approval in July of 1997, for the Parliament Assembly of the new Organic Law of the National bank of Angola, - Law n° 6/97, of 11 of July, and the exchange Law - Law n° 5/97, of 11 of July, had allowed that some embarrassments of legal origin were exceeded, being the BNA as Central banking, competed of bigger responsibility and autonomy stops with bigger property leading and executing the monetary and exchange politics in the country.
The banking activity in Angola until then conducted by Law n° 5/91, of 20 of April - Law of the Financial Institutions - and, a time that of that date to this part, the Angolan financial system knew a gradual associated structural transformation to the sprouting of new institutions, meeting therefore out of time, advised to the reform of its legal picture in combination with the political and economical alterations in course. It is thus that in 1999, a new Law of the Financial Institutions
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is promulgating - Law n° 1/99, of 23 of April - that regulates the process of establishment, the exercise of the activity, the supervision and the sanitation of the financial institutions and the financial societies. Law 1/99 attributes to central banking in the chapter of the authorization of constitution of the related institutions and proceeds to the reclassification from the same ones.
Dated on 30 September 2008 financial systems activities were segregated in banking and non-banking institutions. Law 12/05, established the legal framework for non-banking institutions, under regulation and supervision by Capital Market Commission (CMC - Comissão de Mercados de Capitais). Law 13/05, which revoked Law 01/99 dated on 20 of April, established the new framework for banking institutions, under regulation and supervision by Banco Nacional de Angola (BNA). Both Law are dated on 30 September.
2. Relationship with government
The independence of the BNA is guaranteed by the Organic Law (4/91), reviewed by the Law 06/97 of July, which established it in the form of a public company owned by the government with administrative and financial autonomy and independence, and states that the BNA is the monetary and foreign exchange authority of the Republic of Angola. However, it states that in realisation of its objectives, the BNA shall respect the economic policy defined by the government; in practice there is co-ordination between the central bank, Ministry of Planning and the Ministry of Finance for the determination of monetary and foreign exchange policies.
The President of the Republic appoints the Governor. The Deputy Governor is also appointed by the President of the Republic under the Governor’s proposal, for a period of five years, in terms of section 1, Act 51 of the Law 6/97. The BNA Board comprises the Governor, the Deputy Governor and three to five General Directors. The Governor and the Deputy Governor are not members of the Cabinet, but they participate in its meetings. The Cabinet on recommendation from the Governor, for a five-year period, appoints General Directors on the Board. They can only be dismissed for a serious reason.
The BNA has the Audit Council and the Council of Consultants. The Audit Council comprises of three members, two appointed by the Ministry of Finance and one appointed by BNA staff, for a period of three years. The Council of Consultants is comprised of the Deputy Governor, all ex-Governors, the Audit Council chairperson and four executives with proven banking, financial, planning and economic experience.
The BNA has its own budget and decides on its own finances as approved by the Board.
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According Law 06/97, BNA is responsible for the formulation and execution of monetary and foreign exchange policies. Such policies are made through the annual financial programming and a quarterly re-programming, approved by the Banks Board, in line with the government’s economic policy.
The Banks main functions are to: - Promote and maintain monetary and financial stability; - act as banker of government; - issue of banknotes and coin; - ensure an efficient payment system; - advise the government on monetary, financial and foreign exchange matters; - act as an intermediary on international monetary government relationships; - act as lender of last resort; - manage international country reserves; and - ensure a sound financial system.
The BNA administers the Treasury account (collects tax revenue and effects payments on behalf of government). The Bank advises the Government on formulating the budget in line with the annual financial programme to guarantee co-ordination between the fiscal deficit and central bank credit and international reserves management. The central bank also participates in international negotiations dealing with loan contracting and consequently with debt-servicing arrangements.
The BNA also acts as the alternate Governor at financial institutions, namely the International Monetary Fund, the World Bank group and the African Development Bank.
The BNA must grant credit to the government up to the amount of the government deficit as approved by the Parliament. In this case, the Treasury Department of the Ministry of Finance issues Treasury bills for the amount required to be financed and remits them to the BNA.
According to Law 06/97, the BNA is allowed to extend credit to the government’s current account, up to an amount not exceeding 10 per cent of the governments ordinary revenue collected in the previous year. The credit has to be settled during the same fiscal year.
The Bank is state-owned and the Government of Angola is the sole shareholder of the National Bank of Angola. The Organic Law 6/97 states that at least 60 per cent of the BNA s net revenues should go to the government. In terms of development financing, the implementation of financial activities requires, according to the Banks Law 1/99 dated 23 April, legal authorization provided by the BNA on a case-by-case basis. However, for financial institutions with over 20 per cent of non-resident owned equity, such approval is a competence of the Ministry of Finance with the prior approval of the central bank. Law 13/05 dated 30
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September which revoked Law 01/99 dated on 20 of April, attributed competence of Council of Minister for authorization for financial institutions with over 20 per cent of non-resident owned equity.
3. Design and conduct of monetary policy
3.1 Main objectives of monetary policy
The main objectives of monetary policy in Angola, consistent with the goal of the government’s economic policy, are to achieve stable national currency unit and price stability.
3.2 Instruments of monetary policy
The BNA utilises direct as well as indirect monetary instruments. Since 1992 the BNA has used mostly direct instruments, such as credit controls, interest rate ceilings, as direct and indirect instruments such as reserve requirements and a rediscount rate. In the scope of monetary liberalisation, interest rates have been liberalised and the central bank started the issuance of central bank bills (TBC), in June 1999. Its introduction widened the set of instruments for monetary intervention available to the central bank and allowed a gradual reliance in direct instruments of monetary policy.
The main instruments of monetary policy are: - Reserve requirements. - Central Bank Bills (TBC) issues for liquidity regulation; - Foreign currency selling for liquidity regulation; - Rediscount rate, which is periodically adjusted in line with inflation developments; and - Open market-type operations, not used actually due the context of Central Bank Bills issuing.
3.3 Types of refinancing as well as collateral used
As lender of last resort, according to the Organic Law 6/97, the BNA may extend credit facilities for no more than three months to financial institutions to cover liquidity shortage problems. Collateral requirements for these loans are the following: - Treasury bills or Bonds; - Central Bank Bills; - Assets that the bank is authorised to buy, sell or transfer; - Other credit bills issued and guaranteed by the State - public issue; and - Invoice vouchers, "warrant" and other bills of the same kind.
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3.4 The money supply aggregate that plays the main role in monetary policy
The M2 aggregate is the most important of the money supply aggregates and its control plays a major role in monetary policy, and is a control variable in monetary programming.
Base Money is the operational aggregate is the variable for control money supply in monetary programming.
3.5 Reserve requirements on financial institutions
All banking institutions maintain deposits in the central bank, in the form of reserve requirements. Reserve requirements are extended to demand deposits in local and foreign currency in the banking institutions operating in Angola’s financial system. The present requirement is 15 per cent of the weekly average balance of demand deposits in local and foreign currency collected in domestic currency. Banks may maintain up to 7,5 per cent of reserve requirements in Central Bank Bills (TBC’s) or Treasure Bills with maturity up 63 days.
By Act/08/2009 dated 21 May reserve requirements is 30 per cent of weekly average balance of demand deposits in local and foreign currency collected in domestic and foreign currencies. Banks may maintain up to 10 per cent of reserve requirements in Treasury Securities (Treasury Bonds or Bills) or Central Bank Bills (TBC), also both in domestic or foreign currency.
The above instruction was amended by the Act/03/2010 dated 04 June, which states that reserve requirements is 25 per cent of weekly average balance of domestic currency of demand deposits, term deposits, other deposits, sale transactions in own bonds and repurchase, sale transactions in bonds of third parties and repurchase, bonds and securities issued or endorsed obligations for transactions pending clearance and obligations to provide service tax collection. Moreover, the foreign currency reserve requirement is 15 per cent of the same nature of deposits used for the reserve requirements of domestic currency.
4. Structure of the financial markets
4.1 Organization of the money and capital markets
Money market Angola’s money market is emerging, in June 1999; central bank bills (TBC) auctions were introduced by the central bank. They are issued periodically by the central bank to absorb excess liquidity in local currency in the domestic banking system. So far, this instrument works only in the primary market. TBC bills range in maturity from 14 days up to 364 days, and the interest rate is fixed by central bank and periodically adjusted or determinated by auction.
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In July 2003 the issue of Treasury bills with range in maturity from 28 to 364 days started to be issued in money market.
Capital market Created a Commission of the Capital market (CMC) by the Council of Ministries under the decree nº 9/05 on 18th March 2005 published at the Daily Republic paper. The Commission of the capital market is conducted by Law 12/05 dated 30 September, Law of Movable Values, Financial Institutions, Organic Status, as well as for its Internal Regulation.
The stock market is expected to start in a near future.
4.2 Instruments used in both these markets
There is only a short-term money market instrument - the central bank TBC bills. Actually, there are short, medium and long term instruments used in monetary market. Treasury bills and central bank bills as short term and Treasury Bonds as medium and long term. Act 51/03 and 52/03 establish the legal framework for Treasury Bonds and Treasury Bills issuance, based on Law 16/02, dated 5 December, which establish the general framework for Government debt. A set of additional rules the operational framework for money market transactions.
4.3 Legal frameworks existing for the money and capital markets
The following acts deal directly with the financial system: - Central Bank Organic Law 06/97 provides autonomy for the BNA to issue and negotiate its own bills or other institutions’ bills; - Financial Institutions Law 13/05 dated 30 September, defines the areas in which banking institutions and exchange agencies can operate; and - Law 13/05 dated 30 September establish the areas in which non-banking institutions can operate; and - Central Bank Legislation: Notice 05/2004, dated 24 September defines the framework for the issuance of central bank TBC bills.
4.4 Types of financial intermediaries operating in these markets
At the moment there are 22 banks in Angola all of them are Universal banks as follows: - BPC, BCI, BPD, BDA which are state owned banks; and - BCTA, BFA, VTB, BPA, BESA, BANC, BNI, BIC, BCA, BMA, BRK, FNB, BQC, BMF, BAI, SBA, BSOL, BCH.
All the banks are fully licensed, but some of them are more focused to some activities e.g. micro-credit and investment bank, but all are universal banks.
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Development banks: - BDA; and - BPD.
Micro-credit banks: - BSOL; - BMF; and - BPC.
Offices representing foreign banks: Tentative offices of BNP, Equator Bank, Bank of Brazil, Firstrand Bank Limited, Ecobank, Standard Chartered Bank, Bank of India and Nedbank.
Exchange Bureaux
- Forty (40) Exchange Bureaux authorized as follow: MONETA, LDA, NEV CÂMBIOS, LDA, NOVA CÂMBIOS, SARL, EXPRESSO, LDA, UNIVERSAL, SARL, HUÍLA CÂMBIOS, LDA, ENOQUE & IRMÃO, LDA, SOFICHANGE, LDA, TRANSGLOBAL, SARL, ALMAC CÂMBIOS, LDA, SPOTCÂMBIOS, LDA, COTANGOLA, LDA, MERE- HALIMA, LDA, RIBEIRO DE OLIVEIRA, LDA, CAZUNDO, LDA, BOM CÂMBIOS, LDA, GLOBAL CÂMBIOS, LDA, MULIMBI, LDA, JT&T, LDA, NEVISA, LDA, ROBINSON, LDA, JOBA, LDA TRAVELEX, LDA, FERNANDES, LDA, COSTAMUNDO, MAGNATA, KITADI, LDA, EURODOLAR, LDA, TRIUNFAL, LDA, SANTA HELENA, LDA, BRUNO CHARLES, LDA, CAZUCA, LDA, AMAC, LDA, CASA DE CÂMBIOS DE ANGOLA, LDA, LUANDENSE, LDA, MEGA, LDA, XAMISSO, LUBAMBA, LDA, AND FASTCÂMBIOS, LDA.
- Twenty-two of which are operating: MONETA, LDA, NEV CÂMBIOS, LDA, NOVA CÂMBIOS, SARL, EXPRESSO, LDA, UNIVERSAL, SARL, HUÍLA CÂMBIOS, LDA, TRANSGLOBAL, SARL, ALMAC CÂMBIOS, LDA, SPOTCÂMBIOS, LDA, COTANGOLA, LDA, MERE-HALIMA, LDA, RIBEIRO DE OLIVEIRA, LDA, BOM CÂMBIOS, LDA, GLOBAL CÂMBIOS, LDA, MULIMBI, LDA, JT&T, LDA, ROBINSON, LDA, JOBA, LDA, TRAVELEX, LDA, FERNANDES, LDA, EURODOLAR, LDA, TRIUNFAL, LDA AND- BRUNO CHARLES, LDA.
- According to the BNA regulations about the banking cards under decree nº01/07 of 21 March, It has been introduced the Credit Card (Visa), which is now operating and is providing efficient and convenient payment solutions adapted to customers.
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5. External payment arrangements
5.1 Determination of the exchange rate policy
The BNA is responsible for the formulation and execution of foreign exchange policy in Angola. Since 21 May 1999, Angola has been using a market-determined exchange rate.
5.2 The present exchange rate system
At present, Angola is using a free-floating exchange rate system.
5.3 Organising the exchange market
The Banco Nacional de Angola is the sole state authority for administering exchange control in Angola. Banks and foreign exchange dealers, licensed by BNA, are authorised to deal among themselves and with their customers at freely negotiated rates, namely for import/export proceeds and invisibles.
The Banco Nacional de Angola intervenes from time to time to promote orderly conditions in the foreign exchange market. The participants in the inter-bank foreign exchange market are the central bank and the banks. BNA publishes daily a reference rate, for accounting and statistical purposes, computed as a weighted (by quantities), average rate of the rates dealt with during the day, by banks.
Other measures were taken in the foreign exchange domain regarding the maintenance of export proceeds in the Angolan banking system, namely the abolition of part of the specific exchange prerogatives for the mining sector. Various previous restrictions on foreign exchange operations were relaxed; credit in foreign exchange is permitted to exporters, an incentive for exports; imports of goods and services with resources in own funds in foreign exchange are now permitted.
5.4 The central bank's involvement in managing foreign exchange reserves
The BNA acts as manager of the country's gold and other foreign exchange holdings. The BNA also establishes the maximum permissible foreign exchange limits that banks and exchange bureau may hold.
6. Currency convertibility and exchange control
6.1 Current state of currency convertibility
The domestic currency (kwanza - Kz) is not convertible, neither internationally nor regionally.
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6.2 Exchange control on current account transactions
Almost all current account transactions have been liberalised, but capital operations are subject to previous exchange licensing by BNA. All invisible operations above US$500 000,00 are subject to the previous exchange licensing by BNA.
Due the effects of international financial crisis is Angolan economy that requirement changes. Invisibles transactions above US$100 000,00 are subjected to licensing process by Banco National de Angola.
With regard to payments for invisibles, exchange allowances for medical treatment abroad, is provided through restrictions in the terms of the transitory regimen of Section 2 of Article XIV, and limits to the foreign currency for certain chain operations invisible, also for expenditures (business, education, cultural scientific, health and private travel).
Exchange allowances for private travel abroad on business, for education and fellowship are granted, up to US$15 000,00 per person, allowing being 4 times per year, upon the presentation of a passport with entry visa for the country of destination and airline tickets.
Foreign exchange bureau licensed to operate may deal only in banknotes and traveller's checks, being authorised to execute current invisible operations of a private nature (business, education, cultural scientific, health and private travel).
National residents are allowed to travel abroad without any requirements if the amount of foreign currency does not exceed US$15 000,00. The travel agent should present proof of purchase of foreign exchange from a local institution and authorized dealers. Non-residents are permitted to enter the country with any amount in foreign exchange.
All imports and exports of merchandise (goods) have been liberalized and no longer need a license from the Ministry of Commerce.
Exports of arms and ammunition and ethnological collections are prohibited. Special export regimes apply to aircraft, animals and animal products, historical objects and petroleum. Re-exports of goods other than capital goods and personal belongings are also prohibited.
Exporters are required to sell to the BNA (oil companies) and banks a portion of their export receipts destined for compliance with their fiscal obligations and local expenses, respectively, and may retain the remain to cover production costs.
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6.3 Restrictions on capital account transactions
Regarding restrictions applying to inward capital-account transactions, the Foreign Investment Law now called “LEI DE BASES DO INVESTIMENTO PRIVADO” Law nº 11/03 dated 13 May that revoke the Law No 15/94 of 23 September, prohibits investment in some strategic sectors as defense and security. Direct investment in the oil sector is encouraged. With the prior approval of the Ministry of Finance capital may be repatriated upon liquidation. Dividends are annually transferable after approval by BNA. Transfers of personal capital, such as legacies, dowries, savings from wages and salaries, and proceeds from the sale of personal property, are permitted only after assessing the merits of the individual case. All capital transfers are subject to licensing and control.
6.4 Retention rules for foreign exchange earned and owned by residents
Individual residents who are juridical persons may maintain demand and fixed-term foreign exchange accounts with Angolan financial institutions. These accounts earn interest at current interest rates. Cheque books may not be issued for these accounts. The opening of and transactions through these accounts are not subject to prior authorisation from the BNA. These accounts may be credited only through the delivery of foreign exchange currency in cash, traveller’s cheques or foreign payment orders. The accounts may be debited for the issuance of any instrument normally accepted on the international financial market in settlement of bills for imports of goods and current invisible or capital export operations carried out by the depositor. Transfers among accounts are allowed.
7. The Central Bank and external debt
7.1 The role of the central bank in managing the country's external debt
The Banco Nacional de Angola as a central bank accepts the full responsibility for recording the external debt of Angola. Its mission therefore includes the collecting, processing and interpretation of debt statistics. The BNA is also a participant in a centralised group responsible for debt management, debt strategy and debt sustainability analysis chaired by the Minister of Finance.
7.2 The role of Treasury in this respect
The Treasury acts as a representative of the government in loan-contracting negotiations and also acts as unique state authority in choosing the loan's potential ownership. However, in order to maintain inflation at low levels and to exercise better control over liquidity, the Treasury works in close co-operation with the central bank in contracting loans.
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8. Supervision of financial institutions
8.1 Banking institutions
8.1.1 Authority responsible for banking supervision
In Angola, the Banco Nacional de Angola is responsible for all banking institutions supervision through its Banking Supervision Department.
8.1.2 The licensing procedures for establishing a new bank
The licensing procedures for establishing a new bank in Angola consist of the following two steps:
Step 1: Special authorization Special authorization entails the following: - The request for establishing a new bank is submitted to the BNA. Approval for the creation of Angolan banks is given by BNA, on a case-by -case basis, after the assessment of all the procedural conformity with the policy and requirements defined under section I of the Banking Act 13/05 from September 30th 2005. - For the establishment of a new bank with more than 20 per cent of foreign capital invested, approval must be submitted to Cabinet, after BNA agreement. - The framework of the administrative process uses the following criteria in the authorization process: - the objectives of the bank should be in accordance with the country’s monetary and financial policies; - the bank’s management must be competent and have relevant experience; - the bank should be in a position to improve its diversification and servicing quality rendered to the public, as well as to provide adequate protection for deposits held in its accounts; - technical and financial resources must be sufficient for the kind of operations envisaged; - the institutional development outlook should be compatible with the maintenance or organized market competition; - Authorization to establish a financial institution may not be transferred from one institution to another.
Step 2: Constitution of the bank The Organic Law decrees that no financial institution may be granted authorization to commence banking activities without complying with the following conditions: - a technical feasibility study shall be done for the proposed financial institution; - shareholders shall be identified personally and professionally as well as respective number of shares owned by each; and
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- the major shareholders as well as the proposed members of the financial institution's management board shall have the required competence and technical capacity.
8.1.3 Type of licenses that exist
There is only one full banking license in Angola.
8.1.4 Minimum capital requirements for the different types of banks
Updated at the end of each foreseen exercise, Aviso No 4/07 from September 26th 2007. Own currency: equivalent to US$8 million. That amount may be reduced by 50 per cent in a case where the new bank’s head is office established in any province other than the capital.
8.1.5 Regulations governing current activities of banks
- Large credit exposure: The concept of Large Credit Exposure is aimed at credit operations which exceed 10 per cent of bank assets. The sum of major credit risk is limited to three times the value of net bank assets. The BNA regulation "Aviso no. 5/96 of 26 April" governs large credit exposure.
- Capital adequacy: According to the BNA's "Aviso no. 4/07 from 26 September 2007" banking institutions aiming at constituting a commercial operation require banks to have a capital adequacy of a minimum of US$8, 000, 000.00 or equivalent in own currency. If the commercial banks head office is to be out of Luanda, this requirement can be reduced by 50 per cent. The BNA`S Aviso no. 5/99" authorizes the banking institutions to realize credit operations with exporters in foreign currency.
- Reserve requirement ratio. The bank regulation Instructive no. 02/00" of 13 March, defines the requirement regime in which it is established. Institutions subjected to the regime of reserve requirements include all financial institutions operating in the country, which are permitted to collect deposits. The coefficient of reserve requirements is 30 per cent of a weekly average balance of demand deposits in local currency.
- Provision for bad debts: The BNA's "Aviso no. 4/92 of July" decrees the minimum level of provision that may be made by financial institutions to cover bad debts or any other risk inherent in their activities.
- Restricted lending: According to the monetary programming, quarterly ceilings are set on the Net Domestic Assets (NDA) of the banking system. A global ceiling on NDA is derived as a residual between the M2 of the banking system and the NFA of the banking system. The ceilings on NDA by banks are calculated as a residual between the global NDA of the banking system
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and the bank NDA. The bank regulation Instructive 6/00 of 25 July, governs the establishment of NDA ceilings.
a) Interest rates
Interest rates have been negotiated between banks and their clients, since May 1999.
b) Discount operations
The rediscount rate was modified in September 2006 on basis of the decree nº 06/DSP/07 and has reference to the interest rate of the treasury bills with 91days maturity of the visible auction + 5 per cent of the spread.
Deposit insurance: None
8.1.6 Main supervision practices
The two main supervision practices used by the BNA to control banking activities are the following:
Off-site examination The banking industry in Angola has to submit records of the banks’ position for the main accounting aggregates, in own currency (Directive) and in foreign currency (Directive 1/99). Banks are also obliged to submit monthly statistics and quarterly net domestic asset limits. The review of these instruments allows the central bank to determine if the banks have complied with the regulations and prudential directives governing liquidity, credit operations and security assets.
On-site inspections The BNA physically inspects the records of the banks through on-site inspections and external audits. The BNA has special controllers who travel around the country to visit the different banks.
8.1.7 Measures to remedy deficiencies as well as penalties utilised - Comment - Penalties - Partial or total prohibition from undertaking banking activities.
8.2 Non-banking institutions
8.2.1 Responsibility for supervision of non-banking financial - ISS
Insurance supervision authority:
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8.2.2 Categories of financial institutions and their licensing procedures
Law 1/00 and Decree 6/01 of the Reinsurance and Co-insurance, as well as Decree 25/98, of the Pension funds liberalized the insurance activity.
Insurance companies: There are five Insurance companies: are already to operate in the market of insurances, for beyond the ENSA - Angolan Insurance Company a state -owned enterprise, the AAA LDA enterprise, AAA Broker of Insurances and the PERITANA (broker), Global Seguros (GS);
Pension funds: Pension Funds: there is one state-owned a veteran pension fund, which is managed by a private manager a ” Fundo de Pensões SARL”, and AAA Fundo de Pensões LDA. The following Managing Societies of Pension fund: the AAA Pensions, SARL; and the Management of Funds, SARL. Gestão de Fundos (GF) The first one is to manage the 3 Funds of Pensions (FP) and last 2 FP.
9. National payment, clearing and settlement system
9.1 How is the payment, clearing and settlement system organised?
The Angolan Payment System Project (SPA - Framework and Strategy of Implementation) was approved in February 2000, and its action plan is being developed.
Currently two systems of the Angola Payment System are organized and functioning: the Values Clearance Service (SCV) and the Settlement for Major Payments System.
The SCV is aimed at the payment of clearable instruments, namely cheques, banker’s draft (OS), transfer order (OT), credit document (DC), document of participant, document of regularization of difference.
To participate in the SCV, the seven commercial banks are obliged to maintain reserve requirements accounts at the BNA and the National Treasury which also has an account at the National Bank of Angola. The National Treasury is represented by the BNA exclusively for the forwarding and receiving of clearable papers.
The SCV operates through local (only one location where the clearing house is situated), regional (locations where the clearing house is situated and surrounding locations, predefined by the BNA) and inter-linked systems (location previously defined by the BNA, served by the transport shared clearable papers).
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In the local systems and regional systems, the captive maximum deadline for the clearable papers collected in deposits is two working days, counted from the working day immediately after the reception day of the clearable paper. The devolution deadline is the day immediately after the exchange day. In the inter- linked systems the captive maximum deadline for the clearable paper is variable, being fixed accordingly to the frequency of air transport. Four inter-linked systems are installed, for which, coincidentally, a captive maximum deadline of six working days was set.
The netting carried out at the clearing house is settled on the participants accounts maintained at BNA, through credit or debit.
The settlement for Major Payments System, designed specifically for the settlement of buying and selling of central bank securities carried out in the inter- bank market, and for the settlement of the counter-value in domestic currency of the foreign exchange buying and selling effected at the same inter-bank market, is at an early stage. This system has been implemented to avoid transfers that require real time settlement to be built in. Therefore financial settlement in this system is done via crediting and debiting the accounts maintained by commercial banks at BNA, in bulk, in real time.
9.2 What is the role of the central bank in the system?
Currently, besides being the institution where settlements are made, the BNA also operates the SCV and the Settlement for Major Payments System.
The competence of the BNA is organizing, supervising and inspecting the clearing houses, in latu sensu as swaps systems and settlement systems, is foreseen in the BNA`S Organic Law.
9.3 Short description of the processing of payment instructions
Payment instructions are all paper-based. They are physically delivered at the clearinghouse. The processing at the clearinghouse is made through two specific and different kinds of software, one for SCV and one for Settlement for Major Payments System.
9.3.1 Processing in the SCV
A daily clearing session is carried out from Monday to Friday, at 09:00 am.
The clearing routine foresees the direct delivery among participants, in sealed boxes, of the respective clearable papers (on debit, credit, in refund), along with a diskette with an Issuance Summary File and Documents’ Movement File at Clearing. On the basis of the information on the diskettes received from the participants, the BNA, by automatic process, does the netting of each participant in
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the session and sends the results to the relevant sector to be effected on the Reserve Requirements accounts.
The results obtained from the clearing houses installed elsewhere than Luanda are transmitted via satellite (VST), in specific software, on a daily basis until 14:30.
9.3.2 Processing in the Settlement for Major Payments System.
On a daily basis, the system remains open from 12:00 to 16:00 hours to enable banks to deliver the respective information, through diskettes, on the settled operations, on the day, in this system.
A double set of information is required for each operation in the settlement. Both the buyer and seller banks must send the information to BNA, and if there is coverage in the Reserve requirements of the debited banks and, in the case of the buying and selling of bills, if the bills are available in the position of the seller bank, the operation is settled in real time, by a command in the processing system.
9.4 How are non-funded positions settled in the system?
It is foreseen that if there is insufficient provision in the bank’s reserves account for the settlement financial result from the Clearing process, the bank must redeem itself with the BNA by means of a rediscount operation, according to its regulations.
In the System of Settlement for Major Payments System, there is insufficient provision in the bank’s reserves account, the operation is not settled. Banks involved in the operation are formally informed of the fact by the BNA, leaving to the creditor bank the obligation for the interest rates arising from the delay. To settle the transaction, banks must send a new double communication. In the case of payment of interest rates, the settlement of this operation is processed by the same system through the double command.
10. Currency in use
10.1 List of legal tender notes and coins currently issued and in use in the economy
- Currency: Kwanza (Kz) - Notes: - Kz 2000 - Kz 1000 - Kz 500 - Kz 200 - Kz 100 - Kz 50
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- Kz 10 - Kz 5
- Coins: - Kwanza (Kz) - Kz 5 - Kz 2 - Kz 1
- Cents: - Cê 50 - Cê 10
11. Other activities of the Central Bank
There are no other functions.
12. The position of the central bank in SADC
The BNA participates twice per annum in meetings with the other central banks that are members of the Committee of Central Bank Governors in SADC, has a special relationship with the South African Reserve Bank College with regard to training the BNA’s human resources. Moreover, the BNA participates in projects concerning: - Harmonisation of Organic Law - Statistical database - Committee of Payment Systems - Legal and operational structure of central banks - Information technology - Protection services
13. Publications
13.1 Regularly published publications (since 1997)
- Annual report of the Central Bank - Annual Balance of Payments Bulletin - Economic Quarterly Bulletin - Statistical Monthly and Annual Bulletin
13.2 Occasional/special publications published since 1990
Available occasional published at the Central Bank website: www.bna.ao.
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Bank of Botswana
Bank of Botswana Private Bag 154 Khama Crescent Gaborone, Botswana Fax: + 267 371231 Tel: + 267 3606000
1. History
Before independence in 1966, legal tender in the then Bechuanaland Protectorate consisted of Pound Sterling and Union coins issued by the South African Reserve Bank, later replaced by South African Rands. In 1974, Botswana announced its intention to withdraw from the Rand Monetary Area, establish its own Central Bank and introduce its own national currency, the Pula. The Bank of Botswana Act came into force on 1 July 1975, bringing the Central Bank into existence, and on 23 August 1976 the Pula was released for circulation, initially at par with the South African Rand, which was being exchanged and withdrawn. Since 1977, after the transition period had expired, the Bank of Botswana has pursued monetary policy that is independent of that of South Africa.
2. Relationship with Government
The establishment of the Bank of Botswana was not entrenched in Botswana's Constitution but the Bank was created in 1975 by an Act of Parliament. The Bank of Botswana Act can, therefore, be amended or repealed by Parliament. As prescribed in the Bank of Botswana Act, the Bank is a corporate body with perpetual succession and a common seal, capable of suing and being sued in its corporate name.
The State President appoints the Governor and Deputy Governors for a term of office not exceeding five years and are eligible for re-appointment. The Governor can be removed from office on the following grounds: inability to perform the functions of his/her office, gross misconduct, election to Parliament, appointment by any other financial institution, personal insolvency, conviction of an offence for which he/she could have been sentenced to imprisonment without the option of a fine, and suspension from his/her profession by reason of personal misconduct. The Board of the Bank of Botswana comprises the Governor (Chairperson), the Permanent Secretary in the Ministry of Finance and Development Planning (ex officio) and other seven members appointed by the Minister of Finance and Development Planning. The Bank has its own budget that is approved by the Board on the recommendation of the Governor.
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The Bank of Botswana has considerable autonomy in formulating and implementing monetary policy, although certain matters (e.g., major changes in the exchange rate and currency specifications) are reserved for decision by either designated Ministers or the State President. The Bank of Botswana is responsible for formulating and implementing monetary policy. The Bank also plays an advisory role in fiscal policy.
The Bank’s primary objectives are the promotion and maintenance of monetary and financial stability, issuance of currency, ensuring an efficient payment mechanism, acting as banker for the Government, as well as ensuring a sound financial system. The Bank is also the Government’s agent for the administration of the Banking Act (CAP 46:04), which legislates the supervision and regulation of banking activity.
The Bank is not allowed to make direct loans to the Government, but may grant temporary advances to the Government at an agreed rate of interest, which must be repaid within six months from the end of the financial year in which they were granted. Such an advance was made in 2004 to the Debt Participation Capital Funding (DPCF), a company that was set up by the Government to securitise the commercial portion of the Public Debt Service Fund loan book. DPCF’s P800 million loan was guaranteed by the Government, and was paid back within the six months’ period.
The Government of Botswana is the sole shareholder of the Bank of Botswana and the Bank's capital is not transferable. The Bank of Botswana plays no role in the provision of development financing or directed lending.
3. Structure
The Bank’s headquarters are in Gaborone with one branch in Francistown. This branch works mainly as a currency distribution centre in the north of the country and provides banking services to Government revenue collectors and treasury cashiers. The branch also collects cheques for onward transmission to the headquarters and for forwarding to the Clearing House.
4. Design and conduct of monetary policy
4.1 Main objectives of monetary policy
The main objective of Botswana’s monetary policy is to achieve a sustainable, low and predictable inflation that will contribute to macroeconomic stability and attainment of a stable real effective exchange rate (REER) and, in turn, support diversified economic growth.
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4.2 Instruments of monetary policy
To influence inflationary pressures, the Bank uses the Bank Rate to affect other market interest rates and open market operations, which involves purchase and sale of the Bank of Botswana Certificates (BoBCs) to affect the cost and quantity of loanable funds. Reserve requirements are in place but are less binding as an instrument of monetary policy mainly due to the excess liquidity in the market.
4.3 Types of refinancing as well as collateral used
The Bank of Botswana uses the Secured Lending Facility (SLF) and Repurchase Agreements (REPOS) and intra-day liquidity facility (ILF), as a way of bridging overnight liquidity shortages by providing emergency funding to solvent financial institutions and intra-day liquidity. The intra-day liquidity facility was introduce following the implementation of the RTGS in 2006. The BoBCs and Botswana Government bonds are used as collateral for the SLF and ILF. BoBCs have been used for the repurchase operations.
4.4 The money supply aggregate that plays the main role in monetary policy
The Bank does not actively monitor monetary aggregates in formulating monetary policy; instead the Bank monitors the growth in domestic credit and government expenditure as intermediate targets.
4.5 Reserve requirements on financial institutions
Effective February 2006, the required reserve ratio for commercial banks increased from 3.25 percent to 5 percent of daily average of deposits of a given month, excluding foreign currency accounts deposits. The required reserve ratio now also applies to merchant banks. By statute, no interest is payable on these reserves. The liquid asset ratio for both commercial and merchant banks is 10 percent of daily average deposit liabilities, also excluding foreign currency denominated deposits.
5. Structure of the financial markets
5.1 Organisation of the money and capital markets
5.1.1 Capital market: Botswana's capital market is not broad based. There is a small stock market which commenced operation in 1989. At present there are nineteen (19) domestic companies, out of which 17 are on the main board and twelve (12) foreign companies, half of them on the main board, whose shares are quoted and actively traded in the market while there is one (1) company which is not listed and, therefore, undertakes over-the-counter trading, and whose trading is not regulated by the stock exchange. Venture capital listings consist of eight companies, two (2) of which are domestic.
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5.1.2 Bond Market: In March 2003, the Government of Botswana successfully launched its first ever bond issue, comprising three separate bonds with a total value of P2.5 billon and maturities ranging from two to twelve years. This was a major step forward in the development of the financial sector in general and capital markets in particular. The primary objective of the issue was to develop the domestic capital market by increasing the supply of longer-term debt instruments and establishing a risk-free yield curve against which the launch of bonds by other issuers could be benchmarked.
5.1.3 As of July 2007, 29 bonds had been issued in the Botswana market, twenty-five of which are listed on the Botswana Stock exchange (BSE). Three Governments bonds were issued in 2003; the shortest dated government bond matured on June 1, 2005 at a coupon rate of 10.75 percent. Two more government bonds are maturing on March 1, 2008 and another on October 31, 2015. The coupon rates in both cases are 10.25 per cent. All government bonds are listed on the BSE but traded over-the-counter. There are five unlisted corporate bonds, one of which is floating and a commercial paper, with maturities ranging from 2, 5 and 12 years.
5.1.4 Money markets: Among the short-term money market instruments are BoBC’s which are issued at periodic auctions by the Bank of Botswana and are used to absorb excess liquidity in the domestic banking system. The Bank currently issues a 14-day BoBC, a 91-day BoBC and a 364-day BOBC under the multiple price auction format. The auction of the 14-day BoBC is weekly, while the 91-day BoBC is issued monthly. The 364-day BOBC was introduced in March 2006 and is issued once every month. Starting in 2004, the Bank of Botswana withdrew from the BoBC secondary market: It no longer buys back or sells outright in the market after the auction. The main purpose is to encourage secondary market trading among primary counterparties. The Bank has been using repo and reverse repo transactions to manage the domestic liquidity conditions since 1999.
5.2 Instruments used in both these markets
The key short-term money market instrument is the BoBCs while shares and bonds are the only instruments in the capital market.
5.3 Legal frameworks existing for the money and capital markets
The Stock Market Act was passed in 1995 and a Collective Investments Undertakings Act (CIUA) was also passed in 1996. However, subsequent to the establishment of Botswana as an International Financial Service Centre (IFSC) through the Bank of Botswana Amendment Act (1999), the CIUA was reviewed in order to ensure that it incorporates the IFSC participants and was passed in 1999. The regulations for the CIUA (1999) were passed in June 2001.
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5.4 Financial institutions participating in the open market operations
With effect from March 2006, the banking institutions listed below are the only institutions permitted to purchase and hold Bank of Botswana Certificates: - Barclays Bank of Botswana Ltd - Standard Chartered Bank Botswana Ltd - Stanbic Bank Botswana Ltd - First National Bank of Botswana Ltd - Bank of Baroda (Pty) Ltd - Bank Gaborone Ltd - African Banking Corporation (Pty) Ltd
6. External payment arrangements
6.1 Determination of exchange rate policy
The Bank of Botswana calculates and publishes the daily Pula exchange rates, and this is done in accordance with the Bank of Botswana Act (CAP 55:01), Section 21 which states:
"The external value of the Pula is to be calculated in a manner determined by the President on the recommendation of the Minister of Finance and Development Planning, after consultation with the Bank."
6.2 The exchange rate system
The Pula is pegged to a weighted basket of currencies comprising SDR currencies and the South African rand. A crawling band exchange rate mechanism was introduced on May 30, 2005, with the objective of avoiding the need for periodic discrete large adjustment of the exchange rate to maintain real effective exchange rate stability. The rate of crawl of the nominal effective exchange rate is determined on the basis of the Bank’s inflation objective and forecast inflation for trading partner countries; hence, the exchange rate mechanism is forward looking. At the same time the foreign exchange trading margin of Bank of Botswana for foreign exchange transactions was increased from ± 0.125per cent around the central rate to ±0.5 per cent in order to encourage trading on the interbank market.
6.3 Organising the exchange market
Following the abolition of exchange controls from 8 February 1999, the Bank issued revised guidelines for measuring, monitoring and controlling foreign exchange exposure limits for commercial banks.
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6.4 The central bank's involvement in managing foreign exchange reserves
The Bank of Botswana is responsible for investing and managing the foreign exchange reserves of the country.
7. Currency convertibility and exchange control
7.1 Current state of currency convertibility
The Pula is a convertible currency. Domestically, authorised dealers in Botswana are permitted to avail themselves of foreign currency facilities up to any amount. Limits on foreign currency were removed following the abolition of exchange controls.
In terms of the foreign exchange exposure prudential guidelines, the foreign exchange market consists of the Bank of Botswana dealing in four major currencies (US dollars, South African rands, euro and UK pounds) and other minor currencies, with commercial banks. Authorised dealers (banks) are permitted to deal in foreign currency on behalf of customers and for their own account within specified prudential limits for the net open position and for spot against forward limits. Effective from 7 September 1998, commercial banks are allowed to take foreign exchange positions within net prudential limits specified at 15 per cent of unimpaired capital per major dealing currency (USD, ZAR, GBP and EUR), 5 per cent of unimpaired capital to all other currencies and 30 per cent of unimpaired capital for total foreign exchange exposure.
Botswana residents, meanwhile, are permitted to maintain foreign currency deposit accounts on- and offshore, with no limits. In turn, commercial banks are permitted to make foreign currency denominated loans to all categories of customers, subject to prudential limits on large exposures and foreign exchange risk exposure.
Regarding purchases of foreign currency with Pula outside Botswana, residents are allowed to export an unlimited amount in cash (notes and coin) or in any other form subject to completion of declaration forms if the cash is in excess of the equivalent of P10000. Regarding the selling of foreign currency for Pula, there is no limit, provided the foreign exchange is legally earned and transferred, and declared at the port of exit.
7.2 Exchange control restrictions on current account transactions
With the abolition of exchange controls, effective 8 February 1999, Botswana achieved full capital account convertibility. However, there is a requirement for customers to complete Forms A and S to record inward and outward transfer or foreign currency payments where the amount exceeds an equivalent of P10 000. This is done for balance of payments purpose and money laundering checks.
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8. The Central Bank and external debt
8.1 The role of the central bank in managing the country's external debt
The Ministry of Finance and Development Planning is authorised to contract loans on behalf of Government and the Division of Economic Affairs is charged with the responsibility to negotiate with creditors. The Public Debt Service Unit in the Budget Administration Division in the Ministry of Finance and Development Planning is charged with the responsibility to record disbursements, instructing Bank of Botswana to make debt service payments and also to compile debt data classified by creditor and currency for publication in the Annual Statements of Accounts published by the Accountant General’s Department. The Public Debt Service Unit gets information on reimbursements/disbursements from the Creditors in the form of Loans Disbursement Vouchers and confirmation on debt service payments is got from Bank of Botswana. All this information is computerised and reports are printed on a monthly basis mainly for reconciliation purposes.
The Cash Flow Unit in the Budget Administration Division in MFDP records, manages and monitors public, government guaranteed debt using a computerised system designed by the Commonwealth Secretariat called the Commonwealth Secretariat – Debt Recording and Management System (CS-DRMS). The information on disbursements and debt service payments are obtained from Public Debt Service Unit ledgers, while the information regarding government guaranteed debt is obtained from the respective Parastatals or executing agencies. Debt data is recorded on a cash basis and in foreign currency. The daily exchange rates are used for daily transactions, while the mid exchange rates (as at 31 of March are used for the end of fiscal year balances.
Bank of Botswana handles the information on private debt. The private debt data is derived from the annual and quarterly balance of payments surveys. The requirement is for respondents to give information on stocks of debt at the beginning of the reference period, movements during the period as well as stocks at the end of the period. Until 1995, the Bank used CS-DRMS to monitor the private external debt. This was discontinued because most of the loans that were held by direct investment enterprises were either cancelled or converted to equity. However, as the country moves towards embracing IMF’s Special Data Dissemination Standard (SDDS), it will be required that the monitoring of private debt be resumed. The Commonwealth Secretariat, together with Development Finance International and MEFMI, is providing assistance in this respect.
8.2 The role of the Treasury in this respect
The Ministry of Finance and Development Planning is responsible for recording public and publicly guaranteed external debt. In the execution of its responsibilities, the Ministry uses the Commonwealth Secretariat's Debt Recording and Management System CS-DRMS. The Ministry of Finance and Development
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Planning is responsible for contracting external debt and formulating an external debt policy.
9. Supervision of financial institutions
9.1 Banking institutions
9.1.1 Authority responsible for banking supervision
The Banking Supervision Department of the Bank of Botswana is responsible for supervising the activities of all financial institutions licensed under the Banking Act and designated statutory institutions, namely, the Botswana Building Society, Botswana Savings Bank and National Development Bank.
9.1.2 Licensing procedures for establishing a new bank
The licensing procedures for establishing a bank in Botswana are set out in sections 3 to 12 of the Banking Act and Banking Regulations 3 to 6. The licensing requirements are further amplified in the Licensing Policy of the Bank of Botswana. Among the basic criteria to be met are the following: - Local incorporation - Paying of a non-refundable processing fee by the applicant (currently P3 300 or US $533 as at July 31, 2007 Value Added Tax (VAT) inclusive. - Adequate initial capitalisation, (currently P2.5 million and P5 million or equivalent in foreign currency depending on the type of bank) a proposal for back-up capital and a management comprising fit and proper persons, including management depth - Provision of competition to the established banks - Documentation regarding the particulars of the applicant as well as the technical knowledge and experience of management - A comprehensive business plan, including detailed five-year financial projections
Within six months of receipt of an application for a banking licence, the Central Bank may reject it, or grant the applicant a licence to transact banking business in Botswana, subject to payment of a licence fee of P11 000.00, or US $1778 as at July 31, 2007 (inclusive of VAT) and in either case, this shall be done in writing.
An applicant, whose application for a banking licence has been refused, may within six weeks of notice, appeal (current appeal fee is P1 000 or US $162 as at July 31, 2007 plus 10 per cent VAT) to the Minister or pay the fee as prescribed. The Minister shall decide the outcome of the decision within three months of receipt of the appeal from the applicant.
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9.1.3 Types of licences that exist
In terms of the Banking Act, both general licences and limited licences (specialised types of licences) may be granted. General banking licences are granted to institutions that wish to engage in a full range of banking activities including accepting of deposits of any amount, operation of cheque-based current accounts, granting of loans and overdrafts and other facilities. Limited or special licences are granted to institutions that wish to engage in specialised banking activities, such as asset-based financing, merchant/investment banking and discounting of paper
Limited or special licences are granted to institutions that wish to engage in specialised banking activities, such as asset-based financing, merchant/investment banking and discounting of paper. Such institutions would normally be restricted with regard to the minimum deposits they may accept, types of accounts they may operate, etc.
9.1.4 Minimum capital requirements for the different types of banks
The minimum capital requirements for the different classes of banks are currently as follows: - Commercial/Merchant/Investment banks: The greater of P5 000 000 (US$808 000 as at 31 July 2007) or 8 per cent of the risk-weighted assets and other risk-weighted exposures of the bank, in accordance with the Banking Regulations. - Credit institutions/Discount houses: The greater of P2 500 000 (US$404 000 as at 31 July 2007) or 8 per cent of the risk- weighted assets and other risk- weighted exposures of the bank, in accordance with the Banking Regulations. - Merchant/Investment banks: The greater of P5 000 000 (US$808 000 as at 31 July 2007) or 8 per cent of the risk-weighted assets and other risk- weighted exposures of the bank, in accordance with the Banking Regulations.
9.1.5 Regulations governing current activities of banks
Large credit exposure: Large credit exposure to a single borrower or group of related borrowers is defined and regulated under section 17 of the Banking Act. Exposure limits are determined as a prescribed percentage of a bank's unimpaired capital. Such percentages are prescribed under Regulation 9 (1-3) of the Banking Regulations, 1995. Specified lending limits are as follows: - Direct or indirect credit exposures in excess of 10 per cent of a bank's unimpaired capital must be approved by the bank's board of directors - Direct or indirect credit exposures in excess of 30 per cent of a bank's unimpaired capital must be referred to the Bank of Botswana for consideration
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- Lending to bank's directors and their related interest unsecured facilities in excess of 10 percent of the bank’s core capital or secured facilities up to 25 per cent of its unimpaired capital must be approved by the board.
Capital adequacy: Section 13 of the Banking Act, Regulation 7 of the Banking Regulations, and the Capital Adequacy Policy Paper of 1997 govern the current activities regarding capital adequacy.
Liquidity ratio: In terms of Section 16 (1) and (2) of the Banking Act and Section 8 (1) and (2) of the Banking Regulations, banks are required to maintain a proportion of their assets in liquid form, computed on a basis to be fixed from time to time, as a percentage of the deposit liabilities. At present, the liquid asset ratio for both commercial and merchant banks is 10 percent of daily average deposit liabilities, exclusive of foreign currency deposits. Financial institutions are required to report their liquid asset positions in a prescribed format to the Bank of Botswana.
Open foreign exchange position: The Bank of Botswana determines foreign exchange exposure limits for banks authorised to deal in foreign currency. The limits are set at levels that enable banks to conduct their day-to-day international business of providing foreign exchange facilities for their customers. The need to control the open positions of the banks emanates from the fact that by taking positions in foreign currency, banks expose themselves to foreign exchange risk, which has a bearing on capital, earnings and international reserves. It is also not considered prudent to allow banks to engage in undue speculation against the Pula with the portion of international reserves, which should be managed exclusively by the Bank of Botswana. Section 41 of the Bank of Botswana Act, empowers the Bank to determine the maximum amount which any financial institution may hold or maximum indebtedness which it may incur in foreign currency. The maximum net foreign exchange exposure for a bank shall not, at any time, exceed 30 per cent of the bank’s unimpaired capital; and within the total of 30 per cent, the net foreign currency exposure limit shall be 15 per cent of a bank’s unimpaired capital, per major currency (USD, ZAR, GDP, and EUR). For all other currencies, the prescribed limit shall be restricted to not more than 5 per cent of a bank’s unimpaired capital per currency.
Provision for bad debts: Section 14 of the Banking Act requires all financial institutions licensed under the Act to maintain both general and specific provisions against bad and doubtful debts to the satisfaction of the Central Bank. General provisions are maintained at a percentage agreed between banks and the Central Bank against unforeseeable losses on loans and other unidentifiable risks while specific provisions are to be made for advances that have been identified as having performance problems.
Restricted lending: All lending is regulated under Section 17 of the Banking Act and this is discussed under "Large credit exposure" above.
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Deposit insurance: Botswana does not have a deposit insurance scheme in place as yet. However, the Bank of Botswana is currently reviewing such a proposal.
9.1.6 Main supervisory practices
The main supervisory practices used by the Bank are on-site examinations and off- site supervision and regular bilateral and trilateral meetings with each supervised bank and its external auditors. With the adoption of the risk-based approach the frequency of on-site examinations (full scope or targeted) depends on the risk profile of the bank. However, the Bank of Botswana conducts on-site examinations focussing on internal controls at least every two years. The objectives of these examinations are to establish the financial soundness of banks and to ensure banks' compliance with the provisions of the Banking Act and with banking regulations and policies. An on-site examination involves the assessment and analysis of the banks' books and records in order to determine their capital adequacy, asset quality, profitability and liquidity and to evaluate management and internal controls. Off-site monitoring involves the assessment of a bank's performance through the weekly, monthly and quarterly returns. From the monthly returns, some key financial ratios such as capital adequacy ratios, liquidity ratios, etc. are derived. A full financial analysis of the performance of the bank is carried out on a quarterly basis and an overall performance report on all financial institutions produced annually. Banks are required under Section 22 of the Banking Act to appoint, annually, an independent auditor acceptable to the central bank, and to make available to the central bank financial statements within three months of the banks’ financial year-end.
9.1.7 Measures to remedy deficiencies as well as penalties utilised
There are several measures that the Bank of Botswana uses to ensure that deficiencies noted with regard to prudential banking supervision are corrected. Through examination report findings, banks would normally be required to take corrective actions regarding deficiencies noted, such as: - maintaining provisions at the recommended levels; - directive to suspend interest on non-performing advances; - improvement of internal controls and other risk management systems; - injection of further capital; and - withholding of dividend payments.
The Bank of Botswana has powers to impose penalties or even remove management where there is reasonable cause to do so. A bank may be fined for failure to submit returns or for supplying incorrect information as laid down under Section 20(3) of the Banking Act. Specific penalties for offences by principal officers and directors of a bank are laid down under Sections 26 and 32 of the Banking Act, respectively. Further general penalties for any person who contravenes or fails to comply with the provisions of the Banking Act are laid down under Section 52 of the Act.
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As a more serious action, the Bank may assume temporary management of any institution where: - its unimpaired capital does not meet the requirements of Section 13 of the Act; - its business is being conducted in an unlawful or imprudent manner, or it is otherwise in an unsound financial condition; - the continuation of its activities is not in the best interest of its depositors; - it has refused or refuses to permit an on-site examination; or - it has been served with a notice of intention to revoke its licence, pursuant to Section 11 of the Banking Act.
As a final action, and in terms of Section 35 of the Act, a financial institution in distress may be wound up or placed under judicial management. The Central Bank may revoke a banking licence if a bank or its senior management, affiliate or parent bank has been convicted of an offence involving money laundering.
Revocation of licences: The Central Bank may revoke a banking licence if the bank concerned: - does not engage in the business authorised by the licence within twelve months from the granting of the licence; - is found to have ceased banking business; - goes into liquidation or is wound up or otherwise dissolved; - is found to be carrying on banking business in a manner that may be detrimental to depositors or the public at large; - is found to have insufficient assets to cover its liabilities to depositors or the public; - has been convicted of an offence related to the use or laundering of illegal proceeds, or is an affiliate or subsidiary or parent of a bank so convicted; - has supplied false or misleading information in its application for a banking licence; and - has contravened any provisions of the Banking Act.
9.2 Non-banking institutions
9.2.1 Responsibility for supervision of non-banking financial institutions
The supervision of non-banking financial institutions such as building societies, savings banks and other financial parastatals is, primarily, the responsibility of the Ministry of Finance and Development Planning and to a limited extent, the Central Bank. The authorisation of such institutions lies with the Ministry of Finance and Development Planning. Such institutions are constituted under separate Acts of Parliament. However, the Bank of Botswana is empowered by the Banking Act to conduct examinations on the financial condition of such institutions where they
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accept deposits from the public. The Bank of Botswana's supervision over these institutions is that of examination powers only.
From time to time the Bank of Botswana carries out on-site inspections of such institutions and advises the Ministry on the findings of the examinations.
The current thinking is that the central bank should have full supervisory powers over all deposit taking financial institutions while the Ministry of Finance and Development Planning focuses its attention on other institutions falling under the envisaged Capital Market Authority.
9.2.2 Categories of financial institutions and their licensing procedures
Botswana has a relatively small financial system comprising the Central Bank (Bank of Botswana), six commercial banks, one merchant/investment bank and several development finance institutions. The country also has a number of non- bank financial intermediaries, such as insurance companies, pension funds asset management companies, collective investment undertakings, bureaux de change, a micro-finance institution and three stockbroking companies.
The Ministry of Finance and Development Planning is responsible for licensing some of these non-bank institutions, e.g., insurance companies, pension funds and stock broking companies.
9.2.3 Information as requested under 9.1 which is applicable to non-banking institutions
Non-banking financial institutions are currently not required to adhere to the prudential requirements stipulated under the Banking Act. However, the Bank of Botswana advises these institutions to abide by certain prudential requirements under the Banking Act on capital adequacy, provision for bad debts, large credit exposures and liquidity measurements. As they are formed under different statutes, the regulations governing these institutions’ activities are separate from those governing licensed institutions. In future, all deposit taking institutions will be expected to adhere to prudential requirements.
10. National payments, clearing and settlement system
10.1 The payments, clearing and settlement systems infrastructure
Robust and timely National Payments Systems are a vital element of the overall economic and financial infrastructure. Their efficient functioning, which allows financial transactions and transfers to be completed safely and on time, is a key contribution to overall economic performance.
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The Government is working in conjunction with the Bank of Botswana to accelerate the process of reforming and modernising the country’s national payments system. Their objective is to provide to provide more efficient, secure and timely payment systems and practices that will facilitate safe and sound payments transmission process whilst also reducing the risks in the delivery of value to transacting parties. To this end, the Bank implemented a Code-line clearing system in 2002 to facilitate the exchange of Cheques and Electronic Funds Transfer (EFTs) by the clearing financial institutions. This Electronic Clearing House is owned and managed by the Bankers Association of Botswana. Subsequently in 2006, the Bank implemented the Real Time Gross Settlement (RTGS) system, as part of the overall objectives of the total National Payments System. The RTGS aims to reduce and control systemic disturbances and risk by handling time-critical high value payments. The introduction of the RTGS system has provided interfaces with the Electronic Clearing House (ECH) and the Bank’s core banking system (Globus). The system runs on a SWIFT platform and has the flexibility for connectivity to other future electronic payment streams and future cross border activities.
There are two clearing sessions each weekday, one in the morning at 10:00 hours and the other one in the afternoon at 16:00 hours, and none on Saturdays. These clearing sessions are meant for the clearing banks to exchange Electronic Journal (EJ) files through the Electronic Clearing House (ECH).
The Settlement process in Botswana is a centralised operation at the Bank of Botswana, with the commercial banks maintaining settlement accounts with the Bank of Botswana.
The Bank worked progressively on the implementation of the National Clearance and Settlements Systems (NCSS) Act and regulations following the announcement of the commencement date of 1 March 2005. To-date, the Bank has issued a certificate of recognition to the Electronic Clearing House (Botswana) on 31 August 2005, effectively transferring the Electronic Clearing House (ECH) out of the Bank to the newly registered company under the auspices of Banker’s Association of Botswana (BAB). Operations at the new ECH site commenced on 1 September 2005, and clearing has now stabilised.
10.2 The role of the central bank in the payment systems
The role played by the Bank of Botswana in the payment system is central. The Bank of Botswana does not accept deposits from individuals or non-financial business corporations or compete with institutions in the lending field. The Bank of Botswana does, however, interact the payment system in at least two different ways viz: - it facilitates and effects the final settlement of balances for the national clearing and settlement system and, - it acts as banker to Government, which is the largest payer in the country.
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Furthermore the Bank oversees the management and operation of payments system. This entails recognition and licensing as well as investigations of compliance to the BIS core principles for systematically important payment system (SIPS).
10.3 Short description of the processing of payment instructions
Processing of payment instructions is divided into three parts as follows:
a) “On-us” Cheques These are cheques presented over branch counters of banks on which they are drawn. “On-us” cheques do not go through the clearing system, but are processed directly into accounts on which they are drawn.
b) “Off-us” Cheques These are cheques which are presented over counters of collecting banks, where they are not drawn, either being encashed or deposited. The collecting banks process these cheques and create Electronic Journal files (EJs) and Settlement files which they exchange with the drawee/paying banks through the ECH. The ECH forwards the EJs to the Processing Centres of the drawee/paying banks, where the data gets matched with physical cheques exchanged at the Clearing House. Discrepancy files are generated for any unmatching items and they get sent back to collecting banks through the ECH. Unpaid cheques are also returned to collecting banks, with clear statements of the reason for return, by not later than the third day after deposit. Cheques for which funds are available get processed by the paying banks, thereby debiting the accounts.
c) Credit transfers These are pre-fated credit push payments. The credit transfers are processed electronically via an Electronic Funds Transfer (EFT) system, which became fully operational in October 2002. This new element of the payment system has made it possible for the Government and other commercial bank customers to post payments directly to suppliers’ accounts and to post salaries into their employees’ accounts. The EFT module is used to handle credit transfers through the clearing system.
Other issues related to payment instructions
a) Re-presentment of Cheques In support of the reform and the modernisation of the domestic National Payment System Project, the banking industry has agreed that the presentment of cheques will be restricted to a single instance. Should a cheque be returned to a depositor as dishonoured, it shall be the responsibility of the depositor to seek redress from the issuer of the cheque. The practice of restricting the re-presentment of cheques to a single instant was put into effect
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July 1, 2000. The introduction of the NCSS Act has brought with it criminalisation of bouncing cheques. Issuing of cheques against insufficient funds is a criminal act.
b) Special Clearance Cheques There are special presentations, whereby the collecting bank sends a cheque deposited at their counters to the paying bank requesting for special clearance. The drawee bank issues a bank cheque to the presenting bank. The bank cheque is an acknowledgement by the drawee bank that the cheque has been honoured and funds can be made available to the customer. It should be noted that special clearances are not processed through the clearing system.
c) Clearing Cycle Presently the Clearing House Rules provide that local cheques take 4 days to clear, i.e., to know that value has or has not been received. For high value cheques, notice of dishonour must be given to the depositing bank by no later than the third day.
11. Currency in use
11.1 List of legal tender notes and coins currently issued and in use in the economy
Currency: - Pula (P) (100 thebe (t) are equal to one pula) Notes: - P100, P50, P20, P10 Coins: - P5, P2, P1, 50t, 25t, 10t, 5t
The one thebe and two thebe coins have been demonetised and, therefore, no longer accepted as legal tender. The P1, P2 and P5 banknotes are no longer issued, and are in the process of being demonetised.
12. Other activities of the central bank not covered above
The Bank of Botswana is responsible for the management of Botswana’s foreign exchange reserves. The international reserves amounted to P48 billion (US$8 billion) at the end of 2006. The reserves are invested in a diversified portfolio, part of which are managed in-house and part by external managers.
13. The position of the central bank in SADC
13.1 Special relationships with other central banks in SADC (CMA excluded)
The Bank does not have any special formal relationships with any other central banks in SADC. Many informal links exist for sharing information and experience
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on an ad hoc basis. For example, the Bank has sent senior staff to the central banks of neighbouring countries to learn from their experience with exchange control liberalisation. Similarly, staff from regional banks has visited the Bank of Botswana for short-term attachments to learn about the bank's approaches and policies.
14. Publications
14.1 Regular Publications
The Bank publishes an Annual Report, which incorporates the Economic Review (around May each year), Monetary Policy Statement (around February each year) and its mid-year review (July/August), as well as a Research Bulletin (targeted for twice a year) and the Botswana Financial Statistics (monthly). Effective 1999, the Bank of Botswana also started publishing a Banking Supervision Annual Report.
14.2 Occasional/special publications published since 1990
Since 1990, the Bank has published four special Research Bulletins, the first in December 1994 based on Capital Market Development and Economic Diversification in Botswana, the second, published in September 1996, was to commemorate the twentieth anniversary of the Pula, Botswana’s currency, while the third, published in February 1998, was on Inflation in Southern Africa, based on papers presented at an inflation seminar held in Gaborone. The Bank held a seminar on Savings and Investment in Botswana in November 1998 and later in December 1999 published another special bulletin based on that seminar.
A book, entitled, Aspects of the Botswana Economy: Selected Papers was also published in 1997, and reprinted in 2002.
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Banque Centrale du Congo
Banque Centrale du Congo BP 2697 Boulevard Colonel Tshiatshi, n°563 Kinshasa I République démocratique du Congo Tel: +243 81 5556952 +243 81 5556963
1. Background
Banque Centrale du Congo (BCC) was established on 30 July 1951 under the name “Banque Centrale du Congo Belge et du Rwanda-Urundi”. However, it should be pointed out that already on 11 January 1909, the first private commercial bank was created and as a subsidiary of the Société Générale, under the name of Banque du Congo Belge. The Bank was tasked with organising the fiduciary circulation in the colony, and on 7 July 1911 it received the privilege of issuing notes in the colony for a renewable period of 15 years.
During its existence, Banque Centrale du Congo has undergone various changes, including the following:
- On 3 October 1960, the Congolese Government created the Monetary Council on the suggestion of the IMF, which was charged among other tasks with issuing the national currency, preparing the structure of the future Central Bank of Congo as well as organisaing the liquidation of the ”Banque Centrale du Congo Belge et du Rwanda Urundi”, which occurred with the convention that was signed with Belgium on 15 November 1960 in New York; - On 22 June 1967, when the Zaire was created as a currency, the statutes of the Bank had their first modification; and - In July 1979, through the stabilization programme that was concluded between the Democratic Republic of Congo (DRC) and the IMF, the Central Bank underwent a few adjustments as far as its management was concerned, which consisted - among others - in guaranteeing the Bank’s autonomy with respect to the Government; - In 1993, the statutes of the ‘Banque du Zaire’ were modified, changes were made with regard to the Board of Directors and the relationship between the Bank and the Government was made clear; - In 1997, with the arrival of the AFDL regime, a monetary reform was planned and implemented with a set of measures towards the deregulation of the exchange rate, as part of the introduction of a floating Congolese franc; and
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- In 2002, the statutes of the Bank were reviewed and two important innovations were made: the independence of the Bank in its implementation of the monetary policy and the ruling out of loans to the Treasury by the Bank of issue.
2. Relationship with the government
According to the applicable law No 005/2002 of 7 May 2002 on the constitution, the organisation and the functioning of BCC, the Bank is an institution which is governed by public law with a legal status. The BCC is invested with a mandate to define and implement the monetary policy of the country, the policy’s objective being to insure the general stability of prices.
In terms of the above-mentioned law, the Board of Directors, the Governor and the College of auditors make up the organs of the BCC.
- The Board of Directors comprises seven members, including the Governor and the Deputy Governor, as well as five experts who bear the title of Directors. This Board is chaired by the Governor; - The Governor and the Deputy Governor are appointed by the President of the Republic to hold office for terms of five and four years respectively, renewable once; and - The five directors, including the Director of the Treasury, are also appointed by the President of the Republic for a 3 year-term renewable once.
The BCC exercises ifs full independence to determinate the interest rate, to issue to adjust the facial values of the currency.
In terms of the statutes of 1961, the Central Bank was legally allowed to grant direct loans to the Government, provided that the amount of the loan would not at any time exceed a certain limit. This limit was fixed at 20 percent of the average annual revenue of the Government, calculated on the basis of the last three years for which data was available. This limit was reduced to 15 percent as from 1967.
The law No 005/2002 of 7 May 2002 brought about an end to this, by strictly banning advances or any other form of loan by BCC to the State, its administrative branches and government-owned organisations or enterprises.
The legal documents that deal with the organisation of BCC have established clear mechanisms to preserve its independence. This independence is further strengthened by article 176 of the Constitution.
The BCC plays the role, among others, of manager of the Republic’s official reserve, regulator of banking system and cashier for the State.
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3. Determination and implementation of the monetary policy
During the financial year 2008, the monetary policy in terms of credit by the Bank was marked by pursued efforts to maintain the liquidity of the economy at levels that are compatible with the stability of internal prices.
The effectiveness of monetary policy also depends on the degree of coordination with fiscal policy; the BCC has reformed the CPM in January 2010 to facilitate the communication with those responsible for fiscal policy by integrating, in the Monetary Policy Committee, experts from outside the Central Bank, including the Presidency of the Republic.
In general, decisions of the Monetary Policy Committee are taken on a consensual basis. Without a consensus on an issue, use is made of the vote. However, to preserve the independence of the Central Bank in monetary policy, only members of the Committee from the Central Bank have the right to vote.
In addition, the Bank is working effectively to the development of other frameworks for dialogue on macroeconomic policy such as the strategic and political Troika. Those actions have strengthened the collaboration between the Bank and the government. It has also improved the flow of information and resulted in monetary policy decisions and changes with effective results.
3.1 Main objective of the monetary policy
The ultimate objective of the monetary policy in the DRC remains the stability of internal prices.
Until 2009, this monetary policy, in conjunction with other policies –namely the fiscal policy- remains essentially restrictive and aims at a contraction of the total demand in order to adapt it to the level of the supply, with a view to preserve the macroeconomic framework.
However, since 2010 the BCC has globally pursued an accommodating monetary policy, reducing interest rate from 70% to 2% due to the decline in inflation.
3.2 Reform of the analytical framework of the Monetary Policy
The analytical framework has been significantly improved, the effect of reinforcing the contours of the decision making of monetary policy. The current monetary analyzes were supplemented by forecasts of autonomous factors of liquidity for a better framing of market interventions. This component also includes the analyses of institutional factors of bank liquidity.
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Furthermore, economic analyzes and market have been systematized and extended to a range of indicators including industrial production index, a barometer of the economy and the international context.
The search for transparency of monetary policy
Transparency was an important part of the reforms undertaken by the BCC. Two lines of action were followed:
The first axis is to communicate the financial position of the Bank. The financial statements of the Central Bank, since 2002, audited and certified by audit firms of international repute, are published in the media and the website of the BCC. This action reflects the interests of transparency that the bank authorities wanted to give the owner against the State and the public.
The second part deals with the monetary policy. Indeed, the BCC had adopted as a strategy and prior public announcement of the objectives and directions of monetary policy. The disclosure and transparency of monetary and exchange are strategic, firstly, to establish public understanding and better focus its expectations of inflation or exchange rate and, secondly , to strengthen the credibility of the term at BCC as she reached the macroeconomic targets it has set.
In this context, the central bank has improved the transparency of its monetary policy and exchange by strengthening communication channels with the public.
To do this, the BCC held once a month, a press conference after each meeting of the Monetary Policy Committee to take stock of the objectives of monetary policy and exchange rate risks that could affect the achievement of objectives and future directions. On this occasion, a press release is published.
The objectives of monetary policy
Inflation rate
The inflation rate has fallen significantly between 2001 and 2014. As a reminder, the annual average inflation rate between 2002 and 2010 was 19% against 1972.9% between 1990 and 2009, excluding 2001.
Since 2012, it is noted a decline in inflation, which is maintained at a low level. Indeed, the inflation rate stood at 2.7% in 2012, 1.07 % in 2013 and 1.03 % in 2014. Moreover to strengthen economic stability, the BCC is committed to sustain the stability of the general price level long-term inflation target with a single digit.
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3.3 Instruments of the monetary policy
In accordance with the objective of price stability, the BCC has determined the framework through which the monetary policy should be implemented and has used three indirect instruments, namely the interest rate used for refinance operations, “Bons BCC” (securities) operations and the reserve requirement ratio.
3.3.1 The interest rate
With regard to the debtor interest rate pertaining to the refinance operations that are used to bring about liquidities, the objective pursued by the Bank is to maintain a positive real interest rate. Also with regard to the change of the inflation rate, the BCC makes regular adjustments of its official market rate in order to keep it positive in real terms.
3.3.2 The Bons BCC (securities) operations
To regulate short-term liquidity, the BCC sells securities called Bons BCC by the auction method. The Bons BCC have three maturities: 7, 28 and 84 days. The auctions of Bons BCC were imposed in April 2008.
3.3.3 The reserve requirement ratio
The reserve requirement system consists in ‘sterilizing’ part of the assets that are kept into and unremunerated accounts. In accordance with specified provisions, the base and the reserve requirement ratio varies as a function of the requirements of the monetary policy. This base consists of deposits, both in national and foreign currency, which are collected by lending institutions.
In October 2013, the BCC landscaped device of its monetary policy by introducing discrimination in the reserve requirement ratio depending on the maturity and according to currency of banking deposits in March 2014. Indeed, the first purpose is to promote the collection of long-term resources to finance the economy. The second is the fight against dollarisation allowing the national currency fully plays the three functions of money.
3.3.4 Tightening of eligibility requirements for securities to be admitted as collaterals
Previously, the refinancing mechanism provided for the establishment of a ceiling for the refinancing, depending on an evaluation done on the financing capacity per bank. This mechanism allowed the banks to do a ‘blank refinance’ for themselves, i.e. without any prior collateral security being arranged with regard to the trade bills.
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The tightening of the eligibility requirements for securities admitted as collaterals for refinancing operations came about in January 2006, through the establishment of a rational and effective system of control and evaluation of the quality of the credits distributed by the banks.
To this effect, accredited lending institutions are required to provide in advance to the Directorate of Banking operation and markets with the files of the economic agents who benefit from banks’ contributions, and for which commercial papers may be presented as collaterals for refinancing operations at the Central Bank.
Based on these financial statements of credit beneficiaries, the BCC may carry out an analysis of the risks for credit institutions and establish a list of economic actors whose commercial papers are eligible for refinancing purposes.
Finally, it should be pointed out that in the process of evaluating the eligible bills for the purpose of refinancing, other factors such as industrial interdicts, possible defaults of payment that might have occurred in the last three years, as well as signatures of economic agents who are under a bank or judiciary interdict are also considered.
3.3.5 Innovation in exchange policy
Since May 2015, a bilateral currency auction mechanism has been set up.
3.4 Reforms to be undertaken
They should concern:
3.4.1 Implementation of an open market operation
The central bank should implement an open market operation in order to improve effectiveness of monetary policy. However, the functioning of this system requires a deepening of securities market. The proper functioning of government securities should stimulate private securities and strengthen the functioning of this market. Under these conditions, the Central Bank may, at the beginning of its operations, as guarantor of government securities to ensure the credibility and quality of signature.
The procedure will allow the auction rate determination by the market. In practical terms, it is easy to implement because the steps are similar to those tenders of Bons BCC (securities).
In addition, Bons BCC (securities) were a kind of prelude to implement an open market mechanism.
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3.4.2 Implementation of a one-stop pension
The Central Bank should consider putting in place directly or indirectly (by banks) a counter board (repo to refinance and repurchase agreements for the collection of deposits).
The rate will be determined administratively as to refinance existing. The difference from the open market is the final transfer of ownership to the later while for the pension; transfer of ownership is temporary (until maturity).
This is different than it does now at the counters of refinancing where there is no transfer of ownership.
3.4.3 Implementation of fine-tuning operations of liquidity
It is important that the operational framework provides specific operations intervention (fine-tuning operations in liquidity) or inject or to puncture the liquidity in order to correct significant variances after a regular operation.
3.4.4 Implementation of branch of refinancing in the medium term
This branch of refinancing will aim to get the banks to give more credit to the private sector to support economic activity.
4. Structure of the financial market
4.1 Organisation of the money market
In the DRC, the effort of distributing securities to the public exists since 1972, through the banking law of 14 January 1972 regarding the protection of savings and the supervision of financial intermediaries. This was indeed an innovation brought about by the banking law, as it provided the legislator with the means to regulate the profession of financial intermediaries in a general sense, i.e. the banking institutions as well as other financial intermediaries. Moreover, in a search for complete protection of savings, the banking law invested the Bank of issue with the mandate to organize and supervise these markets by requiring prior notice to the Central Bank of any public offering project and by defining the Central Bank’s course of action in this regard.
On the other hand, the law n° 005/2002 of 7 May 2002 on the constitution, the organization and the functioning of the BCC also points to this concern in its Article 6, by giving the Bank of issue the mandate to promote the development of money and capital markets.
The structure of these markets in the DRC seems to be in practice limited to the level of money and exchange markets, which remain under developed. However,
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we should be point out the private placement of immovables (shares and bonds) during the creation of limited liability companies – which include banks – as well as the growth of their share capital.
4.2 The money market
This market comprises two components: the interbank market and the Bons BCC market.
4.2.1 The interbank market
The interbank market consists of:
a) The short-term loan branch
This branch deals with operations of temporary transfer of Congolese francs (CDF) by the Central Bank to authorised banks, with a maximum maturity of 7 days. The interest collected here is deducted at source.
It should be noted that the interest rate applicable to the short-term loan operations is the official market rate of the BCC. This rate is kept flexible and variable according to the fluctuation of the inflation rate, in order to keep it positive.
b) The permanent facility branch
The permanent facility branch allows the authorized banks to unwind their operations smoothly in a clearing house, namely in the event of any short position that may remain on their accounts in the BCC’s books at the end of the day, subject to an appropriate collateral security being arranged.
With this branch, banks may borrow for a maximum duration of 24 hours and the interests are collected in arrears.
c) The commercial bank lending
Commercial banks may also lend cash through a clearing/settlement system managed by the Central Bank. These operations consist of loans in national currency through (or /not) the pledges of public and private securities.
4.2.1 The Bons BCC market
In the course of implementing its monetary policy, the BCC issues securities (Bons BCC) since December 2002 for banks, economic agents of various sizes, persons or enterprises, whether they are national or foreign, and whether they hold a bank account or not.
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As a monetary policy instrument, the Bons BCC has helped to resolve the tricky issue of the depletion of banks’ assets, while easing at the same time the pressure exerted by the demand of cash in a significant way.
However, it should be mentioned that as from 3 April 2008, the issue of Bons BCC is done through the auction mechanism.
The Bons BCC securities are dematerialised and managed in security accounts by the Central Bank as the central custodian of securities. On the other hand, these securities are negotiable (transferable) on the secondary market, on which the Central Bank can also operate as a purchaser.
Since June 2013, the BCC has removed non-competitive by limiting the opening to tender operations of auction of Bons BCC only to commercial banks.
5. Supervision of financial institutions
In the DRC, the BCC serves – among other roles – as the regulatory authority of the financial system, in accordance with the law No 005/2002 of 7 May 2002 regarding the Bank’s constitution, organisation and functioning.
To this effect, the Bank enacts special regulations pertaining to the creation of banks and the exercise of the banking business. Some of these regulations address issues such as the requirements for entering the profession or the accreditation conditions for the banks.
Thus, in accordance with the law No 003/2002 of 2 February 2002 on the activity and the supervision of lending institutions, called ”Banking Law”, the exercise of the banking business is reserved for the lending institutions which are constituted as corporation and must obtain prior accreditation from the BCC.
This Law subordinates the accreditation to the following legal and economic conditions:
a) Legal conditions:
- the bank must be a corporation with the legal form of a limited company; - the shareholders and proposed leaders must not be under the interdicts provided for in article 15 of the said law; - the shareholders must submit the minutes certifying that their governing bodies have mandated them to participate in the capital; - the project must prove a general or local economic interest ; - The bank must have a legal paid up capital, which has been currently set by the BCC at USD 10,000,000.
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b) Economic conditions
- to present a business plan or a feasibility study over at least three years, reflecting the development plan and the compliance with the management standards; - to guarantee the security of the clientele by making sure that the technical and financial resources deployed by the bank fit its programme of activity; - to make sure that the enterprise has leaders with the necessary good character and adequate experience in relation with their duties; - to evaluate the aptitude of the future banking institution to achieve its development objectives under conditions that are compatible with a good operation of the banking system; - When a lending institution which is accredited in a foreign country wishes to set up a subsidiary in the DRC, the Central Bank consults the supervision authorities from its country of origin in order to ensure its financial credibility in supporting its subsidiary and the good character of its leaders, especially in relation with money laundering and organised crime.
Once it has been accredited, the banking institution must observe certain regulations in the exercise of its business. In addition to the conditions relating to the operations, the accounting and the prudential standards which are set out in the various instructions enacted by the Central Bank, other regulations pertaining to the organisation of the institution itself, or of the entire profession, are specified and must be complied with.
In this regard, the applications for accreditation are placed under a great deal of scrutiny, especially with regard to the quality of capital contributors and of the leaders, the resources deployed and the internal control systems.
The banking system comprises 18 banks of deposit, out of which 17 are private capital banks and 1 is a mixed capital bank.
6. National payment system
In the DRC, the status of the payment system shows several deficiencies that have to do with the low level of banking of the economy, the significance of the informal and rural economy coupled with the predominance of the fiduciary money, with the poor performance of manual compensation and of the telecommunication systems, as well as with the existence of an inappropriate legal framework.
In order to address these deficiencies and on the initiative of Banque Centrale du Congo, the Government – through the Decree No 04/083 of 27 September 2004 - set up the National Committee of Payment System, which it gave the mandate to
Democratic Republic of Congo 47 supervise the implementation of the upgrading project of the National Payment System, whose main mission is to develop the strategic vision of revamping the National Payment System.
This National Payment System has a legal basis which is made up of various legal documents. These documents essentially address the status of the various actors of the payment system, the system of law of the various instruments of payment, the mechanisms of exchange and settlement of securities among payment service providers, as well as the possibility of settlement for certain aspects of the payment system through conventions.
In addition to the BCC, the main financial institutions concerned by the National Payment System in the DRC are the lending institutions, the financial messaging institutions, the bureaux de change, one insurance company, one social security organisation, as well as postal money order and cheques services.
The BCC is finalising the initial study on the implementation of the RTGS/ACH /CSD with the firm MORTRAN to provide the equipment control.
The process of interbank payment systems is underway.
It should be noted that the monetary unit, the Congolese franc, is divided in 100 cents and is made up of the following denominations that are legal tender in the DRC: 20.000 CDF; 10.000 CDF; 1.000 CDF; 500 CDF; 200 CDF; 100 CDF; 50 CDF; 20 CDF; 10 CDF; 5 CDF; 1 CDF; 50 C; 20 C; 10 C; 5 C and 1 C.
However, the strong depreciation of the currency that occurred in the last few years has caused de facto calling in of the notes denominated in cents.
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Central Bank of Lesotho
Central Bank of Lesotho PO Box 1184 Maseru 100, Lesotho Fax: + 266 22 310051/310557 Tel: + 266 22 314281/324281 e-mail: [email protected]
1. History
The Central Bank of Lesotho commenced its operations in January 1980 as the Lesotho Monetary Authority. The status of the authority was elevated to that of a central bank in 1982, with the main functions of promoting internal and external monetary stability and maintaining a sound monetary and financial system in Lesotho in order to provide the financial conditions for balanced and sustained economic growth. In August 2000, the principal law of the Central Bank of Lesotho was revised to provide the primary and sole objective of the Central Bank of Lesotho as being to achieve and maintain price stability.
2. Relationship with government
2.1 Institutional arrangements
The paid up capital of the Central Bank of Lesotho is subscribed and held exclusively by the Government of the Kingdom of Lesotho. However, the Central Bank of Lesotho has its own budget for purposes of its operations.
The Governor of the Central Bank of Lesotho and the two Deputy Governors, are all appointed by the King on the advice of the Prime Minister for a term not exceeding five years and may be eligible for re-appointment.
The Central Bank of Lesotho has eight Members in its Board of Directors, with the Governor (who is the Chairman of the Board) and Deputy Governors being executive Directors. Non-Executive Directors, on the other hand, are appointed by the Minister of Finance and hold office for a period not exceeding three years and may be eligible for re-appointment.
2.2 Operational framework
Bank as banker to government In pursuit of its banking activities to government, the Central Bank of Lesotho, shall amongst others: - deal with/transact in valuable objects of, and on behalf of, government;
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- extend credit to government within stipulated terms and conditions; and - serve as fiscal agent for the government within the ambits of its principal law.
Bank as financial advisor to government The Central Bank of Lesotho’s duties include, though not limited to, advising government on: - financial institutions whose services the government may utilise; - activities of the Central Bank of Lesotho and any matter likely to affect the achievement of the objective of the Central Bank of Lesotho; - economic developments; movement of money supply; price levels, productivity, employment and real income levels/movements; - when contracting external debt, the government has to consult the Central Bank of Lesotho on the terms and conditions of such debt.
Relationship with government on foreign exchange and exchange rate issues The Central Bank of Lesotho formulates and executes exchange rate policies on the one hand and, on the other, the government determines the foreign exchange regime of Lesotho.
3. Design and conduct of monetary policy
3.1 Main objectives of monetary policy
Monetary policy is aimed at: - Promoting and maintaining internal and external monetary stability and the proper functioning of a soundly based monetary and financial system in Lesotho. - Achieving and maintaining an adequate level of foreign currency reserves in order to support the peg of the loti to the rand. - The fostering of monetary, credit and financial conditions conducive to the orderly balanced and sustained economic development of Lesotho. - Enabling and channelling of financial resources into productive investments. - Developing money and capital markets. - Mobilising domestic savings. - Maintaining an appropriate interest rate structure. - Facilitating economic activity in Lesotho and at the same time avoiding the adverse effects of inflation and a deteriorating external balance.
3.2 Instruments of monetary policy
The Central Bank of Lesotho makes use of the following instruments of monetary policy: - Moral suasion - Repurchase operations - Open market operations
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- Reserve requirements - Lombard rate
3.3 Types of refinancing as well as collateral used
The credit to the Government of Lesotho (GOL) should be within stipulated credit ceilings and no collateral is needed. The Central Bank of Lesotho extends credit to commercial banks through the Lombard Credit Facility. The facility requires collateral in the form of GOL monetary policy Treasury bills.
3.4 Reserve Money plays the main role in the conduct of monetary policy
Reserve money plays the main role in the conduct of monetary policy. A target is set on reserve money and any deviation of actual reserve money from the target represents excess or shortage of liquidity. Monetary policy treasury bills are issued on a bi-monthly basis based on liquidity conditions in the economy and maturing domestic debt. This aggregate is compiled from daily central bank balance sheet..
3.5 Reserve requirements on financial institutions
In terms of the Financial Institution Act of 1999, financial institutions are required to maintain certain reserves against their deposit liabilities on the basis prescribed by the Central Bank. These requirements are the following:
a. Minimum local asset requirements: Financial institutions in Lesotho are required to maintain 5 per cent of their deposits and balances due to banks in Lesotho, other borrowing, paid up capital and Reserves, locally.
b. Liquidity requirements: Financial institutions are required to maintain 25 per cent share of their deposit portfolio, balances due to banks abroad, other liabilities for borrowed money (excluding Central Bank and Government borrowings) in liquid form according to the following profile: - The total currency held, surplus funds at the Central Bank, deposits with local banks and GOL securities.
c. Capital requirements: A minimum of not less than M10 000 000 or 8 per cent of risk weighted assets computed in line with the methodology adopted by the Basle Committee on Banking Supervision.
d. Cash reserves: Financial institutions are required to maintain cash reserves amounting to 3 per cent of their deposit liabilities, balances due to banks abroad and other liabilities for borrowed money (excluding Central Bank and Government of Lesotho borrowings).
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4. Structure of the financial markets
4.1 Organisation of the money and capital markets
Lesotho’s money market is at a developing stage. The market still needs to develop further with the introduction of more and better financial products. The Treasury bills market though dating as far back as 1992, saw major improvements in September 2008 with the introduction of two more tenors, the 273 and the 364 day bills, the increased frequency of auctions to bi-monthly for all four tenors, and settlement on a T+0 basis. The secondary market is however dormant.
Capital market: The capital market is not yet active. The Bank and the Government are in the process of introducing Treasury bonds. Necessary legislation is in place and technical and high level committees are commissioned. The Bank has procured a Central Securities Depository (CSD) system which will be used for dematerialising both T-bills and T-bonds. The system will be used for equities as well at a later stage when the market has developed. The CSD has an auctioning module that will be used to auction Treasury securities.
It is expected that the introduction of T-bonds will be in September 2010. The initial offers will be in 3 and 5 year tenors. Other long dated maturities will be issued at a later stage.
4.2 Instruments used in both these markets
Instruments used in the money market include various deposits, Treasury bills and the Central Bank paper. Provision has been done to issue the Central Bank paper as and when there is need.
In the capital market, the 3 and 5 year bonds will be issued in September 2010. Preparations to establish a stock market will begin following the issuance of T- bonds.
4.3 Existing legal frameworks for the money and capital markets
The money and capital market instruments with specific reference to Treasury securities are issued under the Local Loans Act 2001, and Local Loans Securities Trading Regulations of 2009.
4.4 Type of financial intermediaries operating in these markets
The following eight financial intermediaries are operating in the Lesotho money market: - Central Bank of Lesotho - Standard Lesotho Bank - Nedbank
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- First National Bank - Lesotho Post Bank - Money lenders - Unit trusts (Collective Investment Schemes) - Insurance companies
5. External payment arrangements
5.1 Determination of the exchange rate policy
The Central Bank of Lesotho is responsible for determining the exchange rate policy (note: the country is a member of the CMA).
5.2 The present exchange rate system
Lesotho’s currency is pegged at par (fixed) to the South African Rand.
5.3 Organising the foreign exchange market
The commercial banks pay and receive foreign currency on request, subject to exchange control regulations. These regulations are set by the Central Bank of Lesotho.
5.4 The central bank's involvement in managing foreign exchange reserves
The Central Bank of Lesotho is responsible for managing foreign exchange reserves.
6. Currency convertibility and exchange control
6.1 Current state of currency convertibility
Lesotho's currency, the loti is fixed at par to the South African rand which is convertible regionally and internationally.
6.2 Exchange control restrictions on the current account
Lesotho acceded to Article VIII status under the IMF Articles of Agreement. Therefore, there are no controls on current account transactions.
6.3 Restrictions on capital account
Limited reforms on the capital account transactions came into effect on 27 June 2003.
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In terms of this liberalisation, priority has been focused in the following areas: - Foreign investment by private individuals (natural persons) outside the Common Monetary Area (CMA) up to M250, 000. This is a once off investment, until the limit is revised. Individuals must be above the age of 18 years, and be taxpayers in good standing. - Opening of foreign currency and offshore accounts for private individuals who are taxpayers in good standing and are above the age of 18. The limit to be applied is M250, 000. - Direct investment by corporates/companies to countries outside the CMA is allowed up to M50 million within the SADC region and up to M30 million elsewhere. - Companies are being allowed to open bank administered foreign currency accounts (commonly referred to as CFC accounts) for the credit of export proceeds and for payment of imports. - Restrictions have been lifted on long-term capital inflows.
6.4 Retention rules for foreign exchange earned or owned by residents
Residents are required by law to declare any foreign exchange earnings within thirty days.
7. The Central Bank and external debt
7.1 The role of the central bank in managing the country's external debt
The Central Bank of Lesotho's responsibility for debt management is to provide information on macroeconomic developments and to assess the impact and/or the sustainability of the government's borrowing strategy against the observed macroeconomic setting.
The Central Bank also has to manage the external official reserves in such a manner that the government's debt obligations can be met as and when required and in the currencies in which they are denominated.
7.2 The role of Treasury in this respect
The Treasury advises the Central Bank when payment is due and the Central Bank processes the payment.
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8. Supervision of financial institutions
8.1 Banking institutions
8.1.1 Authority responsible for banking supervision
The Central Bank of Lesotho.
8.1.2 Licensing procedures for establishing a new bank
In summary, the registration procedures require an application in writing as well as the submission of the following documents: - authenticated copies of its memorandum and articles of association or such similar documents if the new bank is foreign; - a statement with the address of its head office, etc.; - full particulars of the business it proposes to carry on; - the location of the principal and other places of business in Lesotho; and - other information as the Commissioner may require; - a statement from supervisory authorities of the home country if the new bank is foreign; - a copy of audited financial statements for the last two years and that of its head office or parent company, where applicable. - financial projections (balance sheets, income statements and and cash flow statements) for at leas a three year period. - certified true copy of the board resolution of the head office or parent company authorising the establishment of a branch or subsidiary.
8.1.3 Types of licences that exist
Licences are limited to banking business only.
8.1.4 Minimum capital requirements for the different types of banks
A minimum of not less than M10 000 000 or 8 per cent of total risk weighted assets computed in line with the methodology adopted by the Basle Committee on Banking Supervision.
8.1.5 Regulations governing current activities of banks
- Large credit exposure: The advance to any person should not exceed 25 per cent of the sum of unimpaired paid-up or assigned capital and the unimpaired balance in the Reserve Account of the financial institution. - Capital adequacy ratio equivalent to 8 per cent of total weighted assets. - Liquidity ratio: Every financial institution shall maintain liquid assets amounting to not less than 25 per cent of the deposit liabilities, balances due to banks abroad, and other liabilities for borrowed money (excluding Central Bank and
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Government of Lesotho borrowings. Liquid assets shall consist of freely transferable assets, unencumbered by any charge or lien whatsoever, of the following classes: total currency held, surplus funds at the Central Bank of Lesotho (excluding reserve balance), deposits with local banks and GOL securities. - Open foreign exchange position. - Provision for bad debts. - Restricted lending.
8.1.6 Main supervisory practices
- Off-site surveillance: Weekly liquidity requirements, foreign currency returns, monthly banking statistics, quarterly returns, exposure to top twenty borrowers, lending limits, financial statements, reserve requirements, capital adequacy and minimum local asset returns. - On-site examination: Physical inspection of the banks’ operations as well as surprise checks.
8.1.7 Measures to remedy deficiencies as well as penalties utilised
When a financial institution does not comply with the provisions set out in 8.1.5 above, it is notified of the deficiency and ordered to comply. If the order to comply is ignored, the institution may either be fined or taken to a court of law. The Financial Institutions Act 1999 specifies all the penalties for each and every offence in detail.
8.2 Insurance Institutions
8.2.1 Authority responsible for insurance supervision
The Central Bank of Lesotho.
8.2.2 Licensing procedures for establishing a insurance company
Only public companies are eligible to apply for conducting insurance business. An application letter and a completed application form are to be submitted together with the following: - Certified copies of Memorandum and Articles of Association - Statement showing: o The name and address of the Principal Officer in Lesotho o The name and address of the person in resident in Lesotho who is to accept any notice required to be served upon the applicant o The address and place of business of the applicant o The names and addresses of persons holding five percent or higher percentage of the share capital of the applicant and the number of shares allotted to each such person. o The class of business intended to be transacted by the applicant
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- A statement duly certified by an auditor that the relevant capital requirement (M65 000) specified by the Commissioner has been complied with. - A certified copy of premium rates, rating plans, rules and standard policy forms of each class or subclass of insurance business to be carried out by the applicant. Applicants for long-term insurance business are required to state: o The basis of calculation of premium rates o The calculation of non-forfeiture values o The method of distributing profits to policyholders and shareholders - A statement showing the particulars of proposed reinsurance agreements - A statement as to the prospective administration costs and commission - A statement showing qualification and experience in insurance business applied for of the Executive officers of the applicant at his place of business in Lesotho
8.2.3 Types of licences that exist
Licences are limited to insurance business only.
8.2.4 Minimum capital requirements for insurance companies
A minimum of M65,000 in unimpaired capital.
8.2.5 Regulations governing current activities of insurers
- Margin of solvency: o For life insurance business margin of solvency is M30,000 o For general insurance business margin of solvency is M50,000
8.2.6 Main supervisory practices
- Off-site surveillance: Quarterly returns, annual financial statements, margin of solvency, unimpaired capital minimum, minimum local investment, reserve requirements and working capital requirements. - On-site inspections: Physical inspections of the insurers’ operations are conducted and when necessary, special inspections are undertaken.
8.2.7 Measures to remedy deficiencies as well as penalties utilised
When an insurer fails to comply with the requirements in 8.2.5 and 8.2.6 it is notified of the deficiency and issued with a directive to comply by a given deadline. The regulator can further impose a fine if the directive is not complied with. The Insurance Act 1976 empowers the commissioner to issue fines and take legal action against an insurer who contravenes the requirements of the Act.
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8.3 Non-banking institutions
8.3.1 Responsibility for supervision of non-banking financial institutions
Regarding the non-bank financial institutions (NBFIs), the Central Bank's responsibility through the Non-Banks Supervision Division (NBSD) includes the supervision and regulation of money-lenders, collective investment schemes and ancillary financial service providers. Microfinance institutions (MFIs) in due course will form part of the Division's area of jurisdiction. (These are proposed to emanate from the transformation of large money lenders).
The NBSD was established in 2007, and is charged with the supervisory functions of the non-bank financial institutions (NBFIs) through monitoring and examining of the sector’s performance (through Off- Site surveillance and On-Site Inspection).
8.3.2 Categories of financial institutions and their licensing procedures
The following are the categories of non-banking financial institutions and their licensing procedures: - Money-lenders are required to apply for licenses that are renewable annually. - Collective investments schemes’ licensing requirement is as above and renewable annually. The requirement is for one standard licence renewable annually. - Ancillary Financial Institutions are also expected to apply for an annual renewable licence.
8.3.3 Minimum requirements for the different types of non-bank financial institutions:
8.3.3.1 Supervision: The central bank supervises money-lenders, collective investment schemes and ancillary service providers.
8.3.3.2 Capital required: Collective Investments M1 000 000 Ancillary Service Providers M250 000 Money-lender no specified capital requirement
8.3.3.3 The Regulatory Framework: Money-lenders are governed by Money-Lenders Act 1993. Ancillary service providers are regulated under Ancillary Financial Service Providers (Licensing Requirements) Regulations 2003 and collective investment schemes by Collective Investment Schemes Regulation 2001.
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9. National payment, clearing and settlement system
9.1 How is the payment, clearing and settlement system organised?
The payment system in Lesotho consists of two systemically important payment systems namely: Real Time Gross Settlement named Lesotho Wire (LSW), and Maseru Clearing and Settlement House (MCSH). Preparations for the implementation of the Automated Clearing House (ACH) for clearing low value large volumes electronic payments are at an advanced stage. Lesotho Payment system is striving to achieve the following vision:
Vision: By 2015 Lesotho shall have a widely accessible, secure, reliable, and efficient payment and settlement system. The system shall facilitate Lesotho’s development objectives.
9.1.1 Lesotho Wire (RTGS)
The Central Bank of Lesotho launched the Real Time Gross Settlement system, Lesotho Wire (LSW), on the 25th August 2006. LSW is used for processing large value and Time critical payments. The Lesotho cap is M100, 000-00 (One hundred Thousand Maloti). The participants in LSW are the three commercial banks operating in Lesotho, namely: Standard Lesotho Bank, Nedbank Lesotho, FNB Lesotho and the Central bank of Lesotho which acts as both the system Operator and a participant on behalf of the Government of Lesotho. These banks hold settlement accounts with the CBL, to facilitate settlement of their interbank obligations.
The system is located at the Central Bank of Lesotho and it is operated and administered by the central Bank. The National Payment System Legal Framework is not yet in place, as the NPS Bill is not yet enacted. However, the RTGS operations are governed by the Rule Book containing rules and procedures agreed and signed by the participants, and they are binding.
9.1.2 Maseru Clearing and Settlement House (MSCH)
The second system is the Maseru Clearing and Settlement House (MCSH), for the manual clearing and settlement of small value payments. The system is housed at the Central Bank of Lesotho (CBL). Members who are also participants of the MCSH are the above commercial Banks including the CBL with the Lesotho Post Bank yet to participate. Clearing process is hosted at CBL and it has two sessions, one in the morning and another in the afternoon, and one on Saturday morning.
The Clearing and Settlement House operations are governed by the Maseru Clearing and Settlement House Rules, which are set by the Maseru Clearing and Settlement House Management Committee that consists of the Governor of the
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Central Bank (its ex-officio chairperson), and the Chief Executives of the commercial banks. The rules are also binding for all the participants.
9.2 What is the role of the Central Bank in the system?
The Central Bank of Lesotho is spearheading the Lesotho National Payment Systems Modernisation Project. It is mandated with the successful implementation of the payment reform project. o It is the facilitator, the catalyst in the payment system. o It provides Liquidity in a form of Lombard and Intra-day to LSW participants running short of funds in their settlement accounts to settle their obligations. o It is the overseer of the payment system, to ensure that the payment systems are operated and administered in accordance with the rules and regulations, International standards and Best Practices. o It also provide settlement system or services through the RTGS Settlement is done with the Central Bank money since it bears no risks.
The Central Bank operates the clearing house and supervises the clearing process. It also acts as a settlement agent of the clearing and settlement system.
9.3 Short description of the processing of payment instructions
With Lesotho Wire System, most payments originate from trade in various markets where a customer, following a trade agreement, instructs payment. Once the instruction has been received and accepted by a bank, the bank assumes responsibility for driving the payment to finality and irrevocable transfer of value. Banks initiate payment by verifying certain aspects of the payment instruction and determine the processing path to be followed through the inter-bank funds transfer processes.
The clearing procedures of cheques and returned items are governed by a set of rules, as per the Lesotho Bankers Agency Agreement, to which all participants in the Maseru Clearing and Settlement House must subscribe to. The agreement stipulates the time-frames permitted to clear the various instruments. At each session the net settlements (setoff) are calculated per bank and entries passed to clearing accounts conducted by the participating banks in the books of the Central Bank. Participants are responsible to ensure that the accounts are sufficiently funded, as the accounts are not permitted to be overdrawn.
9.4 How are non-funded positions settled in the system?
Participants are required to maintain sufficient funds to cater for their settlement obligations. In a situation where a participant is not able to settle due to liquidity shortfall, the Central Bank, through its Lombard Credit Facility would provide overnight liquidity boost. Banks should provide the 91-days securities as collateral for this lending. The rate that is incurred for using this facility, the Lombard Rate, is
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equivalent to certain basis points (maximum 4) above the prevailing 91-day Treasury bill rate.
10. Currency in use
10.1 List of legal tender notes and coins currently issued and in use in the economy
- Currency: - Loti - 100 lisente equal one loti
- Notes: - 200 maloti, 100 maloti, 50 maloti, 20 maloti, 10 maloti
- Coins: - 5 maloti, 2 maloti, 1 loti, 50 lisente, 20 lisente, 10 lisente, 5 lisente
11. Other activities of central banks not covered above
The Central Bank of Lesotho also acts as custodian of export finance schemes as well as part of development finances.
12. The position of the central bank in SADC
12.1 Special relationships with other central banks in SADC (CMA excluded)
The Central Bank of Lesotho exchanges its publications with other central banks in SADC. The Central Bank is also a member of some regional groupings together with other SADC central banks, such as MEFMI.
13. Publications
13.1 Regular publications
- Monthly Economic Review, Quarterly Review and Annual Report - Annual Supervision Report
13.2 Occasional/special publications published since 1990
Research Department commissions different papers covering a wide spectrum, such as policy papers, occasional papers and so on. The latest publications in archive include; - Regional comparison of Bank Charges - Private Capital flow Survey - The Optimal Inflation for Lesotho - Economic Impact of Privatisation in Lesotho - The Impact of Taxing Interest Income
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- Determinants of Demand for Holding Net International Reserves - Modelling the Yield Curve - Appropriate Measure of the Competitiveness of the Treasury bill Market - Government Intervention In The Financial Sector: Is Bailout A Panacea? - The Impact of Anti-Money Laundering Legislation on Investment: An Application of an Overlapping Generations (OLG) Model - Soaring Global Food Prices: Nature, Causes, and Responses: The Case of Lesotho
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Banque Centrale de Madagascar
Banque Centrale de Madagascar B.P. 550 Antananarivo (101) Madagascar Tel: +261 20 22 234 85 – 22 217 51 Fax: +261 20 22 345 32 E-mail: [email protected]
1. History
The Banque Centrale de Madagascar (BCM) was established in 1973 after Madagascar had left the Franc Zone.
The main missions of the Bank were then to address the monetary situation, to manage and control credit and to ensure good running of the banking system. Its main objective was focused on growth as defined by the Economic Development Plan framework.
The Central Bank carried out monetary, credit and exchange rate policy as defined by the Government, and was in charge of recommending measures to achieve the objectives of the Government.
The socio-economic crisis in the early 1990s resulted in a negative growth rate and dramatic price escalation as a result of continuous monetary instability. Following that crisis, the Government decided to liberalize the economy to fight against recession.
From 1994, important economic reforms were launched, mainly on the financial and exchange rate system to provide the BCM with capacities and organisation that could improve the design and implementation of monetary policy, and to monitor the smooth running of the financial system.
In order to tackle the issue of shortages in foreign currencies and to remove black market, the exchange rate market was liberalised and a foreign-currency interbank market (MID) was put in place. A floating exchange rate system was established.
The Act No. 94-004 of 10 June 1994 defines the new Status of the BCM and its main objective which is to ensure exchange rate and price stabilities.
Furthermore, national banks have been privatised. A new Banking Act was also established. This new Act governs the terms and conditions of registration and running of banks. It expands the scope of duties of the former “banks and financial institutions’ board of auditors” (CCBEF). The role of the “Banking and Financial
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Supervision Commission” (CSBF) has been extended to credit institutions, including mutual financial institutions, off-shore banking units and specialised financial institutions.
2. Relationship with government
The independence of the Central Bank in monetary policy development According to its Status, the Central Bank defines the monetary policy by taking into account Government global policy on growth and development.
In practice, macroeconomic objectives are formulated by mutual agreement with the Government, in particular short and medium-term objectives on growth and inflation.
Once these objectives are set, the Central Bank defines, in all independence, the strategy for implementing the monetary policy, including actions and measures that are deemed necessary to maintain price stability.
This independence increases the responsibilities of the Central Bank, more particularly in terms of transparency:
- the Central Bank must continuously inform the Government about all the factors which are likely to affect price stability, and the strategies and the rules that should be applied to prevent or reduce inflation pressures; - the communication to the public and the financial markets which impacts on the monetary policy.
However, in order to ensure consistency with fiscal policies and avoid pernicious impacts due to an inappropriate conjunction with policies on prices, platforms of discussion are organised between the Central Bank and the Treasury.
Furthermore, the Central Bank is consulted every year on the draft Finance Law especially on the deficit financing..
Banque Centrale de Madagascar: Financial agent of the State The Central Bank registers the accounts of the Treasury and assists in the management of public debt.
The Bank also has the legal power to grant advances to the Treasury within the limits defined by its statutes and can consent, exceptionally, statutory advances according to conditions clearly defined in the agreement between the Bank and the Ministry of Finance.
Nomination and dismissal of executive organs of the Central Bank The Governor, the General Manager and the members of the Board are designated by the President of the Republic by decision of the Cabinet and are relieved of their respective duties in accordance to the same procedure.
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The Central Bank capital The Central Bank capital is totally taken up by the State.
Relation with the Government for the financial system development The Central Bank participates in the implementation of policies for the financial resources mobilisation needed to fund development programme. The Central Bank, then, takes part in the liberalisation and development of the financial system. It assists the Ministry of Finance in conducting transactions on the Treasury bond market.
3. Design and conduct of monetary policy
3.1 Main objectives of monetary policy
The BCM is responsible for price stability and should always ensure a stable purchasing power. In times of shocks, the Central Bank should use appropriate instruments and measures to mitigate their impacts on price in order to create an environment that is conducive to sustainable economic growth.
The Central Bank clarifies the objective of monetary policy by clearly defining the main guidelines of its policy and procedures on which are based decisions to secure price stability.
This procedure consists in defining medium-term nominal objectives: final, intermediary and operational targets. The Bank selects instruments for intervention depending on perspectives and economic situations, in particular prices.
3.2 Design of monetary policy
Inflation in Madagascar is known as a purely long-term monetary phenomenon, and in practice the main target of the monetary policy turns out to be the control of money supply (M3) and the inflation is an intermediary target. The monetary base becomes the operational target. Monetary program generally sets the target of inflation which in turn determines the overall money and the money base targets. Those aggregates determine the interest rate and the liquidity management policy.
3.3 Organisation
A monetary committee was put in place. It defines and monitors the monetary policy for each year. A technical committee assists the monetary committee in its work, while a committee on liquidity, which includes officials from the Treasury, is in charge of the forecast and liquidity management.
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4. Structure of the financial markets
4.1 Organisation of the money and capital markets
The financial market is characterised by the predominance of commercial banks. It comprises eleven commercial banks, three financial institutions, four insurance companies, a saving bank, centres of postal cheques and thirty-one microfinance institutions. A financial market that connects directly buyers and sellers does yet not exist.
Economic activity mainly depends on the banking system financing. Its contribution to long-term project funding is limited by its resources structure that is characterized by 80 per cent of sight deposits and 20 per cent of fixed term deposits.
Thus, investment and production financing remain below the real needs of the economy, as loans that are granted are mainly short term and concentrate on the tertiary sector.
Most of the bank credit is granted to corporations. That situation renders access to credit for small and medium enterprises difficult. The relatively high nominal interest rate linked to the level of inflation, hampers bank long term financing. It leads to an increase of enterprises financial charges and discourages investment by increasing the credit cost.
4.2 Allocation of Treasury bill contract
According to the agreement signed with the Treasury, the Central Bank ensures management of the Treasury bill contract allocation on behalf of the Treasury.
According to the Decree N°2006-285 of 25 April 2006, the Treasury is free to accept all offering amounts announced or advertised. The Auction gives priority to subscribers having presented the most advantageous rates. This decree allows the Treasury to fix the limit of rates for every maturity.
This contract is characterised by the following:
- Frequency and maturity: The Treasury bills are instruments issued by the Treasury every fortnight (announcement of the application to the intermediaries and through press every Monday, adjudication session on Wednesday and payment/delivery on Friday) with a maturity of 4, 12, 24 and 52 weeks. - Subscribers: Any natural person or legal entity having an account at a local bank with a specimen signature at the Central Bank. - Minimum subscription target: 20 million Ariary and is paid by instalments of 10 million Ariary
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- Interest rate: A two-digit interest rate is proposed by the subscriber and the interests are deducted. Tenders are received at the management credit bureau on Wednesday at the latest before 8:50 a.m. - Adjudication terms and conditions: A “Dutch type” adjudication, meaning that the lowest tender rates are first to be served, and so on until the amount published by the Treasury is reached. If the proposed rates are identical, the breakdown of the marginal instalment is distributed proportionally to the submitted amount. - Forms of bills: The bills are dematerialised and the property of the instrument is established by entering the subscriber’s name account in the Central Bank books. - Tax system: following the Act N°2012-021 on 17 December 2012 the tax on income from movable capital (IRCM) applied to the interests on the Treasury bill contract allocation for all subscribers has been modified and harmonized at 20 per cent. - Negotiability: The Treasury bill contract allocation is negotiable on the secondary market with the Treasury accredited intermediaries. - The auctions results are constantly displayed at the Central Bank, published in the press, sent to Reuters news agency and on the Central Bank’s website.
4.3 Allocation of Fihary Treasury Bill (BTF) Contract
This contract is characterised by the following: - Frequency and maturity: The Fihary Treasury Bills are instruments issued by the Treasury every month (announcement of the application to the Treasury Website and through press every last Friday of the month) with a maturity 1, 2 and 3 years. - Subscribers: Any natural person, economic actors or legal entity. - Minimum subscription target: 1 million Ariary and is paid by instalments of 1 million Ariary. - Interest rate: fixed announcement dates, payment at maturity including the nominal value. - Forms of bills: The BTF are dematerialised and the property of the instrument is established by entering the subscriber’s name account in Treasury. - Tax system: subject to the provisional tax system issued by general tax code.
4.4 The inter-bank market
According to the Bank’s Act, inter-bank market participants are exclusively consisting of credit institutions where they exchange liquidities.
- Characteristics of the transactions carried out on the inter-bank market – amount, duration, remuneration, and possible guarantee – are openly discussed between parties. - The lending institution informs the credit bureau of the Central Bank of the characteristics of the daily transaction at 14:30 at the latest.
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- In order to allow the Central Bank to carry out the transactions, the borrowing institution must send confirmation. - The following day, the Central Bank disseminates the total amount of transactions which were carried out the previous day, the range of rates and the weighted rate.
4.5 Money market
In order to regulate the money supply, the Central Bank intervenes in the money market either by its own initiative or at the request of banks. The actions of the Central Bank on the market mainly include refinancing operations and recover liquidity.
4.6 Instruments used
Since 1996, the Central Bank has used indirect instruments to regulate the monetary market. These instruments can be divided into two categories:
- On the one hand, the structural instruments such as handling reserve requirements coefficient; - and on the other, market instruments such as the official market rate, liquidity recovery instruments (negative tender, sale of bonds) and liquidity injection instruments (positive tender, allowances for 1 day, special allowances). Since May 2007, the open-market operations on the secondary market have been introduced as a new policy instrument. These operations concern bills issued by the Treasury related to Central Bank recapitalization and Central Bank consolidated claims on the Treasury. These bills are renewable at maturity.
The instruments of the first category help to redress structural distortions of the financial system, and therefore are rarely used. The Central Bank, on the contrary, regularly uses market instruments, in particular tenders, to create a balance in the bank liquidity.
The system of reserve requirement compels banks to secure a minimum amount of reserves in the form of unremunerated deposits to the Central Bank. Consequently, the system has the effect of freezing a given amount of bank liquidity, which otherwise could result in excessive money supply.
The official market rate of the Central Bank is a referential rate used for the formation of a basic rate for the banks. Whenever this rate is modified, it signals change in the monetary policy stance.
Furthermore, the Central Bank intervention rates are pegged to the official market rate: - Allowance rate 1 day = official market rate + 1 point - Special allowance rate = allowance rate + 2 points
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- Penalty rate for reserves requirement insufficiency = allowance rate + 5 points
With regard to the Central Bank refinancing operations, there are two categories: Refinancing operations initiated by the Central Bank: - Repurchase agreement of Treasury bills or other negotiable debt securities through positive tender
Refinancing operations at the request of the Bank: - Repurchase agreement of securities within 2 to 10 days - Repurchase agreement of securities (24 hours)
The Central Bank’s actions aimed at tapping liquidities are carried out as follows: - Either in the form of negative tender; or - In the form of firm sales of treasury bills, or other negotiable debt securities.
4.7 Legal and regulatory framework
The relations between the Central Bank and commercial banks are governed by: - Act No. 94.004 of 10 June 1994 establishing the Central Bank; - Act No. 95.030 of February 22 1996 on the Bank Act; and - Different instructions devised by the Central Bank which are, inter alia: • Instruction No. 005-CR/90 of 16 November 1990 relating to the interbank market • Instruction No. 008-CR/2004 of 16 October 2004 relating to the official market rate • Instruction No.01/CR/05 of 15 March 2005 relating to reserve requirements System • Instruction No. 02/CR/05 of 13 June 2005 relating to the Central Bank actions on the money market • Instruction N° 001-CR/06 of 14 August 2006 relating to the official market rate • Instruction N° 002-CR/06 of 24 November 2006 relating to the statement modality and diffusion of information concerning check breach • Instruction N° 044/06-GV/OF of 13 December 2006 relating to the restructuring of the clearing house • Instruction N° 001-CR/07 of 10 May 2007 relating to the open-market operations. • Instruction N°00003-DCR/2009 relating to the Central Bank actions on the money market.
4.8 Financial intermediaries operating on these markets
Banks are the financial intermediaries and all the existing banks have signed an agreement with the Treasury department.
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The role of market intermediaries is to connect supply and demand of the Treasury bills contract allocation sold in the secondary market or by entering themselves as counterparts to ensure liquidity of the market.
The market intermediary has to carry out annual minimal transactions to the lump sum of 1 billion Ariary. Otherwise, the Treasury department will remove their status as intermediary.
The market intermediaries have the exclusive rights to divide the Treasury bills contract allocation.
4.9 Money market development
The Treasury bills contract allocations and Fihary Treasury Bill (BTF) that can be negotiate at a secondary market. Following the geographical extension of the primary market, it is necessary to develop the secondary market.
A “Financial Market Committee” was created on February 2005 with representatives from the Ministry of Finance, the Ministry of economy, the BCM as well as the executive secretariat of the Banking and Financial Supervision Commission. Few years later, the committee met technical problems and its works have been put into stand-by.
The establishment of the financial market would enable enterprises to satisfy their needs for long-term financing and to support the development of their activities, to mobilise and allocate savings towards the financial system. The financial system development would improve macroeconomic conditions and promote good governance through transparency.
5. External payment arrangement
5.1 The exchange rate policy
In 1990’s, reforms were undertaken under structural adjustment programme which included exchange rate liberalization. The implementation of floating exchange rate was the main issue of this reform in order to achieve the goal of market determined exchange rate, repatriation of export earnings and an increase in the flow of foreign currency.
Since May 1994, a foreign-currency interbank market has been implemented.
In 1996, decisive steps towards a market economy were characterised by the liberalisation of current transfers, a suppression of compulsory foreign currency cession and the credit granting in foreign currency. Since August 2014, a percentage of the export income must be sold on the foreign currency market.
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5.2 The foreign exchange interbank market
In this context, the organisation of the foreign-currency interbank market would determine freely the rate of the national currency vis à vis foreign currencies. Since 2004, a continuous foreign currency interbank market has been put in place. The market is delocalised using electronic devices for communication and information via Reuter’s software. The Central Bank and the primary banks are the participants.
A quotation of the Ariary for each commercial bank is displayed on the screen, depending on supply and demand, as well as international foreign exchange market developments. The foreign currencies quoted are the Euro and the US dollar.
The Central Bank is the market authority and may intervene on the market at any time, both for its own purpose or on behalf of its customers.. The Central Bank calculates and publishes the weighted average rate of the day, based on the rates of the exchange transactions reported by the market participants.
6. Currency convertibility and exchange control
6.1 Convertibility of the Ariary
In Madagascar, exchange control is under the responsibility of the Ministry of Finance which supervises directly foreign exchange transactions.
Madagascar is not yet a member of a monetary union or exchange rate union. The BCM has been a member of the clearing house of COMESA since1994.
The present exchange control system may be summarised as follows:
Convertibility of current account The country complies with article VIII of the International Monetary Fund statutes. In that, the current transfer transactions are no longer subject to prior authorisation of the Ministry of Finance. Administrative controls on current account transactions were eliminated.
Convertibility of the capital account Capital flow and financial transactions are still subject to administrative controls. It is too soon for a small and weak economy to liberalize the capital account. Risks of capital outflows and exchange rate attacks may be bigger than the gain expected from the policy choice.
Revenues in foreign currency All the export revenues must be repatriated within a period of 180 days from shipping date for all companies.
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The sale of export revenues in the foreign-currency interbank market, however, is not compulsory.
All the revenues from invisible transactions and current transfers must be repatriated within 30 days after the payment due date.
Foreign-currency account for residents and non-residents Residents and non-residents may have foreign-currency accounts in local commercial banks.
These accounts may be: - credited by bank transfer, deposit of bank notes and travellers’ cheques. - debited with: i) foreign-currency transfer on the foreign market; ii) foreign-currency sales on the foreign-exchange market; and iii) Withdrawal of travellers’ cheques.
Residents and non-residents may withdraw in foreign currency.
Banks should declare all the closing transactions of a foreign-currency account with the references and types of transactions.
7. The Central Bank and foreign debt
The Central Bank centralizes information concerning public and private debt. Data are from the Treasury and are compiled by the Central Bank. Furthermore, it produces data reports to inform the Treasury, its own departments and the donors. As the financial agent of the Government, the Central Bank operates transfers on behalf of the Treasury in favor of the creditors of this latter. Finally, it manages the accounts of the Treasury.
8. Supervision of financial institutions
8.1 Supervisory authority
The banking and financial supervisory commission (CSBF) established by Act No. 95-030 of 22 February 1996 is the credit institutions supervisory authority (commercial banks, financial institutions, Microfinance Institutions).
The CSBF is responsible for: - ensuring the smooth functioning of the credit institutions (organisation and functioning, quality of their financial situation); - monitoring compliance with the legal and regulatory provisions; and - taking disciplinary measures for failure observed.
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The CSBF is endowed with the most extensive prerogatives, namely: - administrative: prior issuance of authorization, licence for credit institutions and money exchange offices; - regulatory: definition of prudential standards and management rules, including the banking chart account; - supervisory: off-site and on-site control; and - disciplinary: sanction related to the noted failure (including withdrawal of licence).
The CSBF (the board) consists of eight members:
- the Governor of the Central Bank of Madagascar, President; - the Managing Director of the Central Bank of Madagascar; - the Managing Director of Treasury Department; - a member designated by the Minister of Finance; - a magistrate at the Supreme Court, nominated by the Senior Magistrate of the court; and - three members nominated on the basis of their banking and financial skills and integrity, on a joint proposal of the Minister of Finance and Governor of the Central Bank.
The CSBF is supported by an executive body: the Secretariat General.
In order to achieve the mission assigned to the banking supervision and regulatory authority, the Secretariat General of the CSBF has four departments: - the Regulation and research department, also in charge of licensing and compliance, - the Off-site control department, - the On-site control department, - the Methods and procedures department.
The CSBF initiated a restructuring in 2009 consisting of reorganization by businesses. For this purpose, the off-site control department and the on-site control department have been created and the systematic examination of adherence to standards in on-site inspections has been strengthened. In addition, the Methods and procedures department, an executive support, was created. This department is in charge of the microfinance credit centralization administration, the development and the procedure manuals updating, the database management and the preparation of the annual Commission report.
8.2 Credit institutions approval
The conducting of banking business requires the licence delivered by the CSBF. Furthermore, the banking Act makes provision for five categories of credit institutions.
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Those are approved as: - on-shore banks – can carry out all banking transactions; - off-shore banks – can carry out transactions only in foreign currency; - financial institutions – can do one or more banking transactions, except, provisionally, the reception of public sight deposits or less than two years; - specialized financial institutions – are specialized credit institutions invested by the Government of a permanent mission; and - microfinance institutions (MFIs) – can carry out microfinance banking business (deposit taking, granting micro-credit). They can be mutualist or non-mutualist.
8.3 Approval procedures of credit institutions
The representative or the promoter of the credit institution who applies for banking licence addresses an application in double specimen to the Secretariat General of the CSBF.
In particular, there are two kinds of licence delivered to MFIs: - an individual licence for non-network MFIs; - a collective licence for mutualist network MFIs.
The licence application form for any credit institution should include in general the following information: - individual information on each capital shareholder holding at least 5 per cent of the capital or the voting rights; - a comfort letter and certification of the information provided by each shareholder; and - a comprehensive statement of the project and objectives containing the information and required documents related to: i) the resources, ii) the activities description, iii) the organisation and management forecast (statutes draft, information to appreciate the integrity and the competence of the executive managers (at least two), information on the members of the board of directors, handbooks of operational and accounting procedures), iv) the control proceeding (internal control, identity of the auditor and all information about its mission), v) the business plan with the main regulatory ratios (projected financial accounts, for at least, a period of three years).
The recommended format of the application and the required file containing all the information needed are defined by: - the Directive No. 002/97-CSBF of 2 June 1997 for banks, financial institutions or specialized financial institutions; - the Directive No 002/2007-CSBF of 11 May 2007 for MFIs level 1; - the Directive No 003/2007-CSBF of 11 May 2007 for MFIs level 2 and 3;
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- the Directive No 001/2004-CSBF of 17 march 2014 on the shareholding of a territorial bank.
The Microfinance Act No 2005-016 of 29 September 2005 classifies the microfinance institutions in three levels. The required files are globally the same as described before except for institutions applying for collective licence (mutualist MFIs level 2 or 3 constituted in network).
The application file of those institutions must give complementary information such as: - minutes of the meeting empowered to create the central entity; - the financial states forecast of the central entity for its own operations and for its mutualist MFIs affiliated; and - the summary of the information about the network.
During the instruction of the file, the Secretariat General of the CSBF addresses to the applicant, if necessary, any request of complementary information or any notification regarding incomplete files.
The instruction closure is notified to the applicant in writing. The CSBF has one month from the instruction closure to decide.
The CSBF appreciates, on the one hand, the coherence between the global strategy and the business plan over a period of at least three years, and on the other hand, the ability of the company which applies its licence to realize its objectives of development in conditions that require a smooth functioning of the banking system and security of the applicants. It may request paid-up capital with an amount over the legal minimum and determine a target of equity to ensure compliance with prudential rules for the three first exercises of the activities.
The CSBF’s decision, signed by its President, is notified to the applicant. This decision determines the category in which the establishment is approved and may specify the authorized banking operations, the deadline to realize the project, if necessary, particular conditions stated by the CSBF for the entry into force of the decision.
The licence decision is published in the “Official Gazette” and in one of the national press at beneficiary expenses. The promoters must justify effective realization of the projects before expiry of the period determined by the decision. The decision will be void if no request for extension has been formulated. If the applicant wishes to maintain the project, he/she should introduce a new file including all the elements required previously. Once the conditions for licence are met, the CSBF allots inscription number to the approved credit institutions list. This list and its updates are published in the “Official Gazette”.
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8.4 Minimum capital required for different categories of credit institutions
According to the Decree No 2007-13 on 9 January 2007, the minimum capital required for different types of credit institutions is: - three billion Ariary (MGA 3 000 000 000) for on-shore and off-shore banks, and specialized financial institutions; - one billion Ariary (MGA 1 000 000 000) for financial institutions.
According to the Directive No 001/2004-CSBF of 17 March 2014, the presence of a financial partner reference as capital shareholder, holding at least a blocking minority of the capital or the voting rights, is required for territorial bank.
According to the Decree No 2007-013 on 9 January 2007, minimum capital of microfinance institution (MFI) varies depending on their legal form: MFI Level 1 Level 2 Level 3 Mutualist No minimum Collective authorization: Collective authorization: capital fifteen million Ariary three hundred million required (MGA 15 000 000) for basis; Ariary; sixty million Ariary (MGA 300 000 000) (MGA 60 000 000) for Union; for basis; one hundred million Ariary five hundred million Ariary (MGA 100 000 000) for (MGA 500 000 000) for Federation Union; one billion Ariary (MGA 1 000 000 000) for Federation.
Individual authorization: three hundred million Ariary Individual authorization : (MGA 300 000 000) fifteen million Ariary (MGA 15 000 000) 1 USD = 2 323,34 MGA on 12 May 2014
MFI Level 1 Level 2 Level 3 Non Mutualist No minimum Non deposit taking: Seven hundred million capital Limited Company (SARL): sixty Ariary required million Ariary (MGA 60 000 000); (MGA 700 000 000) Incorporated Company/PLC (SA): one hundred million Ariary (MGA 100 000 000)
Deposit taking: two hundred million Ariary (MGA 200 000 000)
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8.5 Measures and sanctions to be taken in case of default
The banking Act provides measures and sanctions in case of failure in the banking system. Measures are progressive and taken according to the degree of the infringements or noted failures.
At the beginning, a simple caution or an injunction to regularize, with or without deadline and action plan, is given to credit institutions that infringe the legal and regulatory provisions.
In case of no compliance with the caution or injunction, the CSBF can pronounce one or several disciplinary sanctions followed: - warning; - blame; - prohibition to carry out some operations and any other restrictions in the activities; - auditors dismissal; - temporary suspension of one or several executive managers with or without nomination of temporary trustee; - involuntarily resignation of the one or several of the executive managers with or without nomination of temporary trustee; and - withdrawal of the licence.
The CSBF can pronounce, either in the place, or in addition to these sanctions, pecuniary penalty whose amount is fixed by the banking Act and can be revised every year by Decree of the Minister of Finance on Commission proposal to follow the evolution of net banking proceeds. This same penalty is also applicable in case that offenders don’t comply with the information request from CSBF, communicate inaccurate documents or information to CSBF, make impediment to the exercise of controls or generally transgress applicable Directives to the sector or not comply with the obligations regarding the transmission of information in accordance with the forms and periodicity as well as the requirements related to the account publication.
8.6 Monitoring of prudential risks and standards
Monitoring of risks The surveillance mission of the risks is devolved on CSBF. The exercise of the banking business is subordinated to the licence delivered by the CSBF (control at the entry). Conditions of access are defined in such a way that only legal entities having sufficient financial resources, realistic development and action plan to ensure sustainability and viability, and managed by people with the requisite skills and experiences, will have access to the banking profession.
Risks monitoring consists of ensuring compliance with the regulatory provisions applicable to the profession in order to prevent, master and limit inherent risks to the exercise of the profession.
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In order to implement monitoring, the CSBF uses two control methods: off- site control and on-site control.
Off-site control refers to the analysis of regulatory declarative documents. It is permanent and universal (applicable to all credit institutions subjected to control).
The analysis aims at ensuring compliance and plausibility of transmitted data by credit institutions and compliance with various prudential ratios after checking the methods of calculation. Data provided will be used to be the frame of reference for any analysis at the sectoral level. Information contained in the various declarative statements generally find their source in accounting and financial data, and for this reason it is based on real data resulting from previous events.
An early detection device of banking failure has been set up (CAMEL type). Banks are assessed on the basis of the following criteria (risks factors): - compliance with prudential standards - portfolio quality - return - management quality - shareholding quality.
The assessment grid ranges between 1 and 5. It crystallises the bank’s evaluation through the above-mentioned assessment criteria and, in case a very poor grade is given, it indicates the corrective measures (steps or penalties) to be taken towards the institution or its executive officials.
Physical check aims at completing the verification monitoring method and has specific advantages: - wider and more targeted monitoring; - access to any information relatively without restriction and delay; - opportunity to ensure that accounting information is sincere and exhaustive to assess the pertinence and efficiency of vouchers verification; - checking of compliance with regulation in a wider spectrum rather than being restricted to the only prudential standards; and - opportunity to give an opinion on management quality, return, recurrent nature of profit, financial soundness, shareholding quality, risk control; and suitable amount of reserves for risks incurred by the credit institution.
8.7 Prudential regulation
Prudential regulation has three main purposes: - protecting depositors; - preventing systemic risk: transmission of an institution’s failure to the whole system; and
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- establishing sound and honest competition in the field of financial services delivery by defining clear and homogenous “rules of the game” relating to reliability and honesty in the statements, financial transparency as well as restriction in engaging one’s equity.
Prudential regulation was developed in accordance with international best practice applicable in the banking system and adapted to specifications of the economic situation and legislation in Madagascar. It comprises prudential ratios and management standards.
8.8 Prudential ratios
Available equity Available equity is the first protective line of deposits, which means the last guarantee that is offered to depositors in case of failure of the institution. This aggregate is a cornerstone of prudential standards as long as all the prudential ratios are recorded in it.
The available equity consists of two elements: - basic available equity or hard core, comprising internal resources such as paid-up capital, some reserves, provisions assimilated to reserves, balance brought forward. Intangible assets, the amount of share capital required and not yet released or uncalled, and losses are deducted from available equity; and - complementary equity, generally consisting of external resources assimilated to equity under some conditions such as subsidies, some guarantee funds and subordinated loans. Complementary equity is taken into account within the limit of the amount of basic equity.
Employment being considered as equity in some credit institutions is excluded from calculating the equity.
Capital adequacy Credit institutions should avoid taking excessive risks in proportion to their equity. Ratio = available equity x 100/ risks incurred > 8 per cent
For MFIs Level 2 Ratio = available equity x 100/ risks incurred > 15 per cent
For MFIs Level 3 Ratio = available equity x 100/ risks incurred > 12 per cent
Since 2006, the calculation of the risks incurred by credit institutions uses: - simplified standard approach for sovereign and banking counterparties (from 0 per cent to 150 per cent) - conversion factor in credit risk
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- reducing risk factor - applied to each type of asset.
Risks division ratio Breakdown the risks and avoid concentrating them on the same profit so as to avoid failure that can impact on the financial situation of the institutions.
Ratio = risks on the same profit x 100 /equity ≤ 35 per cent
Moreover, the total of risks, each of which going beyond 15 per cent of available equity must not exceed 10 times the total amount of available equity.
For MFIs Level 2 and 3 Ratio = risks on the same profit x 100 /equity ≤ 10 per cent
Foreign exchange position ratio Restrict exposure of the credit institutions to fluctuation risks of foreign exchange in function of their available equity.
Ratio = accumulation of foreign exchange positions (long and short) x 100/available equity ≤ 20 per cent
Restriction ratio of engagements of shareholders or associates, trustees, executive officials, officials and auditors. An avoidance of people who, in view of their powers or their equity ownership, can influence or participate in decision making of credit institutions, abuse their position to get the credit institutions to grant them or people with whom they have established relations of interest credit or any other credit benefit from the credit institution and therefore jeopardise resources of the institution and depositors assets.
Ratio = accumulation of engagements with targeted people x 100 / available equity ≤ 10 per cent
For MFIs Level 2 and 3 Ratio = accumulation of engagements with targeted people x 100 / available equity ≤ 15 per cent
(The engagements comprise credit paid out and engagement by signing).
Restriction ratio of taking of participation in existing corporate or in the process of establishment Credit institutions must focus their transactions and risk taking on the financing of the economy through the granting of credit from savings collected. Risk takings other than the ones defined above must be incidental and limited.
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Five ratios should be observed: - Shareholding in a company x 100/available equity ≤ 15 per cent - Shareholding in a company x 100/partnership capital ≤ 15 per cent - Total of shareholdings x 100 / available equity ≤ 60 per cent - Building other than those used for operation x 100 / available equity ≤ 10 per cent - Fixed assets + shareholdings ≤ equity.
Restriction ratio of the practice of non-banking activities Compelling the credit institutions to focus their activities on the financing of the economy and urging them not neglect their objectives and invest savings collected in other even more profitable non-banking activities.
Ratio = Proceeds of the non-banking activities (year n) x 100 / Net banking proceeds (year n-1) ≤ 10 per cent.
8.9 Management standards
Management standards are qualitative measures established to prevent risks of credit institutions, in addition to prudential ratios that are generally quantitative.
Provisioning of loaning rules - harmonising downgrading criteria in jeopardised debt; - defining evaluations and fund accumulation rules in accordance with the real risks and guarantees as well as the methods of the corresponding accounting; and - defining the responsibility of the auditors.
Rules related to the nomination of executive managers - ensuring that professional skills and integrity are taken into account before nomination of executive managers; and - ensuring that each institution has at least two competent resident executive managers for the functioning of the institution and who have necessary decision-making powers.
Additionally if the executive is composed of at least two managers, MFIs require an operating structure which is at least composed of a General meeting and a Board of Directors. The same criteria are required for the nomination of executive managers.
Mutualist MFIs are required to have at least a Credit commission at the Central entity and at the mutualist MFIs affiliated.
General meeting The General meeting has to: - validate annual accounts,
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- deliberate on the results of the exercise and their assignment, - proceed eventually to the renewal of the members of the Board of Directors, of the Control entity and the Credit commission, - decide changes in the statutes, - modify the amount of shares capital or pronounce the early dissolution of the MFI.
Board of Directors The Board of Directors is composed of members elected by the General meeting and is endowed with the most extensive powers within the limits of the corporate purpose to act in all circumstances on behalf of the MFI.
Credit commission The MFI’s Credit commission is formed by members elected by the General meeting. The Credit commission is responsible for: - validating the trade policy established by executive managers, - deciding granting credits, - defining policy loan recovery and monitoring, - validating with the Board of Directors while granting credit when the applicant is a member of the Credit commission.
Rules related to the nomination of auditors Ensuring that the auditors, having to express their opinions about the credit institutions, have minima required skills and experiences as well as (material, financial, human and technical) resources to carry out their term in all independence and free of any influence.
Internal control Internal control should ensure risk prevention by setting up specific rules and procedures, establishing a permanent transaction control system in relation to the above defined procedures and establishing an independent internal auditing function with means, powers and minima skills to carry out its mission.
Internal auditing is expected to produce drafts of annual reports on the internal control system and their efficiency, possible failures or weaknesses, suggestions for improvement.
An audit committee linked to the governing body of the institution is responsible for validating and assessing the work done and internal audit reports.
An annual report on the internal control system is forwarded to CSBF to allow it to assess the established system. Furthermore, physical checks on the internal control may be carried out diligently.
MFIs are required to have a minimum control structure composed by Internal control and Auditors. Their roles are the same as those of credit institutions.
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Mutualist MFIs must have a Control Committee composed of members elected by the General meeting. The Control Committee works closely with internal control.
Control Committee is responsible for: - checking practices in matters of good governance, - denouncing all fraud and misuse of corporate assets, - validating the internal and auditor’s report, - validating the annual report on internal control, - verifying the existence of suspicious operations related to the prevention and the fight against money laundering and the financing of terrorism, - establishing a periodical plan at least annually and program controls, - reporting directly to the CSBF for significant events without waiting for the next periodic statement, copy to the Board of Directors.
Accounting rules The setting of accounting rules should ensure the establishment of a system that is harmonious for the assessment, venture accounting and presentation of financial information of all the credit institutions. It also ensures securing a coherent, reliable and comparable accounting and financial information to allow control, monitoring and supervision of credit institutions.
These rules consist of: - a banking chart account (in accordance with IFRS standards) ; and - a periodical declarative obligation including annual financial statements.
Additionally to financial statements, MFIs have to address to the Secretariat General of the CSBF data relative to the financial transparency, such as prudential ratios and management standards, general and statistical information.
The information to be communicated differs from the MFI’s type and level. For mutualist MFIs with a collective licence, declarations are done by the Central entity.
Minimum share capital The share capital required corresponds to the minimum amount of funds that each credit institution should actually have in order to start business banking.
Authorized operations According to the Directive No 005/2007-CSBF of 11 may 2007, authorized operations defer from the level and the legal form of MFI.
8.10 Anti-money laundering and financing of terrorism measures
According to the Directive No006/2007-CSBF of 11 May 2007 related to the prevention and the fight against money laundering and the financing
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of terrorism, credit institutions under the banking legislation and any financial institution subject to the supervision of the CSBF, including foreign exchange office, must set up preventive measures and organization for the fight against money laundering and terrorist financing, which are subject of a report to the CSBF. The Directive established the obligation of due diligence including customers and unusual transactions, the reporting of suspicious transactions to SAMIFIN (Financial intelligence service) and penalties for serious lack of vigilance or a deficiency in the organization of internal procedures prevention of money laundering and terrorist financing.
9. National payment, clearing and settlement system
Malagasy Payment Systems have been the subject of a significant reform following a Project of modernization that lasted 3 years (2006-2009). The main purpose of this Project was the implementation of reliable and secure payment systems which speeds up transactions processing and is affordable for the public. Several reforms have been undertaken in order to implement the new systems, both on the legal and regulatory framework as on the technical aspect (establishment of common standards, implementation of the required technical infrastructures etc.).
9.1 Legal and regulatory framework
The Payment Systems work under two fundamental texts: – The Central Bank Act (Act No. 94-004 of June 10, 1994) which, in its article 42, states that "The Central Bank ensures the smooth running of payment systems"; – The instruction n°001-DSP/09 of September 22, 2009 on the operating of the Automated Clearing and Settlement System. It describes the types of participation, the operating rules, the rules governing the processes and the formats used in the system. It only applies to participants in the system and is not applicable to third parties. Therefore, stakeholders are required to keep records of paper documents on which transactions are based in order to be used as evidence in case of dispute.
At present, the drafting of laws on Payment Systems, on Electronic money and on Mobile payment is underway to provide a legal basis for transactions.
9.2 Systems managed by the Central Bank
The instruction n°001-DSP/09 defines two subsystems which are owned and managed by the central Bank: – The Real Time Gross Settlement System (RTGS) – The Retail Payment Clearing system (ACH)
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9.2.1 The RTGS The RTGS, which has been operational since October 9, 2009, settles urgent interbank transactions, as well as transactions which equal or exceed 500 million Ariary (about USD173,000).
The RTGS handles 300 instructions on an average business day, for an approximate total amount of 130 billion Ariary (about USD45 million). The current number of participants is 12 (the Central Bank, 10 commercial banks and the Malagasy Post Office).
9.2.2. The ACH The Automated Clearing House, which has been operational since October 23, 2009 handles retail payments (less than 500 million Ariary).Presently, processed values are cheques, credit transfers and bills of exchange. Later, EFT debits are expected to be integrated in the system. This subsystem also includes 12 participants.
9.2.3. The Manual Clearing Houses Vestige of the existing system before the payment systems modernization, the manual clearing houses are still maintained to handle the leftovers of non- standardized cheques and bills. However, these manual clearing houses are planned to be closed in the medium term. At present, there are 13 manual clearing houses spread across the island, all managed by the Central Bank.
9.3 Systems not managed by the BCM
9.3.1 Bank cards The use of bank cards in Madagascar appeared in 1997 following the initiative of one local commercial bank. In the beginning, these cards were only private. Thereafter, cards affiliated to VISA international network have also emerged.
Currently, the interoperability of bank cards in Madagascar is limited between those affiliated to the VISA network. The clearing of interbank transactions on cards takes place abroad and, thus, causes significant costs for users. The Central Bank plans in medium term to take measures in order to enhance the interoperability of bank cards used in Madagascar.
9.3.2 Mobile payments Mobile payments have occurred from 2010. Till now, three Mobile Network Operators have been licensed as "Intermediaries in Banking Operations" and have been authorized to offer mobile payment services. The current authorized transactions are: – Deposits and withdrawals of cash on the mobile account; – Transfer between mobile accounts, between bank account and mobile account, between mobile account and bank account; – Receipt of international transfers; – Payment of invoices;
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– Purchase of airtime credit via the mobile account.
9.4 Centralisation of payment incidents
The Central Bank, through the credit management office, registers and manages payment incidents. A monthly file of outstanding debts is forwarded to the banks and signatures of people doing many incidents are removed from refinancing by the Banque Centrale de Madagascar.
The Central Bank works in close collaboration with financial institutions as well as legal institutions to which the above-mentioned information is forwarded periodically.
A new Act on prevention and repression on cheques breaches has been enforced since 25 April 2005, based on decriminalisation, which consists of sharing sanctions between the banking system and judicial administration. New measures for safer use of cheques and a decrease of fiduciary circulation were introduced by the Act.. These measures are listed as follows: - Banking prohibition from the first incident (lack or insufficient funds); - opportunity for the issuer to ensure regularisation within a period as prescribed by the Act (0 to 5 days); - systematic check of the outstanding debts Central File managed by the Central Bank before issuance of the first cheque form at the opening of an account; - starting judicial procedure in case regularisations are not done; and - obligation for the Court to notify Banque Centrale de Madagascar on the legal restraint pronounced against issuers of cheques breaches.
Sanction applied: - by the banks Banks enforce banking restraint against issuers of insufficient fund cheques immediately when they notice the breach. This restraint is valid for a period of one year.
- by the Central Bank - Case of people who do not engage in commercial activities: They “cannot be called upon” after two incidents of payment over a period of 12 consecutive months. - Case of people doing commercial activities: They are excluded from refinancing by the Central Bank after four incidents of payment noticed over a period of 18 consecutive months.
Incriminated signatures may be rehabilitated at the request of a bank about six months following the effective date of the sanction, on presentation of relevant information.
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9.5 Securities transactions settlement
Treasury bills are now the only negotiable securities in Madagascar. An important reform regarding Treasury bills management was carried out in May 1997 and it influenced the massive issuing of Treasury bills whose market was opened to all transactors.
Current-account management and in a dematerialised form issued on the primary market is entrusted by decree to BCM whose role is that of a centraliser body.
Invitations for tender and all transactions on Treasury bills are managed by a computerised system that guarantees the requirements of interveners as far as security and speed are concerned.
9.6 The rules of the Treasury bills settlement system
Settlement principle on delivery All the transactions involving securities transfer and cash transfer are processed by the system in such a way that they take place on the same date without other subscribers’ intervention. This principle also applies to the primary market at the end of invitations for tender, as well as on transactions carried out by mutual agreement on the secondary market.
Double notification rule and instructions matching When a transaction involves two intermediaries, observation of the principle of payment on delivery is based on a double notification requirement. Each intermediary has to notify the centraliser body about the conditions of the transaction carried out: Purchase or sale, date of security, counterpart, category of security, face value of the transaction and net amount to pay.
In case of lack of compatibility between information provided by both parties, the centraliser body should notify the nature of anomaly to each of the counterparts that should bring appropriate remedies to ensure matching.
Control the existence of provision: on securities and cash The Central Bank or the intermediary, depending on the cases, should make sure there is security provision in the accounts of the institutions that have to deliver securities and cash in case the buyer is not a credit institution. This control should be done beforehand as each notification to the centraliser body leads to the debiting of the concerned institutions’ accounts.
Outcome of the transactions In order to get the outcome, the system records not only the transactions of the primary and secondary market, but also the ones from the money market in the context of open market.
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On the primary market, the outcome is produced on the date of payment set in the time-frame. On the secondary market, the outcome takes place on an agreed date between two parties in the context of usual daily practice (15h).
Transactions of the open market are concluded on value today.
Dissemination of information Contacts between the Central Bank and subscribers are made by fax or simple mail. Subscribers’ identity is protected.
Institutional relations The system is based on the existence of interfaces which: - intervene between the issuer and the subscribers; and - manage everything ensuring particularly the outcome of each transaction during subscription; and reimbursement on maturity date.
On the primary market the centraliser body plays this role of interface, manages the tenders and ensures payment on delivery of securities as well at the time of issuance as on maturity date. On the secondary market, the market intermediaries bring the operators close to outcome of the transactions.
External transfers’ settlement system Settlements relating to external transfers are based on the Malagasy banking system. External transfers are carried out through the foreign correspondents’ network of local banks in local currency. In foreign-exchange transaction cover, they are carried out from the bank accounts open in the books of account of the Central Bank.
There is a local foreign-exchange interbank market, the MID which operates with two currencies: The Euro European currency (EUR) and the American dollar (USD). It is a delocalised market where transactions are performed with the help of Reuters dealing means. The foreign-exchange transactions carried out through the MID are settled by bank accounts in local currency open in the books of the Central Bank.
So, all the banks are affiliated to SWIFT and all the transactions are dealt with through this network.
Measures intended for ruling out or restricting transactional risks and short positions at the end of the day The performance of foreign transactions fits into the context of internationally acceptable best practice structures and procedures that contain provisions ensuring prevention or monitoring of inherent transactions.
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10. Currency in use
Since 1 January 2005, the currency used in Madagascar has been the Ariary. The currency changed from Franc Malagasy to Ariary and the conversion rate is one Ariary for five francs Malagasy.
Currency used and date issued Coins 50 Ar 20Ar 10Ar 5Ar 4Ar 2Ar 1Ar 0.20Ar 11/01/93 02/11/92 02/11/92 02/11/92 1970 20/12/04 20/12/04 1965
Notes 10.000 Ar 5.000Ar 2.000Ar 1.000Ar 500Ar 200Ar 100Ar 31/07/03 31/07/03 31/07/03 20/12/04 20/12/04 25/11/04 25/11/04
11. Other activities of the Central Bank not covered above
11.1 Monetary signs management
The supply of monetary signs over the national territory, issuance and change of note and coin as well as their destruction is the responsibility of the Central Bank and they are worked out on the basis of economic needs.
11.2 Services provided to the banks
The Central Bank opens its books of account to banks and financial institutions. It ensures centralisation of banking risks and information related to cheques breaches.
12. The position of the Central Bank in SADC
Madagascar has been a member of SADC since August 2005, after being admitted with the status of special observer in August 2004.
Madagascar has already signed the SADC treaty and two memorandum of understanding: - SADC Treaty (December 2004) - MoU on privileges and immunity (December 2004) - MoU on commerce (July 2005) - MoU on health - MoU on the court
The Banque Centrale de Madagascar has been member of the Committee of Central Bank Governors since September 2005.
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Three Memorandum of Understanding established by the Committee of Central Bank Governors have been signed by the Bank: - ITC (Information Technology and Communication) - Payment, Clearing and Settlement System - Exchange control policies
13. Publications
- Bulletin d’Information et de Statistics (BIS) (News Report and reports on statistics) - Revue of the Banque Centrale de Madagascar - Annual report - Research.
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Reserve Bank of Malawi
Reserve Bank of Malawi PO Box 30063 Capital City Lilongwe 3 Malawi Fax: +265 1 772752/1 or +265 1 772289 Tel: +265 1 770600
1. History
The Reserve Bank of Malawi (the Bank) was established by an Act of Parliament passed on 23 July 1964. It commenced operations in Blantyre in June 1965. The Bank's headquarters moved to Lilongwe in 1981, and the Blantyre office became the first branch.
2. Relationship with government
The Reserve Bank of Malawi (Amendment) Act of 2010 provides for full independence of the Bank in the areas of monetary policy and the issuance of Malawi currency.
The Governor and up to three Deputy Governors are appointed by the President of the Republic of Malawi for a term of five years and are eligible for reappointment for one more term upon the expiry of their term. The Board consists of the Governor, at least one but not more than three Deputy Governors, and at least four but not more than seven Directors, two of whom must come from the business community. Every Director is appointed by the President of the Republic of Malawi for a period of two years and is eligible for reappointment. The Bank has its own budget approved annually by the Board.
The Central Bank and Treasury consult on a regular basis about the formulation and implementation of fiscal policy. At his discretion, the Governor may inform the Ministry of Finance about developments in monetary policy.
The Bank conducts the following activities on behalf of the Government: - the issue and management of government securities; - the facilitation and development of money and capital markets; - the guaranteeing of the repayment of the principal and the repayment of interest and charges of any external borrowing by the Government; - acting as agent of the Government as may be agreed by the Minister of Finance and the Bank; - managing and implementation of exchange control;
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- making payments to, and receiving moneys from, the International Monetary Fund on behalf of the Government; and
The Bank may make short-term advances to the Government in respect of temporary shortfalls in budget revenues, provided that the total amount of advances shall not exceed twenty per cent of the annual budgeted domestic revenues. All advances are payable within four months of the end of the government's financial year in which the advances were made, and if after the end of the financial year such advances remain outstanding, the power of the Bank to grant further such advances shall not be exercisable until the outstanding advances have been repaid. If at any time the Bank has any Government loans and advances outstanding, irrespective of maturity, the Bank may require the Government to issue to it Treasury bills or promissory notes and other instruments as the Bank may deem fit for open market policy purposes. All advances are at the ruling Bank rate.
The capital of the Bank can be increased by such amounts as the Board may resolve with the consent of the Minister of Finance. From time to time, the Bank has provided export development finance. The Bank recently supported the development of a small and medium enterprise fund.
3. Structure
The head office of the Bank is in Lilongwe, and has one branch in Blantyre. The head office is charged with all the functions of a central bank. The main function of the branch in Blantyre is currency issue and recently supervision of financial institutions.
4. Design and Conduct of Monetary policy
4.1 Main objectives of Monetary Policy
The main objectives of monetary policy are to promote economic growth, employment, stability in prices and to maintain a sustainable balance of payments position. The Reserve Bank of Malawi seeks to influence the growth of the M2 money aggregate and market interest rates to attain these objectives.
4.2 Instruments of Monetary Policy
The main instruments used by the Reserve Bank of Malawi are liquidity reserve requirements (LRR), open market operations (OMO) and the bank rate.
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4.3 Types of refinancing as well as collateral used
The commonly used type of refinancing is the repurchase agreement collateralised by short-term government securities. However, liquidity reserve requirements may be drawn upon for domestic cheque clearing, provided that the weekly average reserve requirement is within the required ratio. Violation of the average weekly reserve requirements attracts a penalty charge.
4.4 The money supply aggregate that plays the main role in monetary policy
The main money supply aggregate which plays a role in Malawi's monetary policy is the M2 aggregate. The components of M2 are the following: - Currency outside banks - Demand deposits - Time and savings deposits - Foreign currency denominated deposits
4.5 Reserve requirements on financial institutions
Reserve requirements are applicable to any depository institution licensed under the Banking Act, 2010, and which accepts demand, savings or time deposits or any substantial equivalent thereof. For the time being, these institutions are banks and discount houses. The eligible liquid assets consist of: - Balances on deposit with the Reserve Bank of Malawi.
Reserves are required to be in domestic currency as the underlying deposit liabilities. Required reserves are currently non-interest bearing.
5. Structure of the financial markets
5.1 Organisation of the money and capital markets
The domestic money market includes all commercial banks, finance houses, savings and credit institutions, institutional investors and discount houses.
The capital market in Malawi is in a nascent stage of development with four stockbrokers operating on the Malawi Stock Exchange (MSE). There are fourteen listed companies.
5.2 Instruments used in both these markets
The major money market instruments are: – Treasury Bills – REPOS Malawi
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– Bankers Acceptances – Commercial Paper – Savings bond – Term deposits
Instruments used in the capital market are shares (stocks), Government of Malawi Local Registered Stocks (LRS), promissory notes units of CIS (Unit Trusts).
5.3 Legal frameworks existing for the money and capital markets
The money and capital markets players in Malawi operate within the following legal framework: • The Financial Services Act • The Banking Act, 2010 • The Securities Act, 2010 • Pension Act, 2011 • Insurance Act, 2010 • Microfinance Act, 2010 • Financial Cooperatives Act, 2011 • Exchange Control Act • Anti-Money Laundering, Proceeds of Crime and Terrorist Financing Act • Credit Reference Bureau Act 2010 • Directives and Regulations that are issued under the respective statutes
5.4 Type of financial intermediaries operating in these markets
Central bank: Reserve Bank of Malawi
Commercial banks: National Bank of Malawi Standard Bank First Merchant Bank Ecobank INDEBank NEDBANK NBS Bank Ltd Malawi Savings Bank Ltd Opportunity International Bank of Malawi FDH Bank CDH Investment Bank New Finance Bank
Finance houses and Merchant Banks: Leasing and Finance Company Malawi
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Savings and Credit institutions:
Fodya SACCO Mzimba Teachers SACCO Mudi SACCO Sunbird Tourism SACCOAdmarc SACCO Sucoma SACCO Veterinary SACCO Phindu SACCOKaronga Teachers SACCO United Nations SACCO Lilongwe ADD SACCO Regional Surveys SACCO Chitukuko SACCO Kasungu ADD SACCO Ulimi SACCO Dedza Teachers SACCO Mzinda SACCO Polymed SACCO Oilcom SACCO University SACCO Future SACCO Ministry of Transport SACCO Limbe Leaf SACCO Mchinji Teachers SACCO Blantyre ADD SACCO Thyolo Teachers SACCO Dwasco Employees SACCO Chikangawa Community SACCO Lilongwe Urban Teachers SACCO PTC Group Employees SACCO Nsanje Community SACCO Rumphi Teachers SACCO Fincoop SACCO Securicor SACCO UNC SACCO Kandiya SACCO Kwacibi SACCO Henred Fruehauf MUSSCO Msondole SACCO Champiti SACCO Ligowe SACCO Kusunga Community SACCO Kasantha Community SACCO Phalombe Community SACCO Malawi
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Sumuka Community SACCO Reserve Bank of Malawi SACCO Auction Holdings Employees SACCO Bvumbwe Community SACCO
Microfinance Institutions: Microcredit Agencies Business Finance Solutions SAILE Financial Services Umunthu Microfinance Greenroot Finance Moyowathu Financial Services TEECs DF Agency GetBucks Malawi National Association of Business Women FEDOMA Microfinance Project Fountain Microfinance Citizen Microfinance EPIK Finance Ltd ECORET Ltd
Non-deposit Taking Microfinance Institutions: Pride Malawi Greenwing Capital Financial Services Microloan Foundation CUMO Microfinance Blue Financial Services IZWE Loans Select Microfinance VisionFund Malawi FINCA Ltd
Development finance institutions: INDEfund
Insurance institutions: General Insurers: NICO General Insurance Co Ltd Charter Insurance Company Ltd General Alliance Insurance Co Ltd Prime Insurance Co Ltd Reunion Insurance Co Ltd Real Insurance Co Mw Ltd United General Insurance Co
Re-Insurers: Malawi Re Reinsurance Co Ltd Malawi
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Life-Insurers: Vanguard Life Assurance Co Ltd Old Mutual Life Assurance Co Mw Ltd NICO Life Assurance Co Ltd
Stock Exchanges: Malawi Stock Exchange Ltd
Brokers: Stockbrokers Malawi Ltd FDH Stockbrokers Ltd African Alliance Securities Ltd CDH Capital Ltd Collective Investment Schemes Old Mutual Unit Trust Mw Ltd National Investment Trust Ltd
Investment Advisors: FDH Financial Holdings Ltd CDH Asset Management Ltd NICO Asset Managers Ltd Old Mutual Investment Group Ltd Standard Bank Limited (Malawi)
Portfolio Managers: Alliance Capital Ltd CDH Asset Management Ltd FMB Capital Markets Ltd INDETrust Limited NBM-Capital Market Ltd NICO Asset Managers Ltd Old Mutual Investments Group Ltd Transfers Secretaries: First Merchant Bank Transfer Secretaries NICO Asset Managers Ltd Securities Representatives
CDH Asset Management Ltd: Daniel Dunga Cuthbert Mnyenyembe Bright Chiwaula Blessings Kadazi
FDH Financial Holdings Ltd: George Ramsey Chitera Malawi
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Thomson Frank Mpinganjira
NICO Asset Managers Ltd: Emmanuel Chokani Chikondi Gomani Esnat Lweya Zindaba Mbekeani Masautso Elias Clara Maliro
Old Mutual Investment Group Ltd: James Mhura Mphatso Kasalika Khumbo Shaba Jack Suleman
FMB Capital Ltd: John Sean Michael O’neill Robert Wilson
Standard Bank Ltd: Etness Chanza Frank Chantaya Shakil Sata
Discount houses First Discount House Ltd Pension Funds
6. External payment arrangements
6.1 Determination of the exchange rate policy
The Reserve Bank of Malawi has Authorized Dealer Banks have the responsibility to determine the country's exchange rate policy.
6.2 The present exchange rate system
The Malawi kwacha was floated on 7 February 1994. The official exchange rate is based on the mid-rate of the average buying and selling rates as reported by the banks.
6.3 Organising the exchange market
The foreign exchange market in Malawi is organised as follows: Malawi
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- The Interbank Market: Reserve Bank of Malawi, commercial banks and finance houses (ADBs). - Forex bureau market specialises in spot cash transactions - Residents may maintain foreign currency denominated accounts (FCDAs) with local banks - Non-residents may maintain FCDAs or non-resident local currency deposit accounts - Forex interbank marketing system based on the Reuters System.
6.4 The central bank's involvement in managing foreign exchange reserves
The Reserve Bank is mandated under the Reserve Bank of Malawi Act to manage the country's foreign exchange reserves.
7. Currency convertibility and exchange control
7.1 Current state of currency convertibility
Currency is convertible with respect to current account transactions. Given that capital account controls still exist, the currency is not convertible internationally.
7.2 Exchange control restrictions on current account
No exchange controls exist on the current account.
7.3 Restrictions on capital account
Both inward and outward direct and portfolio investments require prior approval.
7.4 Retention rules for foreign exchange earned or owned by residents
Retention requirements were removed, an exporter is allowed to keep all proceeds. The exporter may hold the balance in a foreign currency denominated account for as long as required.
8. The central bank and external debt
8.1 The role of the central bank in managing the country's external debt
The Central Bank of Malawi is responsible for the following issues relating to the country's external debt: - maintaining a comprehensive database on all public sector external debt; Malawi
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- processing various external debt aggregates and updating the records on Malawi's external debt position; - processing the debt servicing instructions from the Ministry of Finance; - currently creating a database on private sector external debt; - assisting the Treasury with debt management and negotiations on new multilateral and bilateral loans; and - managing the local debt of the Government and issues and trades in Government paper under directives from the Treasury.
8.2 The role of Treasury in this respect
Acting on behalf of the Malawi Government, the Treasury is responsible for borrowing, debt management and servicing.
9. Supervision of financial institutions
9.1 Banking institutions
9.1.1 Authority responsible for banking supervision
The Registrar of Financial Institutions
9.1.2 Licensing procedures for establishing a new bank
- The initial step is for the prospective investor to contact the Registrar and provide a synopsis of the nature of business to be conducted.
- When the Registrar has determined that the proposal has potential and is compatible with the interest of the national economy and public interest, the prospective applicant is provided with a set of application forms. If the Registrar determines at the outset that the proposal is incompatible, the prospective applicant is advised accordingly.
- Applications for a license to conduct banking business are made to the Registrar An application processing fee of Malawi Kwacha equivalent of US$5,000 equivalent is payable when submitting the application documentation.
- Before granting a license the following factors are considered: i) the validity and accuracy of the documents and information submitted; ii) the financial condition and history of the applicant; iii) the reputation of the executive officers as well as their competence and expertise in conducting the proposed business; iv) the capacity of the applicant to maintain an adequate capital base at all times;
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v) the nature, scope and legality of these proposed business operations with regard to soundness, solvency and liquidity; vi) the ability of the proposed business to meet the needs and convenience of the communities and sectors within which it will operate; vii) the impact of the proposed bank’s business operations on prospective depositors, creditors, the national economy and the general public; viii) the ability of the proposed bank to hire at least two persons as executive officers; ix) the capacity of the proposed bank to commence its business operations within 12 months from the day an operating license is granted; x) the adequacy of the capital base and earning prospects resulting from the intended business; xi) the structure of its organisation; and xii) the capacity of the applicant to comply with all conditions of the license, provisions of the Act and any other Act relevant to its business.
9.1.3 Types of licenses that exist
There are no specific categories of banking licenses. All banks are issued a similar generic banking license.
9.1.4 Minimum capital requirements for the different types of banks
The minimum capital requirement for a bank is US$ 5.0 million. Minimum startup capital for other financial institutions licensed under the Banking Act such as leasing companies and discount houses is USD1.5 million.
9.1.5 Regulations governing current activities of banks
- Large credit exposure: There is currently a limit of 25 per cent of core capital on lending to one single borrower or group of related borrowers. This is referred to as the Prudential Lending Limit. Waivers on compliance may however be granted on exceptional facilities of national interest. - Capital adequacy: A risk-weighted tier 1 capital requirement of 8 per cent for commercial banks and 6 per cent for other financial institutions is applied. - Liquidity ratio: Banks are required to institute a liquidity policy statement which serves as the basis for monitoring funds and liquidity management. However, an indicative ratio of 30 per cent of liquid assets to total deposits is observed. Malawi
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- Open foreign exchange position: An overall foreign exchange exposure limit of 35 per cent of qualifying capital is in force. - Provision for bad debts: There is an Asset Classification Directive which stipulates suspension of interest and provision for bad debts in liaison with requirements of IAS39. - Restricted lending: Over and above the 25 per cent limit on lending to an individual borrower, there are some guidelines on lending to shareholders, executive officers, staff and their relatives. This is guided by the Directive on Transactions with related persons.
9.1.6 Main supervisory practices
Supervision is conducted through both off-site analysis and risk based on-site examinations. Routine on-site visits are made at least once a year to each institution. However, special visits may be arranged whenever necessary. In order to facilitate off-site analysis, financial institutions submit balance sheets as well as profit and loss accounts on a monthly basis. Other prudential returns (computation of capital adequacy, suspension of interest and provisioning) are also submitted on a quarterly basis.
External auditors are required to submit a full management audit report after every financial year audit.
As required by the Directive on Audit Committees, Annual Independent Audit and Publication of Financial Statements for Licensed Institutions, financial institutions, are also obliged to publish within six months after the close of their financial year, their audited annual accounts in at least one of the widely circulated daily newspapers.
9.1.7 Measures to remedy deficiencies as well as penalties utilised
The Banking Act empowers the Reserve Bank to (i) impose administrative and monetary penalties, (ii) remove from office any executive officer (iii) appoint a care-taking officer (iv) add new conditions to a license and (v) revoke a license.
9.2 Non-banking institutions
9.2.1 Responsibility for supervision of non-banking financial institutions
The Registrar of Financial Institutions is also the regulator and supervisor of non-bank financial institutions. The office of the Registrar is established under section 8 of the Financial Services Act as the sole regulator and supervisor of the financial industry in Malawi.
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9.2.2 Categories of non-bank financial institutions and their licensing procedures
The broad groups of non-banking financial institutions, namely: - Insurance and assurance companies - Pension funds - Leasing and hire purchase companies - Building societies - Microfinance institutions - Savings and credit co-operatives - Development finance institutions - Capital Market players - Credit Reference Bureaus
Licensing procedures are laid down in respective laws and Directives issues by the Registrar.
9.2.3 Information as requested under 9.1 which applies to non-banking institutions Law Licensing Authority Category Insurance and Registrar of Financial Insurance Act assurance Institutions Registrar of Financial Pension funds Pensions Act, 2011 Institutions Registrar of Financial Building societies Building Societies Act Institutions Development finance Companies Act Registrar General institutions Microfinance Act Registrar of Financial Microfinance Institutions Institutions Savings and credit Financial Cooperative Act Registrar of Financial industry 2011 Institutions
9.3 Capital Market
Under the Reserve Bank of Malawi Act (1989) and the Securities Act, 2011, the Bank is charged with duty of promoting the establishment and maintenance of adequate money and capital markets by establishing and monitoring the regulatory frameworks of such markets for the maintenance of orderly market conditions. Specifically, the Securities Act, 2011 provides for the development of a capital market; expansion of access by companies in Malawi to term financing for development purposes; utilisation of savings and excess liquidity in domestic development; adequate regulation of the capital market and self-regulatory organisations and to foster development of fair and orderly market.
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9.3.1 Categories of Capital Market Professionals
The Malawi Stock Exchange (MSE) is a registered self-regulatory organisation (SRO) which is itself supervised by the Registrar. Other market professionals include the following players: - brokers/dealers; - portfolio/fund managers; - investment advisers; - Investment institutions namely unit trusts, mutual funds and/or collective investment schemes. - Transfer secretaries - Securities Representatives
Licensing requirements are laid down in respective Directives and guidelines.
10. National payment, clearing and settlement system
10.1 How is the payment, clearing and settlement system organised?
Between January 2014 and December 2014, the RBM made significant strides on two major projects with support from the World Bank under Financial Sector Technical Assistance Project (FSTAP). The Automated Transfer System (ATS) and the Central Securities Depository (CSD) that went live in December 2014. The ATS has combined functionalities of the Real Time Gross Settlement (RTGS) System and the Automated Clearing House (ACH). In addition, implementation of the National Switch Project, which went live in February 2015, facilitates interoperability of the commercial banks’ auto teller machines (ATMs), point of sale (POS) devices, internet and mobile banking among others. Regionally, Malawi was among the first three countries outside the Common Monetary Area (CMA) to go live in the SADC Integrated Regional Electronic Settlement System (SIRESS) in April 2014. Other developments during the period under review included promotion of innovative retail payments products and development of appropriate legal framework for oversight of payment systems in Malawi. The successful implementation of the NPS infrastructure was done with the support from the National Payments Council (NPC), the Bankers Association of Malawi (BAM), Government, World Bank, SADC, COMESA and other stakeholders.
10.2 What is the role of the central bank in the system?
The Reserve Bank of Malawi is entrusted with the responsibility of promoting, maintaining and regulating the efficient operation of the payment, clearing and settlement system. In this regard, the Reserve Bank of Malawi plays a leading role in major payment systems reform initiatives.
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While acting as a settlement provider through the ATS, the Reserve Bank of Malawi conducts oversight activities of these systems and other payment systems related products and services to ensure that their operations conform to internationally acceptable best practices.
10.3 Give a short description of the processing of payment instructions
The RTGS component is intended for settlement of high value and time- sensitive transactions on a gross (individual) basis. It also settles net payment instructions from other clearing houses apart from the ACH such as the National Switch. Besides cheques, the ACH also processes credit transfers and direct debits which are new payment products in the country. The CSD is a recent reform initiative aimed at facilitating efficient processing of securities on the financial market. By interfacing the CSD with the ATS, settlement defaults in money market transactions have been eliminated since securities transfer is synchronised, in real time, with settlement.
Besides banks, the Government and Malawi Revenue Authority (MRA) have for the first time in the history of the national payments system reforms, been linked directly to the country’s clearing and settlement infrastructure. While MRA has been granted “view-only” rights in the system to monitor its revenue account positions vis-à-vis tax remittances, access to the system by Government is for the time being limited to credit transactions in the ACH. Government transactions are centrally transmitted into the ATS through the Accountant General’s Department (AGD).
For the RTGS component of the ATS, participants are linked through the SWIFT infrastructure. ACH transaction messages (cheques, credit transfers and direct debits) are processed through a virtual private network (VPN) supplied by the Malawi Telecommunications Limited and Globe Internet. Similarly, participants are interfaced to the CSD solution through the VPN. In order to ensure straight through processing (STP) of transactions, the ATS and CSD is integrated to the core banking systems of each of the participants. This has improved the processing cycle of transactions in ATS and CSD.
11. Currency in use
11.1 List of legal tender notes and coins currently issued and in use in the economy
Currency: Kwacha (notes) and Tambala (coin) Notes: K1,000, K500, K200, K100, K50, K20 Coins: -K10, K5, K1, 50t, 20t, 10t, 5t, 2t, 1t (100t = K1)
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12. Other activities of the central bank not covered above
None.
13. The position of the central bank in SADC
13.1 Special relationships with other central banks in SADC (CMA excluded)
- Currency repatriation arrangements with the South African Reserve Bank; - Training for central bankers with the South African Reserve Bank. - Membership of: MEFMI, AACB, COMESA, SADC, CISNA
14. Publications
14.1 Regularly published publications
Quarterly Financial and Economic Review Annual Report and Statement of Accounts Monthly Economic Review Mid-year Economic Report Registrar of Financial Institutions’ Annual Report The Central Banker
14.2 Occasional/special publications published since 1990
- Official inauguration of the new Blantyre Branch, 26 November 1998 - Several occasional papers written by staff in the Research Department.
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Bank of Mauritius
Bank of Mauritius PO Box 29 Port Louis Mauritius Fax: 230 208 9204 Tel: 230 202 3953/ 3882 https://www.bom.mu E-mail address: [email protected]
1. History
The Bill for the establishment of the Bank of Mauritius (‘Bank’) as the central bank of Mauritius was passed by the Legislative Assembly on 26 July 1966. It received the assent of the Governor-General on 28 September 1966 and became an Act when it was gazetted on 15 October 1966. The first Directors of the Board of the Bank were appointed in July 1967. The Bank started its operations in August 1967.
The Act of 1966 was reviewed over time until the year 2004 when it was repealed and replaced by the Bank of Mauritius Act 2004. Since its enactment in October 2004, several amendments have been brought to the Bank of Mauritius Act 2004 to, inter alia, align the provisions of the Act with evolving international best practices.
2. Relationship with the government
In accordance with the Bank of Mauritius Act 2004, the Board of Directors of the Bank comprises the Governor, who is also the Chairperson, the First Deputy Governor, the Second Deputy Governor and between five to seven other Directors. The Governor and Deputy Governors are appointed by the President on the recommendation of the Prime Minister for a period not exceeding 5 years and are eligible for reappointment. The other Directors are appointed by the Minister of Finance and Economic Development and they hold office for a period not exceeding three years and are also eligible for reappointment.
The Bank is the banker to Government. It is the adviser on monetary and financial matters and the depository of the official foreign exchange reserves of Mauritius and of Government funds. It undertakes the issue and management of loans publicly issued in Mauritius by Government. The Bank may also act as agent of the Government on such terms and conditions as may be mutually agreed. The Bank has, in terms of an agreement reached with the Ministry of Finance and Economic Development under Section 59 of the Bank of Mauritius Act 2004, taken over all debt management functions performed by the Debt Management Unit with effect from 1 July 2008.
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The Bank may grant advances to the Government to cover negative net cash flow of Government at such rate as mutually agreed with the Government. The total amount of such advances outstanding, together with the amount of Government securities in the ownership of the Bank, other than under repurchase agreements, shall not exceed 10 per cent of the Government’s revenue excluding grants and receipts of a capital nature for the current financial year.
3. Structure
The organisation chart of the Bank is annexed to the document.
4. Design and conduct of monetary policy
Effective 18 December 2006, the Bank introduced a new framework for the conduct of monetary policy. The Key Repo Rate has replaced the Lombard Rate as the policy interest rate to signal changes in the monetary policy stance of the Bank. In terms of that framework, the Bank supplies and absorbs liquidity to hold the overnight interbank interest rate within an interest rate corridor around the Key Repo Rate. The corridor around the Key Repo Rate is currently +/- 125 basis points. Reverse repurchase transactions are conducted at 125 basis points below the Key Repo Rate and repo transactions at 125 basis points above the Key Repo Rate. The Key Repo Rate, which was set at 8.50 per cent on 18 December 2006, currently stands at 4.65 per cent, and is unchanged since 17 June 2013.
The Monetary Policy Committee (MPC), which was launched on 23 April 2007, formulates and determines monetary policy to be conducted by the Bank. The composition of the MPC has changed over time and now comprises eight members, namely, the Governor, the two Deputy Governors, two members appointed by the Prime Minister and three members appointed by the Minister of Finance and Economic Development. The MPC meets on a quarterly basis, but stands ready to meet in between its regular meetings, if the need arises.
After every meeting of the MPC, the Bank publishes on the same day a communiqué that provides the gist of the monetary policy decision. Since December 2011, the minutes of MPC meetings are released on the Bank’s website two weeks after the MPC meeting. The Governor holds a press conference after the MPC meeting to communicate the decision of the MPC.
Effective December 2012, the MPC is required to take into account the views of the Bank, the Ministry of Finance and Economic Development, and such other institution or organisation as it considers appropriate in the discharge of its functions.
4.1 Main objective of the monetary policy
Monetary policy is guided by the primary object of the Bank which is to maintain price stability and to promote orderly and balanced economic development.
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4.2 Instruments of monetary policy and types of refinancing as well as collateral used
Prior to July 1993, the main instruments of monetary policy were direct credit control and reserve requirements. Thereafter, monetary policy started to be and is still implemented through indirect monetary management. This is achieved essentially through the purchase and sale of Bank of Mauritius securities, conduct of Repurchase Transactions and Special Deposit Facilities.
The Bank acts as lender of last resort to banks. Effective 15 December 1999, the Bank introduced a standing facility, known as the Lombard Facility, to provide overnight collateralised advances to banks, with a specific borrowing quota earmarked for each. With the introduction of the new framework for the conduct of monetary policy on 18 December 2006, the Lombard Facility was replaced by a new standing facility.
From December 1998 to October 2002, the Bank has been selling, out of its own portfolio, Government of Mauritius Treasury Bills (GMTBs) over the counter (OTC) to individuals as well as financial and non-financial corporations (up to a limit of Rs2.0 million per investor) in view of developing more active secondary trading in securities and to provide an alternative investment instrument to the public. With the establishment of a Primary Dealer System for GMTBs in 2002, the OTC sales by the Bank was discontinued in Mauritius but was maintained in Rodrigues. As from July 2007, the Bank resumed the OTC sale of GMTBs in Mauritius and also introduced the OTC sale of Government of Mauritius Treasury Notes, which are of longer maturity, to individuals.
With effect from 1 April 2008, the Bank brought a series of operational changes in its management of liquidity with a view to strengthening its monetary policy framework. The Bank introduced Bank of Mauritius Bills with shorter maturities of 28 days and 56 days. Concurrently, the Bank of Mauritius introduced a Special Deposit Facility at 100 basis points below the Key Repo Rate for a maximum period of 21 days. This facility was operated at the initiative of the Bank. The corridor around the Key Repo Rate was also widened from +/- 50 basis points to +/- 125 basis points. Reverse Repurchase transactions are conducted at 125 basis points below the Key Repo Rate and Repo transactions at 125 basis points above the Key Repo Rate. A collateralised Overnight Facility at 150 basis points above the Key Repo Rate was introduced subject to a borrowing quota. As lender of last resort, the Bank of Mauritius provides the collateralised Standing Facility to banks without any borrowing quota at 400 basis points above the Key Repo Rate. Drawdowns under both the Overnight Facility and the Standing Facility are at the initiative of banks.
In August 2010, the Bank started the issuance of longer-term securities, namely, Bank of Mauritius Bills with maturities of up to one year and Bank of Mauritius Notes with 2-, 3- and 4-year maturities. In June and August 2013, Bank of Mauritius Bonds with a 5-year maturity was issued and, in March 2014, the Bank issued Bank of Mauritius Bonds with a 15-year maturity. Mauritius 110
A Special Foreign Currency Line of Credit extended to facilitate trade financing in December 2008 was withdrawn in July 2011. In 2012 amid the intensification of the Eurozone Sovereign debt crisis, the Bank introduced a new Special Line of Credit in Foreign Currency for an amount of EUR600 million or its equivalent to enable export and tourism operators to address currency mismatches between their income streams and existing debt-servicing requirements. The line of credit was reduced to EUR 100 million as from 1 March 2014.
Further, in a bid to prevent net liquidity injections, the Bank has been conducting sterilized foreign currency intervention with effect from 20 January 2015. An amount of Rs5.5 billion has been sterilized as at end June 2015.
As from 18 May 2015, the Bank embarked on a programme of effective liquidity management in the banking system. The Bank has been issuing 1-Year Bank of Mauritius Bills as well as 2-, 3- and 4-Year Bank of Mauritius Notes. A total amount of Rs10.93 billion was issued during the period 18 May to end-June 2015.
4.3 The money supply aggregate that plays the main role in monetary policy
Broad Money Liabilities (M3) is one of the main indicators used to assess monetary conditions. It is defined as the sum of: – currency outside depository corporations; – private deposits, which comprise rupee transferable, savings, time and foreign currency deposits, and – securities other than shares included in broad money.
4.4 Reserve requirements on financial institutions
Prior to July 1998, Category 1 banks were required to hold no less than 6 per cent of eligible rupee deposits in the form of non-interest bearing cash balances with the Bank and notes and coins in their vaults. Subsequently, with effect from July 1998, the Cash Reserve Ratio (CRR) was reduced from 6 per cent to 5.5 per cent of total deposits, including those denominated in foreign currencies.
With effect from January 2006, the minimum CRR was reduced from 5.5 per cent to 4.0 per cent of banks’ total deposits and there was no minimum CRR on a particular day at that time. For the purpose of computing the CRR, minimum cash balances consist exclusively of balances held by banks with the Bank. The minimum CRR on a particular day was introduced in January 2007 and was set at 2.0 per cent and the maintenance period for the CRR was lengthened from one to two weeks. In August 2008, the CRR was raised from 4.0 per cent to 6.0 per cent and the minimum CRR on a particular day was also increased to 4.0 per cent. The CRR was reduced to 5.0 per cent in November 2008 and further down to 4.5 per cent in December 2008 while the minimum CRR on a particular day was also brought down to 3.0 per cent.
The CRR was raised to 5.0 per cent in June 2010 and the minimum CRR on a particular day was also increased to 4.0 per cent. In October 2010, the CRR was Mauritius 111
raised to 6.0 per cent and concurrently, the minimum CRR on a particular day was raised to 4.5 per cent. The CRR was further raised in February 2011 to 7.0 per cent while the minimum CRR on a particular day was increased to 5.0 per cent.
With effect from the monitoring period starting 26 July 2013, all banks are required to keep cash reserves of the rupee component of their deposit base in Mauritian rupees only. For the foreign currency equivalent of their deposit base, banks are required to keep foreign currency balances with the Bank in Euro, GBP and USD, respectively, as follows: 1) For Euro-denominated deposits; 2) For GBP-denominated deposits; and 3) For USD-denominated deposits and for all foreign currency-denominated deposits other than euro and GBP.
In October 2013, the fortnightly average CRR on rupee deposits was raised from 7.0 per cent to 8.0 per cent and the minimum CRR on a particular day was increased to 5.5 per cent. Concurrently, the CRR on foreign currency deposits was reduced from 7.0 per cent to 6.0 per cent and the equivalent minimum CRR on a particular day was lowered to 4.5 per cent. In May 2014, the CRR on rupee deposits was raised further to 9.0 per cent, with the daily minimum CRR increased to 6.5 per cent. The fortnightly average CRR and the daily minimum CRR on foreign currency deposits were kept unchanged at 6.0 per cent and 4.5 per cent, respectively.
4.5 New proposed operational framework for monetary policy
The Monetary Policy Committee was briefed on a draft proposal in July 2015 to review the operational framework for monetary policy. The new operational framework, in which the Key Repo Rate and the 3-month yield on Treasury/BoM bills may play a critical role, is intended to improve the transmission of monetary policy impulses to the economy.
5. Structure of the financial markets
5.1 Organisation of the money market and capital markets
Money Market The money market consists of an interbank money market and a market for Treasury Bills/Bank of Mauritius Bills and other Government securities. The definition of Government Securities in the Public Debt Management Act 2008 has been extended to include Sovereign Sukuks in light of the initiative of the Bank to capture the Islamic finance market. Interbank transactions are carried out among banks for call (overnight), short notice (up to 7 days) and term maturity (more than 7 days).
Since June 2004, banks can enter into repurchase/reverse repurchase transactions among themselves using Government/Bank of Mauritius Securities as collateral. Effective 22 August 2003, the Bank started to issue Bank of Mauritius
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Bills again. Bank of Mauritius securities are issued for monetary policy purposes while Government Securities are issued for Government borrowing requirements only. There also exists a secondary market for these securities.
A Primary Dealer System for Treasury Bills was established in February 2002 and as of date nine banks are appointed primary dealers. With the enhancements of the Primary Dealer System, only primary dealers, who have agreed to collectively subscribe to the whole tender amounts at primary auctions, are allowed to bid at the primary auctions of Treasury Bills effective May 2014.
The Bank intervenes in the money market from time to time by way of repurchase/reverse repurchase transactions, Special Deposits Facility and issuance of Bank of Mauritius securities depending on liquidity conditions on the market.
With a view to increase the pace of credit growth and encourage secondary market trading for GMTBs, the Bank introduced a cap on bank’s holdings of GMTBs in their banking book. The cap, which was initially set at 20 per cent of their total rupee deposits in April 2011, was reduced to 18 per cent effective 1 July 2011.
As from 26 August 2011, the Port Louis Interbank Offered Rate (PLIBOR) is published daily on Reuters page at 12 00 hours. The PLIBOR, which is an average interbank rate, is computed from rates quoted by banks for this purpose. It used to be published for four tenors, namely overnight, one-week, one-month and three-month. As from December 2013, given that there are no interbank transactions beyond one week, the PLIBOR for only two tenors are published, namely, overnight and one-week. These rates are also available on the Bank’s website.
Capital market As at end of June 2015, there were 48 companies listed on the official market of the stock exchange of Mauritius, of which 47 were local companies and one was a foreign company. 21 foreign funds were also listed. Market capitalisation stood around US$6,253 million as at 30 June 2015. The number of companies listed on the Development and Enterprise Market (DEM) were 44 on 30 June 2015. Currently, the financial instruments traded on the capital market are mainly company shares. The stock exchange of Mauritius, which was set up on 30 March 1989, is the only organised market for trading company shares and debentures. The DEM, launched on 4 August 2006, is a market designed for Small and Medium-sized Enterprises and newly set-up companies that possess sound business plan and demonstrate a good growth potential. It is meant for companies wishing to avail themselves of the advantages and facilities provided by an organised and regulated market to raise capital to fund their future growth, improve liquidity in their shares, obtain an objective market valuation of their shares and enhance their overall corporate image. The DEM’s objectives are in line with Government's policy to foster the development of a dynamic business environment in Mauritius and the emergence of a diversified financial services sector where companies can raise financial resources from a variety of sources and where Mauritius 113
investors can have access to a wider array of investment opportunities. The stock exchange of Mauritius has been going through a strategic reorientation of its activities and is gradually moving away from an equity-based domestic exchange to a multi-product internationally-oriented exchange.
5.2 Instruments used in the money and capital markets
In the money market, the major instruments used are Treasury Bills/Notes and Bank of Mauritius Bills/Notes and other Government Securities. As from September 2002, the Bank has been auctioning Five-Year Government of Mauritius Bonds. Five-Year Government of Mauritius Bonds are, in general, issued every two months. Further, long-term bonds are being issued on a more regular basis. Instruments traded on the capital market are mainly shares that are issued by private companies listed on the stock exchange of Mauritius.
During the period 17 September 2004 to 15 April 2005, the Bank issued, on a weekly basis, Treasury Notes with a 3-Year maturity through conversion of existing maturing Treasury Bills. As from 7 October 2005, the Bank started with the monthly issue of 2-Year, 3-Year and 4-Year Treasury Notes with interest payable on a semi-annual basis.
The Bank continued with its objective of lengthening the maturity profile of Government debt and the development of an active secondary market for Government securities. As from October 2011, a new tenor of Government of Mauritius Treasury Bills of 273-Day maturity has been introduced in addition to GMTB of 91-Day, 182-Day and 364-Day maturities. Further, as from January 2012, the Bank of Mauritius has discontinued the issue of 2- and 4-Year Treasury Notes and is only issuing Treasury Notes of 3-Year maturity with the objective of helping the Government better determine its debt maturity profile and create conditions conducive to the development of a secondary market for Government securities.
With a view to further broadening the range of Government instruments, the Bank issued the Seven-Year Inflation Indexed bonds in June 2009 and since 2010 Fifteen-Year Inflation-Indexed bonds are issued on a yearly basis. Further, in order to foster secondary market trading, 5-Year, 10-Year and 15-Year Government of Mauritius benchmark bonds are being issued.
In order to encourage savings and also to help to mop-up excess liquidity, the Bank, acting as agent for Government, started the issue of retail instruments as from July 2014. Four types of instruments were issued: 6 per cent Five-Year Government of Mauritius Savings Bonds, Five-Year Government of Mauritius Inflation Linked Savings Bonds, 5.25 per cent Three-Year Government of Mauritius Savings Notes and 4.75 per cent One-Year Savings Certificate. The issues were closed at the end of February 2015.
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5.3 Legal framework for the money and capital markets
There is no specific framework regulating the money market. However, transactions in Treasury Bills, Five-Year Government of Mauritius Bonds and Mauritius Development Loan Stocks and Long Term Bonds were, until 1 July 2008, regulated by the Loans Act 1974. The Loans Act was repealed and replaced by the Public Debt Management Act 2008, which was enacted on 8 May 2008, and came into force on 1 July 2008. With regard to the stock market, it is regulated by the Securities Act 2005, which became effective as from 28 September 2007. Prior thereto, the stock market was regulated by the Stock Exchange Act 1988.
At the initiative of the Bank, as a part of a consultative forum, a Financial Markets Committee (FMC), comprising representatives of the central bank and banks, was set up in March 2000. In May 2001, the FMC published the Mauritius Code of Conduct for the foreign exchange and money markets.
Primary dealers have access to the primary auctions of Government of Mauritius Treasury Bills. Secondary market trading of Government of Mauritius Treasury Bills is guided by the Terms and Conditions governing Primary Dealers in Government of Mauritius Treasury Bills/Bank of Mauritius Bills. The conduct of repurchase transactions is governed by the Master Repurchase Agreement signed by Bank of Mauritius and banks.
5.4 Type of financial intermediaries operating in these markets
– Central Bank – Pension Funds – Banks – Mortgage Company – Non-bank deposit taking – Leasing Companies institutions – Investment Companies and – Money-changers Trusts – Foreign exchange dealers – Stock Exchange of – Development Bank Mauritius – Insurance Companies – Stock-broking Companies – Reinsurance Companies – Asset Managers – Mutual Funds – Credit unions – Equity Funds – Moneylenders – Fund Managers
6. External payment arrangements
6.1 Responsibility for determining exchange rate policy
The exchange rate policy is under the responsibility of the Bank.
6.2 Present exchange rate regime
The International Monetary Fund (IMF) has classified the exchange rate regime currently in place in Mauritius as floating. Mauritius 115
6.3 Organisation of the foreign exchange market
The foreign exchange market is liberalised wherein banks, foreign exchange dealers and money-changers transact foreign exchange freely. The Bank intervenes in the market to smooth out excessive volatility and to ensure that the market functions efficiently and the Mauritian rupee remains in line with economic fundamentals.
6.4 Management of foreign reserves
The Bank is responsible for the management of foreign exchange reserves.
7. Currency convertibility and exchange control
7.1 Current state of currency convertibility
The Exchange Control Act was suspended in July 1994. Both the current account and the capital account of the balance of payments are fully convertible.
7.2 Exchange control restrictions on current account transactions
Mauritius has adopted Article VIII, Sections 2, 3 and 4 of the IMF Articles of Agreement with effect from September 1993.
7.3 Restrictions on capital account transactions
There are no restrictions on capital account transactions.
8. The central bank and external debt
8.1 The role of the central bank in managing the country's external debt
The Bank acts as the banker of the Government. Effective 1 July 2008, the Bank has also taken over the management of the external debt portfolios of the Government.
8.2 The role of Treasury in this respect
Negotiations for foreign currency loans are carried out by the Ministry of Finance and Economic Development.
9. Supervision of financial institutions
9.1 Banking institutions
9.1.1 Authority responsible for banking supervision
The responsibility for licensing, regulating and supervising banks is vested with the Bank. Mauritius 116
9.1.2 Licensing procedures for establishing a new bank
Applicants willing to carry on banking business, Islamic banking business, private banking business or investment banking business in Mauritius are required to obtain a banking licence from the Bank of Mauritius. The central bank may grant a banking licence to carry on any or all of the above types of business if the licensing criteria are met and subject to such conditions as it may impose.
An application for a banking licence to carry on any or all of the above types of business should be made by a corporate body on the form prescribed by the Bank. It should be accompanied, inter alia, by the applicant’s constitution, copies of the financial statements as of a date within 60 days preceding the date of the application as well as a business plan incorporating projections for the next 3 financial years. In case of a foreign company registered in Mauritius, its application must also be supported by a written confirmation from the banking supervisory authority in its country of incorporation that it has no objection to the applicant’s proposal to carry on banking business in Mauritius. These documents should be authenticated copies or, where the originals are not in the English language, certified English translation should be submitted. The Bank may also call for such supplementary information or document as it may require.
As of 31 July 2015, 23 banks were licensed under the Banking Act 2004, of which one bank conducts exclusively Islamic banking business and two banks carry on exclusively private banking business. All banks are supervised by the Bank through off-site monitoring and on-site examination.
9.1.3 Type of licence that exist
Under the Banking Act 2004, the Bank issues a single banking licence. Banks may, under a single licence, conduct any or all of the following: banking business, Islamic banking business, private banking business and investment banking business.
9.1.4 Minimum capital requirements of banks
Banks are required to maintain in Mauritius, an amount paid as stated capital or an amount of assigned capital of not less than 200 million rupees or the equivalent amount in any freely convertible currency held in assets in or outside Mauritius, as may be approved by the central bank or such higher amount as may be prescribed, after deduction of the accumulated losses of the bank.
9.1.5 Regulations governing current activities of banks
Macroprudential measures The Bank implemented a series of macroprudential measures in October 2013 to cope with emerging vulnerabilities and curb potential systemic risk in the financial system. The measures on loan-to-value (LTV) ratio, debt-to-income (DTI) ratio, and additional provision for certain sectors are being applied in a phased manner Mauritius 117 by banks to encourage them, inter alia, to adhere to more prudent lending standards. The guidelines on LTV and DTI ratios became effective as from 1 January 2014.
– The LTV ratio imposes a cap on the size of loans relative to the value of the properties financed. The measure aims to discourage speculation, prevent excessive leverage and reduce systemic risk associated with the rapid expansion of credit in the construction sector. In the event of customer default or decline in property prices, banks’ losses will be contained. Customers borrowing from banks to purchase property for the first time will not be affected by these measures. – The DTI ratio is a microprudential measure used by banks to assess borrowers’ repayment capability. The ratio protects households from debt traps and ensures that borrowers are not overleveraged whenever they borrow for the purchase or construction of a property. – The two additional macro-prudential measures consist of risk-weighted asset and additional portfolio provisions. The measure on risk-weighted assets requires banks to maintain higher risk weights in the targeted borrower segments. The additional portfolio provision ensures early provisioning against future credit losses in more vulnerable sectors.
Large Credit Exposure The Banking Act 2004 requires the central bank to set out by way of guidelines on credit concentration limits related to the capital base of a bank in respect of: – individual large credit exposure, including off balance sheet commitments, to any one customer or group of closely-related customers; and – aggregate amount of large credit exposure to all customers and groups of closely-related customers.
The Bank has reviewed the Guideline on Credit Concentration Risk which was issued in 2000. The revision took into account best central banking principles, the recommendations of the Financial Sector Assessment Programme (FSAP) and the specificities of the local industry. The system of approvals by the Bank on a case- by-case basis has been dispensed with and the limits moderated so as not to stymie a bank’s ability to lend to a reasonable extent.
The Basel II Pillar 2 specifications have also been taken into consideration. Banks will be required to conduct stress tests on the impact of the large exposures turning delinquent.
Banks are required to report to the Bank of Mauritius quarterly data on credit facilities extended to any one customer or group of closely-related customers which exceed 15 per cent of the banks’ capital base.
Guideline on Related Party Transactions The Bank has reviewed the Guideline on Related Party Transactions to bring it in line with best international practice and to take into consideration the recommendations made by the FSAP Mission. The guideline embodies the Mauritius 118 essential criteria of the Basel Core Principles relating to exposures to related parties and realigns the definition of ‘related party’ with the Banking Act 2004. The Bank has dispensed with the system of approvals in excess of the regulatory limits. Any derogation from the regulatory limits will be considered by the Bank on the express condition that the additional exposure is deducted from the financial institution’s Tier 1 capital. The Guideline was revised in June 2015 in order to provide clarification regarding exemptions for related party credit exposures which represented less than 2 percent of a financial institution’s Tier 1 capital.
Guideline on Measurement and Management of Market Risk A Proposal Paper on market risk (including interest rate risk in the banking book) was issued to banks in January 2007. After further consultation with the banks, a Guideline on Measurement and Management of market risk was issued to banks in July 2009. The Bank has not imposed a capital charge in respect of market risk other than foreign exchange risk; rather capital add-ons may be required under Pillar 2 on an individual basis.
Guideline on Supervisory Review Process In line with its objective of implementing Basel II framework, the Bank of Mauritius finalised the Guideline on Supervisory Review Process and which was issued to banks for implementation with effect from 1 July 2010. Banks have the possibility to use the Internal Rating Based approach to credit risk for the limited purpose of drawing up the Internal Capital Adequacy Assessment Process (ICAAP) document. They have to submit their ICAAP document to the Bank as a hand- holding process not later than 5 months after the end of their financial year. With the coming into force of this guideline, the Bank has implemented all the three pillars of the Basel II framework.
Capital Adequacy In accordance with the Banking Act 2004, banks are required to maintain, in Mauritius, a minimum capital of 10 per cent of such of their risk assets and of other types of risks, as specified by the central bank.
The central bank may require a higher percentage or ratio from a bank, which will be determined, having regard to the nature, scale and risks of the bank’s operations, other financial resources available to the bank and the amount and nature of capital required, in the central bank’s opinion, to protect the interests of depositors and potential depositors and the public.
The Bank has implemented the standardised approaches of the Basel II framework as from first quarter of 2009.
In line with the objective of the Basel III reform package, the Bank of Mauritius has issued the Guideline on Scope of Application of Basel III and Eligible Capital which came into effect on 1 July 2014. The guideline aims at raising the quality of capital in a phased manner by 1 January 2019. The guideline also incorporates a capital conservation buffer designed to ensure that banks build up capital buffers to be drawn down if losses are incurred during a period of stress. Mauritius 119
The Bank has issued a Guideline on Capital Adequacy Ratio for Non-Bank Deposit Taking Institutions (NBDTIs) to bring about greater convergence in the regulatory framework for banks and NBDTIs, to prevent regulatory arbitrage and reinforce the safety and soundness of our financial sector.
Guideline on Standardized Approach to Credit Risk The Bank of Mauritius reviewed the Guideline on Standardised Approach to Credit Risk in order to incorporate new risk weights prescribed by the macro-prudential measures in respect of claims secured by residential property and commercial real estate for construction purposes in Mauritius.
Domestic Systemically Important Banks The Bank has established a framework for domestic systemically important banks (D-SIBs) which focuses on the impact that the failure of large banks will have on the domestic economy by issuing a Guideline for D-SIBs effective 30 June 2014. The guideline sets out the methodology applied by the Bank for assessing the degree to which banks are systemically important in the domestic context. In order to identify D-SIBs, five equally-weighted parameters have been identified, namely, size, interconnectedness, substitutability/financial institution infrastructure, structure and complexity and large exposures. Based on the importance of the D- SIB, a capital surcharge will be applied to the bank and calibrated accordingly. The first capital surcharge will be effective as from 1 January 2016.
Public Disclosure of Information The Bank reviewed the guideline on Public Disclosure of Information in 2008 with a view to incorporate the new disclosure requirements of Basel II and the revised International Accounting Standards (IAS). The guideline provides for the disclosure of comprehensive, meaningful and accurate information in a timely manner and brings strong market discipline on financial institutions to manage their activities and risk exposures prudently and consistently with their stated objectives. The Guideline on Public Disclosure of Information was reviewed again in 2009 to reflect changes in the revised IAS1. The revised guideline makes it incumbent on financial institutions to comply with the new requirements in the presentation of their financial statements. However, financial institutions have been given a choice to present their income and expenses either in a single statement (a statement of comprehensive income) or in two statements (a separate income statement and a statement of comprehensive income).
Guideline on Fair Valuation of Financial Instruments The Bank issued in August 2010 a guideline on Fair Valuation of Financial Instruments which became effective as from 1 November 2010. The guideline requires institutions to establish strong governance and control processes around the fair valuation of financial instruments. This follows the issue of a guidance paper entitled “Supervisory guidance for assessing banks’ financial instrument fair value practices” by the Basel Committee on Banking Supervision in April 2009. Concerns were raised over the major failures in the financial sector and in financial regulation and supervision and the role played by fair value Mauritius 120 accounting in exacerbating the financial crisis through the promotion of pro- cyclicality. While fair value gains and losses shall, in accordance with and as far as permissible by accounting standards, be taken to the Income Statement, fair value gains, given their unrealized nature, shall not, from a prudential perspective, count towards distributable profits or earnings for the payment of dividends either in cash or in kind.
Guideline on Country Risk Management The Bank issued a Guideline on Country Risk Management effective since 1 October 2010. The guideline gives a broad framework for banks to assess measure and monitor country risk. However, while banks would be required to provide for country risk, the quantum of the provision would be left to banks for individual determination, based on their internal assessments. Banks shall have to establish internal policies for the management of country risk.
Well-being of a Financial Institution Reportable by an External Auditor This guideline was issued in February 2003 and lays down the ground rules respecting certain types of relationships between financial institutions and their external auditors. The relationships are described in terms of categories of transactions or conditions impinging on the well-being of financial institutions that must be reported by their external auditors. The reportable transactions and conditions are those that are encountered by external auditors in the course of financial statement audits. The guideline was reviewed in February 2014 to incorporate, inter alia, three new sections dealing with serious conflict among directors and dissension among shareholders, aggressive strategies detrimental to the interest of depositors and financial institutions and risk of complex group and overseas operations.
Liquidity The current prudential framework for liquidity risk management in banks, set out in Guideline on Liquidity that was introduced by the Bank in 2000, has been reviewed in October 2009 in light of financial market developments and changing banks’ liquidity management practices over the past decade. The revised prudential standard takes into account the updated global principles for sound liquidity risk management and supervision developed by the Basel Committee on Banking Supervision as well as the lessons learnt from the global financial market turmoil. It provides for the reporting of gap analysis and requires banks to perform scenario analysis and stress tests on their liquidity positions.
Open Foreign Exchange Position The Bank issued the Guideline for Calculation and Reporting of Foreign Exchange Exposures of Banks effective 14 April 1997 whereby it prescribed that the overall foreign exchange exposure or overall open position of a bank in foreign exchange as at close of business each day must not exceed 15 per cent of its Tier 1 capital. The limit was raised to 30 per cent of a bank’s Tier 1 capital as from 7 July 2005. The limit is applicable to foreign exchange transactions for Segment A activities. The limit was reduced to 20 per cent with effect from 17 April 2010 and restored to
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15 per cent with effect from 4 January 2011. Moreover, effective that date, a single exposure limit of 10% of Tier 1 capital per currency has been introduced.
Credit Impairment and Measurement In November 2004, the Bank issued a new Guideline on Credit Impairment Measurement and Income Recognition in line with international accounting standards. Banks are required, inter alia, to establish a sound credit risk management policy with adequate associated internal controls, documentation processes and information systems, and to ensure that they have adequate processes for determining allowances for credit losses, the carrying amounts of credit portfolio represent recoverable values and there is timely recognition of identified losses.
The guideline sets strict criteria on how to determine the recoverable amount (based on net present value of future cash flows) in an objective manner in respect of individually impaired loans, which must, among other things, be supported by reliable cash flow estimates and business or repayment plans.
Loans that have not been individually assessed for impairment or those assessed individually and not found to be impaired must be assessed on a ‘portfolio basis’.
The guideline also makes provision for the establishment of a general provision, which is designed to cover potential losses that are not captured in the allowances for individually assessed loans and ‘portfolio’ loans. Banks should exercise their best judgement to determine the amount of the general provision.
The guideline is currently being revised to ensure that early, timely and sufficient levels of provisions are made by financial institutions and to bring about a balance between the application of international accounting norms and prudential norms respecting credit impairment measurement.
Corporate Governance The Bank reviewed, after lengthy consultations, the Guideline on Corporate Governance which became effective as from 30 September 2012, to replace the one issued in 2001. The objectives were to set up minimum standard expected from financial institutions while ensuring its safety and soundness and to enhance shareholder value. It defines the division of power and establishes mechanism for achieving accountability between the board, management and shareholders, taking into account the interests of other stakeholders such as customers, employees and the community at large.
The guideline has been revised in August 2014 in line with the provisions of the Banking Act 2004 and taking into consideration international best governance practices in the aftermath of the global financial crisis. The salient features of the revised Guideline are:
• Composition of Board / Term of Office A member of a board shall cease to be eligible to be a member after having served on the board for an aggregate period of 6 years. A board member who has served Mauritius 122 for an aggregate period of 6 years may only be re-appointed as director after a cooling-off period of two years. The Bank, however, has the discretion regarding the re-appointment of those directors who have not observed a cooling-off period of two years in exceptional cases.
• Chairperson The Chairperson of the board of a bank should be independent. Branches and subsidiaries of foreign banks have been given a dispensation from this requirement although they are encouraged to have an independent chairperson.
• Local Advisory Board Branches of foreign banks have been encouraged to set up a local advisory board so as to provide it with more autonomy in the decision-making process and to bring it more in tune with local priorities and realities.
• Orientation program of Directors For the board to function effectively, incoming directors should receive comprehensive and tailored induction, including an orientation program, to ensure that they are familiar with the company's business and governance practices.
Internet Banking The Bank issued a Guideline on Internet Banking, effective as from 2 April 2001. In terms of that guideline, any institution licensed by the Bank of Mauritius which seeks to launch its own communicative and/or transactional website or utilize the communicative and/or the transactional website of a third party requires the prior approval of the Bank to that effect. Such approval should take into account, inter alia, a confirmation by the bank’s board of directors, the strategic plans, the internet security policy, the risk management framework, the terms and conditions for the services, a private policy statement and any outsourcing or strategic alliances that have been finalised.
Guideline on Mobile Banking and Mobile Payment Systems In February 2013, the Bank issued a Guideline on Mobile Banking and Mobile Payment Systems with the view to promote a sound financial system in Mauritius and regulate the mobile banking and mobile payment systems. Any institution intending to provide mobile banking or mobile payment services requires the prior approval of the Bank. The Guideline was revised in May 2015 to allow banks to carry out transfers exceeding Rs10,000 to third party accounts, with the Bank’s approval and under such terms and conditions as the Bank may determine.
Credit Risk Management The Bank has issued a Guideline on Credit Risk Management effective 5 January 2004, which sets out the responsibilities and accountabilities of the board of directors and management of all deposit-taking financial institutions for the formulation and management of credit risk policy. The credit risk policy of each financial institution should outline the processes to be used in managing the credit activity. The processes of the entire credit cycle are, inter alia, credit appraisal, approval, disbursement, monitoring and recovery. Mauritius 123
Operational Risk Management and Capital Adequacy Determination Effective 1 April 2005, a Guideline on Operational Risk Management and Capital Adequacy Determination was issued to banks. The guideline outlines the essential elements of the principles for an effective operational risk management framework including, inter alia, the establishment of an Operational Risk Management Policy, the responsibilities and accountabilities of the board of directors and senior management, processes for identification, assessment, monitoring, reporting, control, mitigation of operational risk.
The requirements of the guideline are supplementary to those of the guidelines issued under Basel II for the determination of capital adequacy, entailing a capital charge to be maintained by banks in relation to their operational risk. As such, there are three alternative approaches for calculating operational risk capital charge, namely the Basic Indicator Approach, the Standardised Approach and the Advanced Management Approach. Presently, all banks are subject to the Basic Indicator Approach for calculating the capital charge for operational risk.
Fit and Proper Persons The Bank believes that fitness and propriety are undeniable pre-requisites for a financial institution to be run along sound principles. The officers holding senior positions in financial institutions should be essentially of good character, competent, honest and financially sound and exercise total integrity. The Guideline on Fit and Proper Person Criteria sets out the framework for assessing whether the person is fit and proper. A Fit and Proper Person Test should be carried out on senior officers, directors and shareholders with significant influence. The Guideline together with the Fit and Proper Person Questionnaire was last revised in June 2014 to facilitate the process for assessing independence and fitness and probity of senior officers, directors, and shareholders, and for determining any conflict of interest in the exercise of their functions. The Questionnaire was also reviewed to make the reporting of information on shareholdings therein simpler and more user- friendly.
In accordance with the Banking Act 2004, financial institutions are required to give prior notice to the Bank before appointing a senior officer. The Bank may raise its objection, if any, for the appointment.
Furthermore, the Act requires all directors and seniors officers of financial institutions to take an oath of confidentiality in the Supreme Court of Mauritius before they commence any duties under the banking laws.
Outsourcing by Financial Institutions Effective 1 June 2006, a Guideline on Outsourcing by Financial Institutions was issued to all financial institutions falling under the supervisory purview of the Bank. The guideline sets out a broad framework for financial institutions that have entered into outsourcing and/or planning to outsource their business activities to service providers. It covers issues relating to, inter alia, the role of the board of directors, policy formulation, risk evaluation, due diligence in selecting service
Mauritius 124 providers, contract issues, service level agreement, contingency planning, confidentiality and security.
The guideline provides a three-tier classification of activities, namely, material, non-material and core. Financial institutions require the prior authorization of the Bank when outsourcing material activities. The core activities, as defined in the Guideline, cannot be outsourced except on certain specific circumstances.
Guideline for Institutions Conducting Islamic Banking Business The Banking Act 2004 was amended by the Finance Act 2007 to enable existing banks licensed under the Banking Act 2004 to offer Islamic financial products through a window. The Bank has also been empowered to issue new Islamic banking licence in Mauritius for the conduct of Islamic banking business.
The Bank has issued a guideline for institutions conducting Islamic Banking Business in June 2008. The requirements of this guideline serve to complement the current regulatory framework applicable to financial institutions. Accordingly, in addition to this guideline, Islamic Banking Institutions are required to adhere to the other guidelines and guidance notes issued by the Bank.
The introduction of Islamic financial services will adds to the repertoire of products that banks offer thus furthering the broader objective of making Mauritius a major international financial centre.
Guideline on Disclosure of Information to Guarantors In terms of section 37(7) of the Banking Act 2004, the Bank may require every financial institution to send or make available to the guarantor of a credit facility extended by it, a statement of account in written or electronic form, in accordance with guidelines or instructions issued by the Bank.
In this respect, in September 2013, a Guideline on Disclosure of Information to Guarantors was issued with a view to providing guidance to financial institutions, setting out the framework and prescribing the instances for issuing statements of accounts in written or electronic form to guarantors of credit facilities.
Guidelines on Complaints Handling Procedures A new section 96A was added to the Banking Act 2004 which lays down specific provision for the protection of customers. In terms of section 96A (6) of the Act, the Bank has issued a Guideline on Complaints Handling Procedures, effective 1 November 2013. The guideline sets out the minimum criteria to be observed by financial institutions for the handling of complaints from their customers, amongst others.
Guideline on Agent Banking In accordance with Section 7(7B) of the Banking Act 2004, the Bank has issued a Guideline on Agent Banking on 20 May 2014 which sets out the framework and minimum criteria to be observed by a bank when contracting the services of an entity to provide services on its behalf or entering into any agency agreement for Mauritius 125 that purpose. The objectives of the guideline are to provide minimum standards and requirements for agent banking operations, to enhance financial inclusion and to provide for agent banking as a delivery channel for offering banking services in a cost effective manner.
Guideline for the Setting up of Representative Offices in Mauritius Effective 1 November 2014, a Guideline for the Setting up of Representative Offices in Mauritius was issued by the Bank to provide the minimum standards and requirements for the setting up of a representative office in Mauritius by a foreign bank. The permissible activities of a representative office, as set out in the Guideline, are mainly to establish contacts, promote the services of a foreign bank, arrange meetings with clients in Mauritius, serve as a point of contact for customers and collect information. However, a representative office cannot conduct any form of banking business.
Anti-Money Laundering Measures In June 2005, the Bank issued the revised Guidance Notes on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) to financial institutions falling under its jurisdiction. The Guidance Notes outline the broad parameters, in line with international best practices, within which financial institutions should operate in order to ward off money laundering and terrorist financing risks.
The Guidance Notes were reviewed in December 2009 to cater for the recommendations made by the FSAP following their mission from 24 September to 9 October 2007.
The Guidance Notes are amended on a regular basis – the last amendment was brought in March 2015 – to, amongst others, reflect update issued by the Financial Action Task Force (FATF) and other standard setting bodies such as the Basel Committee on Banking Supervision.
A list of all guidelines issued by the Bank of Mauritius is available on its website: https://www.bom.mu under the menu ““LEGISLATION, GUIDELINES AND COMPLIANCE – Guidelines”
Submission of returns The Bank has embarked on a comprehensive project to revise the set of returns it uses to collect data for statistical and off-site surveillance purposes, and to completely overhaul its data management system. The new data set takes into account the enhanced reporting requirements following the 2007-08 financial crisis as well as the need for more granular information. The project entails the automation of the Bank’s entire data collection, management and processing system. The whole project is planned for completion by October 2015.
The new data management system is based on the eXtensible Business Reporting Language (“XBRL”) information standard. The innovative infrastructure involves the setting up of an advanced online report filing system, the establishment of a Mauritius 126 data warehouse and the introduction of a Business Intelligence platform for users. The XBRL technology shall endow the Bank with the optimal automated system for data management currently available at the international level.
Deposit Insurance The Banking Act 2004 which came into force in November 2004 makes provision for the establishment of a Deposit Insurance Scheme to provide insurance against the loss of part of or all deposits in a bank in a manner that will contribute to the stability of the financial system in Mauritius and minimize exposure to loss. The Bank of Mauritius has started work towards the establishment of a Deposit Insurance Scheme and a draft Deposit Insurance Scheme Bill was prepared by the Bank. The draft Bill is being updated in the light of the Core Principles for Effective Deposit Insurance Systems as revised in 2014.
Supervisory Colleges In line with the Basel Core Principle 13 (Home-Host Relationships) which requires the home supervisor to organize supervisory colleges for banking institutions with important cross-border operations, the Bank organized inaugural supervisory colleges in November 2013 for two systemically important banking groups in the Mauritian banking sector. One of the fallouts of the colleges is the exchange of supervisory data on a quarterly basis through an agreed template.
Mauritius Credit Information Bureau The Mauritius Credit Information Bureau (MCIB), fully owned and operated by the Bank, was established in 2005 under the provisions of the Bank of Mauritius Act 2004. It collects information from all institutions offering credit (including leasing facilities and hire purchase insurance companies, other non-bank financial institutions) and utility bodies, and consolidates stores and discloses this information to its participants. The Act also provides for the credit bureau to impart information to recognized external credit assessment institutions for credit rating purposes.
Participants of the MCIB are, as from 1 December 2005, required to consult the MCIB before approving, increasing or renewing any credit facility.
Where it appears to the Bank that any participating institution has refrained from complying, or negligently failed to comply, with any statutory requirement imposed with respect to the MCIB, the Bank is empowered to – issue directives to remedy the situation, – impose penalties, – revoke licenses of institutions licensed by it, or – refer the matter to the relevant authority for action as appropriate in case of institutions other than those licensed by the Bank.
The Bank is also empowered to take actions against any institution which fails with the Bank’s request for its participation in the MCIB.
The Bank of Mauritius Act 2004 was amended in December 2013 to provide for
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a. the collection of information other than credit information from institutions offering credit and utility bodies b. the imparting of data by the Bank to (i) public sector agencies or law enforcement agencies to enable them to discharge or assist them in discharging their functions, and (ii) any other institution and for such purpose as the Bank deems fit provided the data subject has given his consent for the sharing of information.
Ombudsperson The Banking Act 2004 provides for the appointment of an ombudsperson for dealing with complaints against financial institutions by their customers. The Minister of Finance and Economic Empowerment has in his Budget Speech 2009 stated that an office of the Ombudsperson will be set-up to merge the functions of the ombudsperson for banking, for non-banking financial services and the Commissioner for the Protection of Borrowers.
Conservator Provision has been made for the appointment of a conservator for the purpose of taking charge of the assets of a financial institution for the protection of depositors where the central bank has reasonable ground to believe that the institution’s capital has been or may be impaired or its directors are engaging in practices that are detrimental to the interests of depositors or where the institution has violated purposely or negligently the provisions of laws or guidelines.
Licence Fee Banks are required to pay to the Bank of Mauritius such annual licence fee as may be prescribed by regulations made by the Bank with the approval of the Minister. The Banking (Processing and License Fees) Regulations 2007 came into operation on 15 April 2007. These set out the processing and annual license fees for banks, non-bank deposit-taking institutions, foreign exchange dealers and money changers.
The Regulations had been revised in 2009 to further refine the determination of the fixed fee component of the annual licence fee payable by financial institutions.
New provisions have also been added in 2011 for payment of a fee by cash dealers to conduct foreign exchange business at a place other than the principal or regular place of business. The Regulations were further amended in 2013 to include payment of a processing fee by a bank in respect of an application for the transfer of its undertaking. The Regulations are currently under revision. The new scale of fees will be applicable from the current financial year (2015-16).
9.1.6 Main supervisory practices
The supervision of banks is exercised through off-site surveillance and on-site examination. Banks are required to submit to the Bank of Mauritius periodical reports containing, inter alia, information on their assets and liabilities, off-balance sheet commitments, sectoral distribution of private sector credit, foreign exchange Mauritius 128
exposure, foreign currency assets and liabilities, foreign currency commitments, concentration of risks, risk-weighted capital adequacy, value range of loans and advances and bills discounted, ownership and value range of deposits, maturity value of time deposits particulars of investments, profit and loss accounts and schedules, amounts due to and from subsidiaries, related party transactions and impaired credit facilities. These reports are analysed to monitor the condition and performance of banks on an on-going basis. The off-site surveillance is carried out on a systematic and integrated system along the lines of the CAMEL system. Based on the performance indicators of the components of CAMEL, a rating is assigned to each bank on a quarterly basis. The ratings on individual banks are not presently disclosed, but are used for internal purposes only.
Furthermore, every bank is required to appoint annually an external auditor to audit its accounts, and such appointment is subject to the approval of the Bank of Mauritius. Banks are required to prepare and publish financial statements in such form as the Bank of Mauritius may approve. The Guideline on Public Disclosure of Information requires each financial institution to disclose relevant information in the required format including a management discussion analysis report.
The Bank of Mauritius is empowered under the Banking Act 2004 to conduct regular examinations of the operations and affairs of every financial institution at least once every two years to assess whether the financial institution is duly observing the provisions of the banking laws, guidelines, and instructions issued by the central bank and is in a sound financial condition. The Bank may also conduct special examinations at any time, if so required.
9.1.7 Measures to remedy deficiencies as well as penalties utilised
In October 2008, the Minister of Finance and Economic Empowerment made two regulations stipulating the compoundable offences under the Banking Act 2004 and the Bank of Mauritius Act 2004. The Bank can impose fines on institutions for specified offences, with the concurrence of the Director of Public Prosecutions and of the institution concerned. It can equally impose an administrative penalty on any financial institution which has refrained from complying, or negligently failed to comply, with any instructions or guidelines issued or requirement imposed by the Bank under the banking laws.
9.1.8 Revocation of Licenses
The Bank of Mauritius may revoke the license of a bank, where, inter alia, the bank in question: – fails to commence business within a period of 12 months from the date the license is issued; – is carrying on business in a manner which is contrary or detrimental to the interests of its depositors or the public; – has insufficient assets to cover its liabilities to its depositors or the public; – fails to comply with any directive or instruction issued by the central bank under the banking laws; Mauritius 129
– contravenes any provision of the banking laws; – has been convicted by a court in Mauritius, a court of the Commonwealth or a court of such other countries as may be prescribed, of an offence under any enactment relating to anti-money laundering or prevention of terrorism or the use, laundering in any manner, of proceeds or funding of terrorist activities or other illegal activities or is the affiliate or subsidiary or parent company of a financial institution which has so been convicted, provided the conviction is a final conviction; – ceases to carry on banking business; – goes into receivership or liquidation, is wound up or otherwise dissolved; or – in the case of a branch of a bank incorporated abroad, such bank has lost its banking license in the jurisdiction where its head office is located.
9.1.9 Offences by Directors or agents of banks
Any director, chief executive officer, manager, officer, employee or agent of a bank shall commit an offence and shall on conviction be liable to a fine not exceeding one million rupees and to imprisonment for a term not exceeding five years, if he – makes, with intent to deceive, any false or misleading statement or entry or omits any statement or entry in any book, account, report or statement of the bank; – obstructs an inspection or examination of the bank under the Banking Act 2004; – fails to take all reasonable steps to ensure compliance by the bank with the Banking Act 2004; or – is privy to any of the above mentioned offences and fails to report them to a senior officer or in the case of a director, to the Board of the central bank.
The directors and senior officers are also liable to various other penalties for breaches of other provisions of the Banking Act 2004.
9.1.9.1 Powers of the Bank following regular or special examination
Where an inspection or examination of a bank by the Bank of Mauritius discloses that the bank is conducting its business in a manner detrimental to the interests of its depositors or the bank has insufficient assets to cover its liabilities or the amount paid as the bank’s stated capital or assigned capital, as the case may be, is impaired or the bank is otherwise in an unsafe or unsound condition, the Bank of Mauritius may take any of the following actions: – impose conditions on the bank’s license or vary conditions attached thereto; – require the bank forthwith to take such steps as may appear to the central bank to be necessary to remedy the situation; – appoint a person to advise the bank in the proper conduct of its business and fix the remuneration to be paid by the bank to the person so appointed; and – revoke the bank’s license.
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9.2 Non-bank financial institutions
9.2.1 Responsibility for regulation and supervision of non-bank financial institutions
As at 31 July 2015, 8 non-bank deposit-taking institutions were licensed under the Banking Act 2004 to undertake deposit taking business in Mauritius. These institutions are supervised by the Bank of Mauritius through off-site monitoring and on-site examinations.
The Financial Services Act 2007, which came into force on 28 September 2007, regulates financial services which do not fall under the aegis of the Bank of Mauritius. Prior thereto, those financial services were regulated under the Financial Services Development Act 2001. The Financial Services Commission is responsible for supervising the capital market and other non-banking financial businesses such as leasing, insurance, unit trusts etc.
9.2.2 Memorandum of Understanding between the Bank of Mauritius and other institutions
Financial Services Commission A Memorandum of Understanding (MOU) was signed on 5 December 2002 between the Bank of Mauritius and the Financial Services Commission (FSC). The MOU sets out a framework of co-operation between the Bank of Mauritius and the FSC in their common pursuit to maintain a safe, efficient and stable financial system in Mauritius. Both supervisory bodies, under the terms of the MOU, work in close collaboration to ensure the setting up of appropriate arrangements to respond to threats to financial stability, and to coordinate information sharing and avoid duplication.
On 12 July 2007, as part of the process of promoting a more structured collaboration and coordination between them, the Bank and the FSC signed a Protocole D’Accord and launched the Joint Bank of Mauritius/FSC Coordination Committee. The main purpose of the Protocole D’Accord is to expand on the scope of the MOU signed between the two regulatory and supervisory bodies in December 2002. The Protocole D’Accord makes further provision for the parties to agree on the extent of their responsibilities and harmonization of their procedures with respect to financial institutions which are regulated by both institutions. The Bank of Mauritius and the FSC have also agreed to the principle of rotating Chairmanship.
Statistics Mauritius A MOU between the Bank of Mauritius and Statistics Mauritius (SM, formerly the Central Statistics Office) was signed on 3 March 2009 with a view to have a more structured collaboration between the Bank and the SM and to promote quality statistics and avoid overlapping and duplication in the collection and production of statistical information. The Bank and the SM have also agreed that staff and resources shall be made available to each institution for participation in technical Mauritius 131
committees to be established to ensure that the aims and objectives of the MOU are achieved.
Financial Intelligence Unit A MOU between the Bank and the Financial Intelligence Unit (FIU) was signed on 12 November 2009 as part of the National effort in combating money laundering and terrorist financing. The MOU underscores the need for consultation, cooperation and assistance between the Bank and the FIU.
Mauritius Revenue Authority A MOU between the Bank and the Mauritius Revenue Authority for the purpose of, amongst others, gauging activities in the real sector of the economy and also setting out the framework of their co-operation in the interest of the economy was signed on 31 December 2009.
Competition Commission of Mauritius A MOU between the Bank and the Competition Commission of Mauritius (CCM) was signed on 26 August 2010 for the purpose of, amongst others, mutual consultation and information-sharing between the two institutions with the aim of avoiding inconsistent decisions, ensure complementarity in policies and to smooth out potential sources of conflict.
Registrar of Cooperatives Societies A MOU between the Bank and the Registrar of Cooperatives was signed on 14 August 2014 to set out a framework of cooperation between the two authorities with a view to ensuring effective supervision of credit unions.
Independent Commission Against Corruption The Bank and the Independent Commission Against Corruption (ICAC), acknowledging the need for consultation and assistance as part of the national effort to combat financial crime effectively, have entered into a MOU on 24 November 2014 for the purpose of facilitating the exchange of information in a timely manner and promoting capacity building between the two institutions, among others.
Overseas Supervisory Authorities Memoranda of Understanding have also been signed with 16 overseas supervisory authorities, especially with those jurisdictions where our local banks conduct cross- border operations. Among the 16 MoUs signed, nine are with regulatory authorities on the African Continent.
9.2.3 Categories of financial institutions and their licensing procedures
Deposit-taking business by non-bank financial institutions A non-bank deposit-taking institution (NBDTI) is an institution other than a bank which has been authorised by the Bank of Mauritius under the Banking Act 2004 to conduct deposit-taking business. Deposit-taking business means the business of accepting deposits of money for the purpose of financing the specific activities of
Mauritius 132 the non-bank deposit taking institution receiving such deposits or such other activities as may be approved by the central bank and investment in Government securities, Bank of Mauritius Bills issued under the Bank of Mauritius Act 2004 or such other investment as may be approved by the central bank. It also means the business of accepting Islamic deposits for the purposes of financing the activities of the non-bank deposit taking institution receiving such deposits or such other activities as may be approved by the central bank, the aims and operations of which are, in addition to the conventional good governance and risk management rules, in consonance with the ethos and value system of Islam.
With the proclamation of section 12(5) of the Banking Act 2004 which became effective 1 June 2007, a non-bank deposit-taking institution is subject to the same prudential regulation as a bank and any guidelines and instructions issued thereunder and the existing terms and conditions of non-bank deposit taking institutions shall stand amended to that effect.
Foreign Exchange Dealers and Money-Changers (Bureaux de Change) Anybody corporate, other than a bank, wishing to carry on the business of cash dealer in Mauritius shall apply to the Bank of Mauritius for a foreign exchange dealer license or a money-changer license, as the case may be.
A foreign exchange dealer is permitted to conduct the business of buying and selling of foreign currency, including spot and forward foreign exchange transactions, wholesale money market dealings and the business of a money changer and/or money or value transfer services.
A money changer is licensed to carry on solely the business of buying and selling foreign currency notes, coins and travellers cheques, the replacement of loss or stolen travellers cheques and encashment under credit cards.
Cash dealers are subject to off-site surveillance and on-site examinations carried out by the Bank of Mauritius. Foreign exchange dealers are required to maintain liquid assets equivalent to or not less than 10 per cent of their liabilities or such higher percentage as may be prescribed by the Bank of Mauritius.
Foreign exchange dealers and money changers are required to pay an annual fee as prescribed by regulations made by the Bank of Mauritius and shall, at all times, display in a conspicuous place at their principal place of business, the license granted to them and an authenticated copy of the license in each branch or office.
With a view to fostering competition in the domestic foreign exchange market, the Bank decided in July 2008 to license more money-changers.
As at 31 July 2015, 5 foreign exchange dealers and 9 money-changers were operating in Mauritius.
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9.2.4 Capital requirements for Cash Dealers
A cash dealer has to maintain at all times such amounts of capital as may be determined by the Bank of Mauritius.
A foreign exchange dealer, other than a bank, shall at all times maintain such minimum liquid assets, equivalent to not less than 10 per cent of its liabilities or such higher percentage, as may be determined by the Bank of Mauritius.
9.3 Moneylenders and credit unions
New provisions have been added to the Banking Act 2004 in December 2013, with respect to the licensing of moneylenders and credit unions.
Section 14D empowers the Bank of Mauritius to license and regulate companies to carry out the business of moneylending in Mauritius.
Section 14E empowers the Bank of Mauritius to licence and regulate existing credit unions registered under the Co-operatives Act 2005 with total assets of Rs20 million or more. The Bank and the Registrar of Cooperative Societies under the Co-operatives Act may also collaborate and assist each other and exchange such information as they may consider appropriate for the effective supervision of credit unions.
9.4 Credit Information Bureau and External Credit Assessment Institution
The Banking Act 2004 was amended through the Finance (Miscellaneous Provisions) Act 2008 to enable the Bank of Mauritius to license any company wishing to engage in the business of credit information bureau and to recognize external credit assessment institutions.
9.4.1 Credit Information Bureau
Any company wishing to carry on the business of credit information bureau, i.e. collecting, consolidating and collating trade, credit and financial information whether fund based or non-fund based on recipients of credit facilities and guarantors for sale to creditors, must apply to the central bank for a credit information bureau license.
9.4.2 External Credit Assessment Institution
Any institution desirous of being recognised by the central bank as an external credit assessment institution, i.e., an institution which has been recognised by the central bank under the Banking Act 2004 for the purposes of carrying on the business of assigning credit ratings on debt instruments and on issuers of debt instruments, shall submit an application for recognition to the central bank. The application shall be in such medium and in such form as the central bank may
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determine and shall be accompanied by such information or document as may be required for the purposes of determining the application.
9.5 Agency agreement and Representative office of foreign banks
In December 2013, specific provisions were made in the Banking Act 2004 – (i) for the Bank of Mauritius to approve the setting up of representative offices by foreign banks in Mauritius. (ii) to enable a bank to contract the services of an entity to provide its services on its behalf or enter into an agency agreement for that purpose, subject to the approval of the Bank of Mauritius.
9.6 Specialised Financial Institutions
A new section 11B has been added to the Banking Act 2004 to provide for the licensing of specialised financial institutions, i.e. a body corporate set up for the purpose of facilitating the economic development of Mauritius.
10. National payment, clearing and settlement system
10.1 How is the payment, clearance and settlement system organised?
The Payment Systems infrastructure in Mauritius consists of a real time gross settlement (RTGS) backbone to which clearing, depository and other payment networks are connected.
The Mauritius Automated and Clearing and Settlement System (MACSS) Operated by the Bank of Mauritius, the MACSS is a Real Time Gross Settlement (RTGS) system with guaranteed finality of payment, based on the credit push principle.
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The Port Louis Automated Clearing House (PLACH) Also operated by the Bank of Mauritius and fully integrated with the MACSS, the PLACH, performs netting on cheque, and Electronic Fund Transfer data that are sent to the clearing house by electronic means and performs settlement at each clearing cycle on the MACSS.
On-line Revenue Collection (VAT, PAYE) Operated by the Mauritius Network Services (MNS), the Contribution Network Project (CNP) connects all large employers, and the majority of small ones, to the Mauritius Revenue Authority (MRA) via a single point of contact. The final settlements are done through the MACSS at the Bank of Mauritius which maintains the accounts of the MRA.
Central Depository System (CDS) This system is operated by the stock exchange of Mauritius and allows delivery versus payment of stock exchange transactions on a T+3 rolling basis via the MACSS. Transactions in MUR and USD are settled through the MACSS.
Retail Payments (Credit and Debit cards) This is a private initiative on behalf of commercial banks to settle inter-bank rupee transactions made through credit/debit cards through the Net National Settlement system of the card providers.
10.2 What is the role of the Central Bank in the system?
In this respect, section 48 of the Bank of Mauritius Act 2004 provides that the Bank of Mauritius may organize, own, participate in and operate payment, clearing and settlement systems. The Bank may also organise, own, participate in, operate or promote payment schemes with a view to promoting sound payments instruments.
In addition, the Bank may provide facilities, including intraday credit, to payment, clearing and settlement systems and their participants, to ensure the safety, soundness and efficiency of such systems.
A new section 48A has been added to the Bank of Mauritius Act 2004 in May 2015 which empowers the Bank to license and oversee the financial market infrastructure and payment scheme providers. The Bank is responsible for the regulation, licensing, registration and overseeing of payment systems, clearing houses and the issuance and quality of payment instruments. In this respect, the Bank may, inter alia, require (i) the registration or licensing of any payment, clearing or securities settlement system or the operator of any such system or any payment scheme provider and (ii) any payment, clearing and settlement system or the operator of the such system or a payment scheme provider to observe such conditions and requirements as the Bank may determine. The Bank may also conduct examinations of the payment or clearing systems, their operator and participants as well as payment scheme providers.
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10.3 Short description of the processing of payment instructions
RTGS Payments MACSS is a SWIFT-Ready application and therefore strictly adheres to SWIFT Message protocols. Participants send payment instructions to and receive settlement notification from the MACSS via SWIFT network. The funds transfer mechanism in MACSS is based on the SWIFT Y Copy scheme and the MUP service which is owned and operated by the Bank of Mauritius.
Payment instructions sent to the MACSS are subject to a priority value set by the sender and all instructions of same priority are settled in real time on a first in first out basis. Most instructions are sent with a priority of 99 which is the lowest priority and means ‘settled or rejected’, i.e., the instruction is rejected if funds are not available in the account at the time of settlement. Instructions may be sent with higher priorities to be queued until funds are available. All queued payment instructions are cancelled at end of day.
Participants of the MACSS are also connected to the central application by a private and secured network for monitoring purposes. In case of SWIFT outage, this network can be used to send payment instructions.
Since December 2009, the multi-currency feature of MACSS has been enabled and the system now settles payments in USD, EUR, GBP, CHF, ZAR and JPY in addition to the MUR in real time with finality.
Cheque Clearing Cheque payment instructions are processed separately in the Port Louis Automated Clearing House application and settled via special clearing transactions in the MACSS. As from September 2011, cheques are truncated at the point of deposit and cleared on the basis of image and data transmitted to the central system. The Cheque Truncation System also allows bulk clearing of electronic fund transfers (EFT).
Banks use their internal systems to scan cheques and prepare files in the format prescribed by the software of the Cheque Truncation System. An overview of the process is provided below:
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Four clearing sessions are held daily from Monday to Friday at 10:00, 12:00, 15:00 and 16:00. The first clearing session of the next day is open for overnight processing, typically, as from the close of the 4th session of the day.
Net settlement is effected in the RTGS system after each clearing session. Electronic files containing details of the MICR code line, amount and image of cheques are sent to the cheque truncation system operated by the PLACH.
10.4 How are non-funded positions settled in the system?
Non-funded positions have not arisen as all banks are required to maintain adequate cash balances in their current accounts held with the Bank of Mauritius. The balances on these current accounts are monitored on a daily basis at the Bank. Settlement instructions, which bear same day value, are effected electronically through the MACSS system which maintains the accounts of all participants. In the event that these banks are in need of funds during the day, they may have recourse to intra-day facility from the Bank of Mauritius against eligible collateral securities. These facilities should be repaid by the end of the day.
10.5 International Bank Account Number (IBAN)
The Bank of Mauritius implemented the International Bank Account Number (IBAN) format in March 2006. Banks in Mauritius are increasingly engaging in cross-border banking transactions. In this connection, the Bank of Mauritius initiated action with a view to adopting an IBAN format for Mauritius. Extensive consultations were held with banks. A consensus was thereby reached on the
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IBAN format which was implemented by banks as from March 2006. Banks were requested to issue an IBAN to their clients as from 1 April 2006.
The IBAN consists of 30 alphanumeric characters as shown below:
MU67BOMM0101123456789101000000
The first two letters represent the Country Code for Mauritius The next two digits represent the Check Digits for validation purposes. The next four letters represent the SWIFT code of the Bank of Mauritius. The next two digits represent the Bank Code. The next two digits represent the Branch Code. The next twelve digits represent the National Account Number. The next three characters have been reserved for any future needs (to be filled in with zero for the time being). The next three characters have been reserved for the currency code.
11. Currency in use
11.1 List of legal tender notes and coins currently issued and in use in the economy
Currency - Rupee - 100 cents equal one Rupee Notes - 2000 Rupees, 1000 Rupees, 500 Rupees, 200 Rupees, 100 Rupees, 50 Rupees, 25 Rupees Coins - 20 Rupees, 10 Rupees, 5 Rupees, 1 Rupee, 50 Cents, 20 Cents, 5 Cents, 1 Cent, Commemorative coins and the Dodo Gold Bullion coins
11.2 Introduction of polymer bank notes
On 22 August 2013 the Bank launched its first polymer bank notes in three denominations of Rs25, Rs50 and Rs500. These polymer bank notes are in circulation concurrently with paper bank notes.
12. Some Other activities of the Bank of Mauritius not covered above
The Bank may – issue bills and demand drafts, and effect remittances of funds; – purchase/sell gold coins, gold bullion, gold or shares or units in gold funds; – issue a gold certificate in such form and subject to such conditions as may be determined by the Bank, to represent a certificate of ownership of any gold bar held in custody by the Bank in favour of the person who has purchased it; – open and maintain accounts for the Governor, Deputy Governors and members of the staff;
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– invest in securities of government on behalf of staff funds and superannuation Funds and other internal funds of the Bank; – issue and hold Bank of Mauritius Bills and purchase and sell outright or by way of repurchase agreement, Bank of Mauritius Bills; – regulate the fees or charges in respect of the services provided by banks; and – appoint, on such terms and conditions as it may deem fit, fit and proper persons to act as primary dealers.
The Bank is also required to promote public understanding of the financial system, including awareness of the benefits and risks associated with different financial products regulated by the Bank, which are offered by financial institutions and also carry out investigations and take measures to suppress illegal, dishonourable and improper practices, market abuses and any potential breach of the banking laws.
Furthermore, the Bank has the right to institute and conduct proceedings in any Court against any financial institution for the proper application of the banking laws or intervene in any proceedings in which a financial institution is a party.
13. The position of the central bank in SADC
13.1 Special relationship with other central banks in SADC (CMA excluded)
The Bank participates in collaborative projects with other SADC central banks, such as short-term attachments and study missions with a view to promoting the mutual exchange of experience.
The Bank has signed Memoranda of Understanding with 6 central banks/ regulatory institutions of SADC member states. (Banco de Moçambique, South African Reserve Bank, Central Bank of Seychelles, Registrar of Financial Institutions in Malawi, Reserve Bank of Zimbabwe, Commission de Supervision Bancaire et Financière de Madagascar).
14. Publications
14.1 Regular published publications
According to the Bank of Mauritius Act 2004, the Bank shall, not later than 4 months after the close of its financial year, submit to the Minister of Finance a copy of the annual accounts certified by the auditors together with a report on its operations during that year. The Minister of Finance shall, at the earliest available opportunity, lay a copy of the annual report, which contains the audited accounts as at end-June, before the National Assembly.
Apart from the audited accounts of the Bank, the Annual report provides a review of the economy and also covers developments in the area of Banking Supervision and Regulation during the financial year ended June. The Bank also publishes a Monthly Statistical Bulletin which is posted on the Bank’s website. As per section Mauritius 140
33(2)(b) of the Bank of Mauritius Act 2004, the Bank is required to publish at least twice a year statements on price stability and on the stability and soundness of the financial system. Accordingly, the Bank has been publishing bi-annual Financial Stability Reports and Inflation Reports since July and November 2008, respectively.
14.2 Occasional/special publications since 1990
Since 1990, the Bank has published the following papers: 1. Monetary policy making in Mauritius, co-authored by Prof Maxwell Fry and Mr R. Basant-Roi, the then Director-Research, which appeared in the Quarterly Review January-March 1995. Occasional Paper Series No.1 2. The determinants of interest rate spread: Empirical evidence on the Mauritian Banking Sector by P. Ramful (Research Officer) - May 2001. 3. The impact of the Africa Growth and Opportunity Act and the phasing out of the Multi Fibre Agreement on the Mauritian Economy by Vimal Thakoor - Research Officer - April 2003. 4. The Experience of Mauritius with the Lombard Rate: An Overview by Vikram Punchoo - Senior Research Officer, April 2004. 5. Determination of an Equilibrium Rs/US$ rate according to the purchasing power parity - By Marjorie Heerah-Pampusa, Assistant Director-Financial Markets Department, and Padma Hurree-Gobin, Senior Research Officer, Research Department - 30 June 2006. 6. Occasional paper series - A Primer on Inflation - Marjorie Heerah-Pampusa, Waësh Khodabocus and Vandana Morarjee - November 2006 7. Occasional paper series - A primer on Core Inflation - Jitendra N. Bissessur and Vandana Morarjee - November 2006 8. Inflation Expectation Survey - Since 2007 9. Report on Unfair Terms and Conditions in banking Contracts in Mauritius; June 2014 10. Fighting Financial crimes brochure -16 October 2014
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Banco de Moçambique
Banco de Moçambique PO Box 423 Maputo, Mozambique Fax: +258 1 29718 Tel: +258 1 428151
1. History
Banco de Moçambique (BM), was established on 17 May 1975, conducting both commercial and central bank operations. However, as a result of the financial sector reforms, in 1992 the Government decided to split the two functions, creating for commercial aims the Banco Commercial de Moçambique (BCM), now integrated on group BIM, the major commercial bank in the country.
2. Relationship with government
The independence of the BM is guaranteed by Law no. 1/92, which creates and states that the BM is the Monetary and Foreign Exchange Authority of the Republic of Mozambique. However, it states that in the realisation of its objectives the BM shall respect the economic policy defined by the Government of the Republic of Mozambique.
According to the Constitution of the Republic of Mozambique, the President of the Republic appoints the Governor and deputy Governor of the BM for a period of five years.
The relationship between the BM and the Government in formulating monetary policy lies in the level of co-ordination, as Law no. 1/92 states, the BM is responsible for designing and implementing the monetary policy, according to all the macro- economic objectives of the Government.
The Board of the Bank is composed of seven members: The Governor and Deputy Governor who are appointed by the President of the Republic, and five General Managers who are appointed by the Prime Minister. They can only be dismissed for a serious reason.
According to Law no. 1/92, the number of Board members is limited to 7, i.e. Governor, Deputy Governor and five General Managers. The central bank is allowed to grant credit to the Government to an amount not exceeding 10 per cent of the Government’s ordinary revenue collected in the previous two years. This credit has
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to be settled during the same fiscal year. Any outstanding amount bears interest at the rediscount rate.
On behalf of the government, the central bank intermediates the sale of Treasury bills issued by the Government to the commercial banks, manages the Government loans to be allocated to the economy through the commercial banks (refinancing process).
3. Structure
As from June 2011, five agencies and one Department were turned into branches, thus totalizing eight branches distributed along the equal number of cities.
The specialised functions reserved for central bank branches are:
• co-ordinate clearing operations among commercial banks (including the central bank) in that specific region; • Hold Government accounts and to do operations with the Government; • Promote operations both in domestic and foreign currencies; • Provide technical and specialized support to local financial operators, particularly those operating in microfinance area; • Elaborate specialized information on their jurisdiction in a regular basis; • Ensure a more regular provision of banknotes and coins of the Metical to commercial banks nearest operating areas.
4. Design and conduct of monetary policy
4.1 Main objectives of monetary policy
The main objective of the monetary policy in Mozambique, consistent with the goal of the government’s economic policy, is to reduce inflation.
4.2 Instruments of monetary policy
The main instruments of monetary policy are:
- Open Market Operations; - The Bank of Mozambique reference interest rates (the Standing Lending Facility and the Standing Deposit Facility); - Reserve Requirement Ratio; and - Moral suasion.
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4.3 Types of refinancing as well as collateral used
The refinancing policy by Banco de Moçambique, whereby it advances overnight funds to commercial banks against Treasury Bills as collaterals, aims at liquidity management, according to the reserve money target.
4.4 The money supply aggregate that plays the main role in monetary policy
The money supply aggregate playing the major role in the monetary policy is the reserve money, as an operational target and M3 as the intermediate target.
4.5 Reserve requirements on financial institutions
The reserve requirement has been extended to all deposits (deposits in local and foreign currency, demand and time deposits) in the banking institutions operating in Mozambique’s financial system, including Government deposits, deposits of commercial banks with other commercial banks outside the monetary market (since April 1998).
The reserve requirement, for deposits both in local and foreign currency, to be placed two weeks with the central bank, must be denominated in local currency (Metical), referring to the average deposits of the preceding two weeks.
In the context of the gradual abandonment of direct monetary control, the BM introduced the Inter-bank Monetary Market in September 1997, in which open market operations are performed as well as liquidity exchanged between credit institutions.
5. Structure of the financial markets
5.1 Organisation of the money and capital markets
The Interbank Money Market (MMI) was introduced in September 1997. It comprises:
- Operations of exchange of liquidity among the commercial banks; - Issuance and trading of Treasury Bills (issued by central bank on behalf of government) for Monetary Policy Purposes and to Finance the Temporary Deficits of the Current Budget (subject of request of MoF); - Issuance of Central Bank Bills (TAMs) for Monetary Policy Purposes, suspended since August, 2004; - Availability of Deposit and Lending Standing Facilities (Commercial Banks Initiative); - Repo and reverse repo operations were introduced formally in June 2007 by the Central Bank, with transactions (reverse repo) starting in July 2007 and in July 2008 the BM software became suitable to repo transactions, and the first
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operations between the Central Bank and commercial banks occurred in the second half of 2009 as did the operations amongst commercial banks.
The capital (stock) market was introduced in October 1999.
5.2 Instruments used in both markets
- Treasury Bills (T-Bills); - Central Bank Bills (TAMs); - Standing Facilities; - Reserve Requirements (ROs); - Repo and Reverse Repo; - Treasury (Government) Bonds (T-Bonds), and; - Corporate Bonds and Equities.
5.3 Legal Frameworks existing for the Money and Capital Markets
BM is the intermediary of T-Bills and the Commercial Banks of Treasury Bonds (T- Bonds).
Existing Notices in Money and FOREX Markets:
- Notice nº 10/GGBM/2005, 28 September, Treasury Bills (T-Bills); - Notice nº 05/GGBM/2006, 28 December, Interbank Foreign Exchange Market (MCI); - Notice nº 11/GBM/2007, 19 June, Repurchase Operations of fixed income securities; - Notice nº 01/GBM/2009, 26 January; Interbank Money Market (MMI); - Notice nº 11/GGBM/2009, 26 January, Markets Operations System (SOM); - Notice nº 01/GBM/2011, 24 January , Reserve Requirements; - Notice nº 02/GBM/2011, 27 April, Interbank Foreign Exchange Market (MCI).
6. External payment arrangements
6.1 Determination of exchange rate policy
The central bank is responsible for designing and conducting Foreign Exchange Policy in Mozambique.
6.2 The present exchange rate system
The present exchange rate regime is the free floating system.
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6.3 Organising the exchange market
The participants in the inter-bank foreign exchange market are the central bank and commercial banks. Foreign exchange is freely traded, namely export proceeds and invisibles. Funds from import support are also marketed in this market according to the conditions stated in the agreements by the donors/financiers.
6.4 Management of foreign reserves
6.4.1 Legal Framework
- Law 1/92, of 3 January – Law of the Banco de Moçambique, which defines the nature, objectives and functions of the Bank as Central Bank of the Republic of Mozambique. - Investment Policy - Guidelines
6.4.2 Rationale for holding reserves
a) Meet foreign exchange needs and external obligations - Service foreign exchange liabilities and public debt obligations; - Provide foreign exchange for operational purposes/transactional needs.
b) Support monetary exchange rate management policies - Intervene in support of the domestic currency, providing confidence to markets.
c) Limit external vulnerability - Provide a buffer to absorb shocks during times of crises, in terms of imports coverage.
6.4.3 Reserve management Objectives
Capital preservation – to ensure that liquidity, market and credit risks are controlled in a prudent manner;
Liquidity - to ensure that adequate foreign exchange reserves are available to meet the following objectives: provide confidence that the country can meet short term foreign debt obligations; support monetary and exchange rate policy; buffer for times of crises; and
Income generation – to ensure that, subject to liquidity and other risk constraints, efficient earnings are generated over the medium and long term on the funds invested.
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6.4.4 Strategic Currency Composition
Working Capital Tranche - is denominated in the currency composition of historical average of monthly transaction and FX intervention currency; Liquidity Tranche - is denominated in the currency composition of historical average of 3 months of imports and the currency composition of the short term debt; Investment Tranche - is designed to replicate the currency composition of the stock of external public debt.
6.4.5 Strategic interest rate risk
The strategic target effective duration of the portfolio is set up to be consistent with the maximization of long term annual average returns attributable to interest rate exposure, subject to a low probability of posting negative returns on any given year. The Investment Committee reviews the strategic asset allocation in accordance to the approved criteria prior to the beginning of every fiscal year when significant changes in volatility or level of interest rates take place.
7. Currency convertibility and exchange control
7.1 Current state of currency convertibility
The domestic currency (Metical - MZM) is not convertible, either internationally or regionally.
7.2 Exchange control restrictions on current account transactions
No restrictions are imposed on the export of goods. Only registration is needed with the Customs, for statistics and balance of payment purposes.
The import of goods must be preceded by negotiation of foreign currency with commercial banks and then it must be registered at the Customs.
There are no restrictions on the entry of earnings for services. Only registration with the banking system bureaux of exchange is required, and subject to conversion into MZM, the retention in foreign currency is allowed up to 50 per cent, after covering domestic debt service in foreign currency. Payments for current transactions are liberalised.
As from 2006, with the purpose of minimizing the foreign exchange risk on banking loans, the financial institutions were obliged to create a provision of 50 per cent for each loan in foreign currency granted to non-exporter entities or individuals.
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7.3 Restrictions on capital account transactions
Capital transactions are subject to approval of the central bank. The entry and exit of foreign currency is allowed up to equivalent US$5 000 and no need for declaration. Amounts above US$5 000 have to be done by a bank transfer.
Under the present investment law, foreigners are allowed to invest in Mozambique. The expatriation of profits and invested capital (at the end of the investment) are also allowed and regulated by the law.
7.4 Retention rules for foreign exchange earned or owned by residents
The new regulation establishes that foreign exchange earned has to be converted to MZM and the retention in foreign currency is up to 50 per cent.
Residents are allowed to hold foreign currency accounts in the foreign currency, even if they are not exporters.
The bureau de change can only transact with individual, and sell foreign currency for purpose of travel abroad up to equivalent US$5 000.
The account in foreign currency can only withdraw up to US$5 000 per transaction and for the purpose of travel abroad.
8. The Central Bank and external debt
8.1 The role of the central bank in managing the country’s external debt
The role of the central bank in managing the external debt is the following:
- Monitor the external debt service;
a) Government’s adviser on multilateral and bilateral negotiations of external debt.
b) For the private sector indebtedness, is required a previous authorization by the central bank. The private sector debt service is effected with the commercial banks prior to disbursement registration at the central bank.
8.2 The role of the Treasury in this respect
The Treasury controls the public debt by budgetary measures.
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9. Supervision of banking institutions
9.1 Banks
9.1.1 Authority responsible for banking supervision
The central bank is the authority responsible for banking supervision through its Bank Supervision Department.
9.1.2 Licensing procedures for establishing a new bank
The licensing procedures for establishing a new bank are the following:
- Formal application to the central bank (BM), through bank supervision department; - After evaluation, the department gives its opinion and submits the application to the governor - Governor decision comes within ninety (90) days from the date on which the application is submitted to the Bank of Mozambique.
9.1.3 Types of licences that exist
Banks are allowed to conduct general operations and Microbanks operate in Microfinance
9.1.4 Minimum capital requirements for the banks
At present, the minimum paid-up capital required for banks is 70 million Meticais for banks – roughly US$3 million at present exchange rate.
9.1.5 Regulations governing current activities of banks
a. Large credit exposure - Financial institution shall not grant an advance or credit facility to a single customer or group of customer which exceed 25 per cent of its total regulatory capital. - Advances or credit facilities that are equal or greater than 10 per cent of total capital are considered large exposure. The aggregate limit on large exposure shall not exceed eight times the total capital. Notwithstanding, a financial institution may grant an advance or credit facility in excess of twenty five percent of its total regulatory capital with prior approval of Bank of Mozambique if the facility is adequately secured by—(a) Mozambique Government; (b) deposits held by the financial institution and secured by a lien; (c) Bank of Mozambique; (d) Foreign Government and Central Banks (e) International Financial Organization.
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b. Capital adequacy ratio is 8 per cent as established by Basle Committee Requirement. c. There is no regulation on the liquidity ratio yet. However, a maturity gap approach is applied to assess liquidity amongst the supervised institutions. d. Foreign exchange positions
- The net open foreign exchange position in each currency must not exceed 10 per cent of the total regulatory capital. - The overall net open foreign exchange position is fixed at 20 per cent of the total regulatory capital. e. Provision for bad loans
The provisions are recognized when the loan fall due and according to its classification. There are six categories (classes) of non-performing loan:
Category I principal or interest is due and unpaid up to 90 days Category II principal or interest is due and remain unpaid for more than 90 days to 180 days; Category III principal or interest is due and unpaid for more than 180 days to 270 days; Category IV principal or interest is due and unpaid for more than 270 days to 360 days; Category V principal or interest is due and remain unpaid for more than 360 days to 540 days; Category VI principal or interest is due and remain unpaid for more than 540 days
The specific provision for the above mentioned categories are calculated as a percentage of outstanding balance of the credit facility, taking into account, the security held on the facility. The restructuring of the facility does not change the classification category and the corresponding level of provisions:
Class Class Class V Class VI Class I Class II III IV Residential 5 15 20 50 75 100 mortgage Property 5 15 25 50 75 100 Leasing Commercial 5 15 35 60 85 100 mortgage Other securities 10 20 40 75 100 Unsecured 15 25 50 75 100
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f) Deposit insurance The draft of deposit insurance scheme has been submitted to the Ministry of Finance to be approved by the cabinet
9.1.6 Main supervisory practices used
The supervisory approach comprises off-site supervision and on-site supervision. The Off-site supervision is conducted on a daily, monthly, quarterly and annual basis using several indicators to assess the financial soundness of the banks. The indicators include Asset quality, Liquidity, Capital Adequacy and Earnings and are derived from returns submitted by banks on a periodic basis. On-site supervision is conducted within the financial institution premises according to the supervision work plan or on ad-hoc basis.
Furthermore, reports based on such analysis are submitted to the Board of the BM and of the supervised banks.
Regular meetings are held with the financial institutions to discuss general and specific aspects of the prudential regulations.
The department is moving towards full implementation of risk based supervision since March 2007.
9.1.7 Measures to remedy deficiencies as well as penalties utilised
In order to remedy/prevent deficiencies, the Banking Supervision Department of the central bank has been using moral persuasion and assuming an educational posture. However penalties, including charges and temporary or definitive suspension are envisaged for non-compliance with the regulations.
9.2 Non-banking financial institutions
9.2.1 Responsibility for supervision of non-banking financial institutions
The central bank is also responsible for the supervision of the non-banking institutions (except insurance companies and pension funds), in conjunction with the Ministry of Finance.
9.2.2 Categories of financial institutions and their licensing procedures
The categories of financial institutions and societies are described on the law no. 15/99, amended by the law no. 9/04 and the Decrees 56/2004 and no.57/2004, the last of which focus on micro finance institutions that comprises both deposit taking and non-deposit taking institutions.
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9.2.3 Information as requested under 9.1 which is applicable to non-banking institutions
For licensing of non-banking financial institutions, a formal application must be submitted to the Governor with the following information enclosed:
- Amount of initial capital and the method of realisation. - Identification of the shareholders and their shares in the equity capital, as percentage of total. - Description of the main objectives of the institution and the financial and economic needs it intends to satisfy. - Any previous economic and financial feasibility studies - Statutary project made according to the law - Declaration that the money do not come from illegal activities - 5 per cent of capital must be deposited at Central Bank or issued a first demand guarantee
After evaluation the central bank gives the authorisation and proposes the specific conditions for the operation of the new institution, according to the overall objectives of the monetary and financial policies pursued by the Government.
There are limited licences for the non-banking financial institutions. The minimum capital requirement varies according to the type of institution.
Banking and Non-banking financial institutions are mainly regulated according to the law no. 15/99, amended by the law no. 9/04 and the Decrees 56/2004 and no. 57/2004, with effect from 10 December and by specific terms of the licence given.
The non-banking financial institutions must submit monthly balance sheets. Their annual balance and regular on-site inspections are done by the banking supervision department.
There are penalties for non-compliance with the regulations.
10. National payment, clearing and settlement system
10.1. Payment, clearing and settlement system organised
The payment system in Mozambique is composed by the following streams:
Automated Clearing House (ACH) for cheques and Electronic Funds Transfers (EFT).
Government Electronic Funds Transfer System (STF) – it allows same day settlement for government payment instructions.
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Settlement of VISA card (debit and credit) transactions through National Net Settlement System.
Settlement of national debit cards transactions branded Ponto24. The cards are issued by Interbancos, a private company that owns a switch interlinking five commercial banks.
Settlement of stock exchange transactions (BVM)
Banco de Moçambique is the settlement agent for all the payment streams in Mozambique.
Money Market both for Domestic and Foreign Currencies - it is a grosspayment stream dedicated to settle the open market operations.
Mozambique Stock Exchange (BVM) – deal with securities transactions of government bonds and treasury bills as well as financial market instruments.
VISA International - For National Net Settlement System of VISA debit and credit cards.
Banco de Moçambique is in the process of introducing the Large Value Payment (RTGS) system that will address the processing, transmission and settlement of high value payments. The conceptual design of the RTGS system has been carried out by the SADC Payment System Project Team and Banco de Moçambique has adopted it as a guiding instrument in building its own RTGS system, suitable for Mozambique’s unique environment. The system went live in December 2008.
10.2 Role of the central bank in the system
Banco de Moçambique acts as operator, coordinator, settlement agent and overseer of the NPS.
10.3 Recent developments
In retail payment stream we have introduced the check digit as a security feature in the cheques. In order to introduce EFT, we have introduced the bank identification number (BIN).
10.4 Short description of the processing of payment instructions
We do not have a RTGS system in place. The clearing cycle for each of the payment system stream is as follows: D + 2 for cheques stream; D + 1 for Ponto 24; D + 3 for BVM; D + 1 for Visa and EFT and, D + 0 for money market transactions.
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10.5 How are non-funded positions settled in the system
The settlement system does not allow banks to go overdraft in the accounts held at the central bank. Also, the banks have to comply with a daily reserve requirement of 9 per cent.
The banking system is long in liquidity, thus we have not experienced the unfunded situation. Therefore, Banco de Moçambique is the lender of the last resort.
11. Currency in use
11.1 List of legal tender notes and coins currently issued in use in the economy, since 1st July 2007:
a-1) Notes and issuing dates:
1000 MTn (16 June 2006) 500 MTn (16 June 2006) 200 MTn (16 June 2006) 100 MTn (16 June 2006) 50 MTn (16 June 2006) 20 MTn (16 June 2006)
a-2) Coins issuing dates:
10 MTn (16 June 2006) 5 MTn (16 June 2006) 2 MTn (16 June 2006) 1 MTn (16 June 2006) 50 Cents (16 June 2006) 20 Cents (16 June 2006) 10 Cents (16 June 2006) 5 Cents (16 June 2006) 1 Cent (16 June 2006)
In the context of the currency reform process, which is in course, the following structure of notes and coins are simultaneously still circulating in the economy with the above indicated.
b-2) Coins:
10 000.00 MT (2003) 5 000.00 MT (1998) 1 000.00 MT (1994) 500.00 MT (1994)
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100.00 MT (1994) 50.00 MT (1994) 20.00 MT (1980 and 1994) 10.00 MT (1980 and 1994) 5.00 MT (1980 and 1994) 2.50 MT (16.06.80) 1.00 MT (1980 and 1994) 50 Cents (16.06.80)
12. The position of the central bank in SADC
12.1 Special arrangements with other central banks in SADC (CMA excluded)
BM has been cooperating with the other Central Banks in the SADC region under SADC regional payment system project. Banco de Moçambique, has a bilateral agreement for clearing and settlement.
13. Publications
13.1 Regularly published publications
The BM publishes the following regularly bulletins:
- Annual report; - Report on prices and financial situation (Quarterly); - Monthly Bulletin (Monthly); - Quarterly Statistical Bulletin; and - Press release on Recent Development on a fortnightly basis.
13.2 Occasional/special publications published since 1990
Twenty-three "staff papers" and three occasional papers have been published, and there is a set of other occasional publications which include documents on the regulations and laws concerning the financial sector.
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Bank of Namibia
Bank of Namibia PO Box 2882 Windhoek, Namibia Fax: + 264 61 283 5151 Tel: + 264 61 283 5111 Webpage: www.bon.com.na
1. History
The Bank of Namibia was created by an Act of Parliament in compliance with the Namibian constitutional provision under Article 128. The Bank of Namibia started its operations on 1 August 1990. In 1993, the national currency, the Namibia dollar, was introduced and is pegged at par with the South African rand.
The Bank of Namibia operates as an independent and autonomous institution, accountable to the Government and the People of the Republic of Namibia. The Bank is wholly owned by the Namibian Government.
The Governor and the Deputy Governor are appointed by the President of the Republic of Namibia in consultation with the Minister of Finance, for a term of five years. The President may remove the Governor or Deputy Governor on the grounds of misconduct, or unfitness to carry out his duties efficiently. The Board of the Bank consists of eight members, namely the Governor, Deputy Governor, the Permanent Secretary: Ministry of Finance, one staff member from the Public Service, who is appointed on the recommendation of the Minister of Finance and four other persons, appointed on the recommendation of the Minister of Finance. All board members are appointed by the President for a period of five years, subject to the Namibian Constitution and the provisions of the Bank of Namibia Act.
The Bank has its own budget, which is approved by the Members of the Board.
2. Relationship with government
The Bank acts as banker and financial adviser to, and fiscal agent of the Government. It also serves as the official depository of Government funds and manages the issue of Government securities. Furthermore, it advises the Government on the administration of exchange controls. The Bank also serves as fiscal agency through which Government deals with international financial organisations such as the IMF and the World Bank.
In terms of the Bank of Namibia Act of 1997 (No. 15 of 1997 as amended), the Bank may grant advances to the Government on such terms and conditions as the Board
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and the Minister may agree upon, every such loan must be repaid within six months from the date on which the loan in question was granted.
The financial relationships between the Government and the Bank are further defined in a Memorandum of Understanding.
3. Design and conduct of monetary policy
3.1 Main objectives of monetary policy
Namibia’s monetary policy objective is to support the fixed exchange rate between the Namibia dollar and the South African rand. This policy has been effective in attaining the ultimate monetary policy objective of price stability.
3.2 Instruments of monetary policy
The Bank uses the Repo Rate, Reserve Requirements, and moral suasion as instruments to conduct its monetary policy. An intraday credit facility is offered to commercial banks to ensure prompt and smooth interbank settlement, while a longer-term discount window facility is also available to inject liquidity into the banking system. Owing to the country’s membership in the CMA, the scope for an independent monetary policy is very limited.
3.3 Types of refinancing as well as collateral used
The 7-day repo is the main refinancing facility offered by the Bank of Namibia. In addition the Bank offers the overnight repo and the intraday repo facilities to commercial banks. The usage of the intraday repo facility is free, whilst a penalty above the ruling repo rate is charged on the usage of the overnight repo.
Commercial Banks are required to pledge to the Bank adequate holdings of Internal Registered Stock, Treasury Bills, Bank of Namibia Bill, securities fully guaranteed by the Government or investment graded debt papers of State Owned Enterprises to cover any credit extended by the Bank should the need arise. Various haircuts are charged on the market value of these securities, based on the maturities and the quality of the assets.
3.4 The money supply aggregate that plays the main role in monetary policy
Namibia uses the M2 aggregate for analytical purposes. The M2 is compiled from the Banking Survey which is a consolidation of the accounts of the central bank, four commercial banks and three other banking institutions. M2 is defined to include M1 plus time and savings deposits of the non-bank private sector.
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3.5 Reserve requirements on financial institutions
The minimum reserve requirement for each banking institution is determined by applying a unified ratio of 0.5 per cent to the average daily amount of a banking institution’s total liabilities to the public on a monthly basis.
4. Structure of the financial markets
4.1 Organisation of the money and capital markets
Money market Local interbank lending is limited as local banks frequently deal with the South African interbank market. This is due mainly to their close links with South African parent or affiliated companies
Capital market While encouraging additional companies to list their shares, the Namibian Stock Exchange (NSX) has also established a Development Capital Board to organise a separate trading system for shares of companies, which wish to have a market for their shares but do not meet the stringent requirements for a full board listing on the NSX.
4.2 Instruments used in these markets
The major money market instruments are: - demand and savings deposits; - notice and fixed deposits; - negotiable certificates of deposits; and - treasury bills.
Lending by financial institutions mostly occurs in the form of overdrafts, but also includes mortgage loans, leasing and instalment sales.
The major capital market instruments are: - shares listed and traded on the NSX; - listed government stock; and - bills, debentures and bonds issued by state-owned enterprises and commercial banks.
4.3 Legal frameworks existing for the money and capital markets
The issuing of money and capital market instruments is regulated by the following: - Bank of Namibia Act, 1997 (Act No. 15 of 1997 as amended) - Banking Institutions Act, 1998 (Act No. 2 of 1998 as amended) - Development Bank of Namibia Act, 2002 (Act No. 8 of 2002) - Agricultural Bank of Namibia Act, 2003 (Act No.5 of 2003)
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- Building Societies Act, 1986 (Act No. 2 of 1986) - Long and Short Term Insurance Acts, 1998, (Acts Nos. 4 and 5 of 1998) - Stock Exchanges Control Act, 1985 (Act No. 1 of 1985) and rules and regulations issued by the NSX - State Finance Act, 1991 (Act No. 31 of 1991) - Unit Trusts Control Act, 1981 (Act No. 54 of 1981) - Participation Bonds Act, 1981 (Act 55 of 1981) - Friendly Societies Act, 1956 (Act No. 25 of 1956) - Namibia Financial Institutions Supervisory Authority (NAMFISA) Act, 2001 (Act No. 3 of 2001) - Public and Accountants’ and Auditors’ Act, 1951 (Act No. 51 of 1951) - Inspection of Financial Institutions Act, 1984, (Act No. 38 of 1984) - Pension Funds Act, 1956 (Act No. 24 of 1956) - A money lender as defined in the Usury Act, 1968 (Act No. 73 of 1968)
4.4 Type of financial intermediaries operating in these markets
The Namibian financial system comprises the Bank of Namibia as the central bank, five commercial banks, a number of other banking institutions, a range of non-bank financial institutions such as insurance companies and pension funds, smaller financial intermediaries in the form of stockbrokers and money market funds, and the Namibia Stock Exchange, which was established in 1992. The financial intermediaries operating in Namibia are the following:
Commercial Banks - First National Bank of Namibia (Ltd.) - Standard Bank of Namibia (Ltd.) - Nedbank of Namibia (Ltd.) - Bank Windhoek (Ltd.)
Other specialised banking institutions - Namibia Post Office Savings Bank a division of NamPost Ltd - Agricultural Bank of Namibia Ltd - National Housing Enterprise Ltd - Development Bank of Namibia Ltd - SME Bank Namibia Ltd
5. External payment arrangements
5.1 Determination of the exchange rate policy
Namibia is a member of the Common Monetary Area (CMA) region, and its national currency (Namibia Dollar) is pegged, on par, to the South African Rand. Therefore, it follows the same exchange rate policy as that of South African.
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5.2 The present exchange rate system
Namibia has a fixed exchange rate regime.
5.3 Organising the exchange market
Within the CMA, all member countries apply the same exchange control regulations. All foreign exchange transactions are to be routed via an authorised dealer (AD). Foreign exchange earnings by Namibian enterprises have to be brought into the CMA within three months of exports.
The foreign exchange acquired by the ADs has offshore limits, which they can hold as a balance with their external correspondent banks. The prudential requirements on currency risk containment in terms of their foreign assets and liabilities, allow commercial banks to have an open position, limited to 15 per cent of each bank’s capital and reserves. In terms of the Determination on Foreign Currency Limits, the requirements on currency risk containment in foreign assets and liabilities, consist of two limits, namely the “overall” and “single” currency exposure limits. The first is to restrict the exposures of banks in foreign currency to 20 per cent of capital funds, whereas the second limit it to 10 percent for all major currencies and 5 percent for all other currencies, irrespective of whether long or short positions.
Given the capital mobility within the CMA and functional linkage between some commercial banks in Namibia and those in South Africa, it is easy to tap into the foreign exchange market.
5.4 The central bank’s involvement in managing foreign exchange reserves
The Bank of Namibia is responsible for managing and investing the country’s stock of foreign reserves. Through its Executive Committee the Bank assesses the investment performance of reserves and decides on the best options for investment, within the investment guidelines approved by the Board.
6. Currency convertibility and exchange control
6.1 Current state of currency convertibility
The Namibia dollar is convertible regionally into the South African rand, while it is not convertible internationally.
6.2 Exchange control restrictions on current account
There is virtually no restrictions on the current account. Namibia acceded to Article VIII of the International Monetary Fund in 1996.
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6.3 Capital account restrictions
On inward investments There are no restrictions on capital from non-residents for equity investments.
On outward investments On application to the Bank of Namibia, corporate entities are allowed to invest offshore. The quantitative limit has been abolished.
Private individuals over 18 years of age are allowed to invest up to N$ 2 million outside the CMA.
Travel allowance may be availed at the rates of N$ 160 000 per adult and N$ 50 000 per child under the age of 12, per calendar year respectively.
Any student may be provided with study allowance at the rate of N$ 160 000 per annum and N$ 320 000 if a student accompanied by a spouse who is not studying.
6.4 Retention rules for foreign exchange earned or owned residents
Private individuals resident in Namibia are allowed to retransfer abroad income earned abroad and capital introduced into Namibia.
As a member of the CMA, Namibia follows the same exchange control rules and regulations as South Africa, Lesotho and Swaziland. However, in terms of exchange control liberalisation, Namibia follows its own pace of liberalisation.
The Bank continues to gradually release the emigrant blocked funds with the aim of softening the impact on the country’s reserves. Emigrant whose assets are under the physical control of an Authorised Dealer will, on application to the Exchange Control Division of the Bank of Namibia, be allowed to transfer funds in excess of the limit of N$ 2 million or N$ 4 million per family unit. Such approval will be subject to an exit charge of 10 per cent of the amount in excess of the limit.
7. The central bank and external debt
7.1 The role of the central bank in managing the country’s external debt
In 1992, the Government of the Republic of Namibia designated the Bank of Namibia (BoN) as the main institution responsible for recording information on each private foreign borrowing, non-parastatal debt, associated draw-downs, and debt service payments. The Ministry of Finance (MoF) was given the responsibility for contracting loans, recording and monitoring the country’s public and publicly guaranteed external loans.
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The Commonwealth Secretariat Debt Recording and Management System (CS- DRMS) is an electronic recording system installed at Bank of Namibia’s Research Department to capture data on private external loans. The system was also installed at the Ministry of Finance to capture data on public and publicly guaranteed external debt.
Apart from recording private external debt, the Bank acts as financial adviser to the Government. Whenever Government procures external loans, the Bank plays an advisory role on the suitability of the terms and conditions of such loans.
7.2 The role of Treasury in this respect
Disbursements of the loans proceeds to Government are routed via the Bank’s Treasury Division. The division is responsible for ensuring that the Bank has enough foreign exchange to service external loans. This involves matching the timing of loan repayments with the availability of foreign currency. To undertake this function effectively, the Bank liaises with the Debt Management Unit of the Ministry of Finance.
8. Supervision of financial institutions
8.1 Banking institutions
8.1.1 Authority responsible for banking supervision
The Bank of Namibia’s Banking Supervision Division is responsible for the supervision of banking institutions. The Bank of Namibia derives its supervisory and regulatory powers from the Banking Institutions Act, No. 2 of 1998, as amended (Act).
8.1.2 Licensing procedures for establishing a new banking institution (a bank)
Any person who intends to carry on the business of a banking institution may apply to the Bank to establish a bank and the Bank of Namibia, after consultation with the Minister, may grant such permission if the applicant satisfies all the criteria applicable to authorisation.
Sections 10 to 13 of the Banking Institutions Act No. 2 of 1998 sets out in part the essential requirements for the authorisation process, which includes among other things: - capital requirements as specified in section 28 of the Act; - fit and properness of shareholders, directors, and officers of the applicant; - permission from home country supervisor; - the structure and shareholding of the group of companies of which the applicant forms a part or intends to form a part; and - economic interest of Namibia.
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An applicant who is authorised to conduct banking business may engage in the complete range of banking activities or part thereof as contained in the conditions of authorisation. The Act does cater for all types of banking institutions, as all the criteria for licensing such institutions are the same.
8.1.3 Minimum capital requirements
In terms of section 28 of the Act the minimum capital funds, unimpaired by losses, shall at any time not be less than the greater of: - an amount as determined by the Bank; or - an amount which represents a percentage (currently 10 per cent) of the risk- weighted assets and other exposures of a banking institution as the bank may determine.
Sub-section 4 of section 28 empowers the Bank to require banking institutions to maintain higher levels of capital if there is a risk of the existing capital funds being impaired.
In addition, section 28A stipulates the minimum capital funds in respect of a banking group. In terms of section 28 (1) a controlling company must manage its affairs in such a way that the sum of the capital funds of the banking group structured under such controlling company does not at any time amount to – - less than the sum of the amounts of the required capital funds determined, for the respective entities constituting such banking group, in accordance with the rules and regulations of the respective regulators responsible for the supervision of those entities; - plus such amount as may be determined by the Bank in respect of entities that are included in such banking group, but are not subject to the supervision of a regulator.
In terms of subsection (2), in calculating the aggregate amount a banking group is required to maintain in terms of subsection (1), the sum of the banking group’s capital funds is calculated by deducting from it such amounts as may be determined by the Bank.
8.1.4 Regulations governing current activities of banks
The Act empowers the Bank to issue determinations, circulars and guidelines in accordance with the various provisions of the Act. The determinations relating to prudential requirements prescribe the minimum prudential standards relating to: - liquid assets requirement; - large exposures to a single customer or group of related customers; - capital adequacy; - loan classification and provisioning and suspension of interest on non- performing loans; - appointment, duties and responsibilities of directors and principal officers;
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- role of the audit committee, responsibilities and duties of external auditors; - fraud and other economic crime; - compulsory suspension of cheque accounts by banking institutions; - minimum local assets; - minimum insurance cover for banking institutions; and - other banking business practices.
8.2 Non-banking institutions
8.2.1 Responsibility for supervision of non-banking financial institutions
Most non-banking institutions are exempted from the provisions of the Banking Institutions Act, 1998, Act 2 of 1998 as amended, and are governed by their respective legislations. As from 2001, the Namibia Financial Institutions Supervision Authority (NAMFISA) supervises all non-banking financial institutions, a function that was previously performed by the Ministry of Finance. However, there are other non-banking financial institutions that are supervised by their own boards of directors. These include the Post Office Savings Bank, the Agricultural Bank, the Development Fund of Namibia, the National Development Corporation, the National Housing Enterprises, the Social Security Commission and the Motor Vehicle Accident Fund.
8.2.2 Categories of financial institutions and their licensing procedures
- Insurance Companies - Pension Funds - Unit Trusts - Asset Management Companies
Licensing procedures are as follow for respective institution. As the list of requirements is not exhausted, interested stakeholders are advised to consult respective legislations as outlined in 4.3 above.
Insurance: The insurance business is divided into two categories, namely: short- term insurance and long term insurance. The following licensing requirements apply for both: - Payment of N$ 200 registration fee - Be registered with the Registrar of companies - Be a public company with the Managing Director and at least 50 per cent of the Directors to be Namibian citizen or residents.
Asset Management Company: The following requirements apply: - Registration with Ministry of Trade and Industry (MTI); - Memorandum and Articles of Incorporation from MTI; - Business physical address; - Proof of capital of N$20,000.
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9. National payment, clearing and settlement system
9.1 Namibian Interbank Settlement System (NISS)
The Namibia Inter-bank Settlement System (NISS) was implemented in 10 June 2002 for settlement of Namibian domestic interbank transactions. NISS is based on pre-funding principle and transactions settle in NISS is final and irrevocable. Another advantage of NISS is that it allows high value payments to settle on the same business day as long as instructions to transfer funds are given within agreed cut-off times.
During 2004, NISS moved to same-day settlement. This means that the settlement of payment obligations for all payments, including the PCH batches, was now settling on the intended day of value. The Bank of Namibia provides credit to participants in NISS through repurchase agreements, such as intra-day, overnight and 7-day repurchase agreements.
Namclear In 2003, the Namibian banking industry together with the Bank of Namibia established the electronic payment clearing house, called Namclear Pty Limited. Each of the four banks jointly owns Namclear with 25 per cent shareholding by each bank.
The activities and operation are governed through mutually agreed clearing rules agreements. Namclear was established with the objective to process, clear and settle domestic retail payments, such as Cheque, Card and EFT transactions for Namibian banking industry.
Electronic Transfer System (EFT) The EFT system was implemented on 14 June 20042004 for clearing of all domestic EFT transactions. The banks are submitting NAD-to-NAD EFT transactions to Namclear, which is handling the clearing of the transactions within Namibia. Settlement of EFT transactions is taking place through NISS in Namibian dollar at Bank of Namibia. The EFT stream caters for bulk retail payments (e.g. salaries, stop orders and insurance premium payments).
Electronic Cheque Processing System (CPS) The Namibian banking institutions, represented by the Bankers Association of Namibia (BAN), together with the Bank of Namibia, implemented a multi-bank electronic Cheque Processing System (CPS) on 18th July 2005. The CPS solution replaced the manual cheque clearing system with code line (CLC) system. Code line clearing enables banks to capture the information of a deposited cheque electronically by reading the magnetic code line and transmitting the information via Namclear clearing house to the paying bank for settlement before the paper cheque is delivered to the paying bank for final approval.
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The cheque clearing cycle has been reduced to 5 days, nationally, from 1 April 2008. This means that upon depositing a cheque, banking customers will have access to their funds on their bank accounts within five working days anywhere in the Namibia. This is a major achievement because the clearing cycle used to vary between 7 to 21 years in the past. The cheque item has also been reduced from 5,000 000 to 500 000 effective from 10 June 2010. This means that Namibian clients and businesses cannot issue cheque above 500, 000. For cheques above this limit electronic payment methods or NISS can be use.
NAMSWITCH The Namibian banking industry implemented a local card switch called NAMSWITCH in 2008. NAMSWITCH was implemented in a phased approach because of the nature of payments, facilities, and the complexity of systems that are involved. The Automated Teller Machine (ATM) solution went live on 21 April 2008 and the Point-of-Sale (POS) was rolled out on 16 November 2008. With the implementation of NAMSWITCH, the Namibian banking industry has achieved the objective of switching/clearing of Namibian inter-bank domestic card transactions locally and settling it in Namibia Inter-bank Settlement System (NISS) in order to manage and control domestic exposures and risks.
9.2 What is the role of the central bank in the system?
In terms of the Payment System Management Act, 2003 (Act No. 18 of 2003 as amended) the Bank of Namibia has the powers to oversee, inspect and monitor the national payment system, the operation of the Payments Association of Namibia (PAN), system participants and service providers. The Bank has carried out a number of oversight activities aimed at promoting a safe and efficient NPS.
Effective payment system oversight is an essential ingredient in achieving the public policy objective relating to the safety and efficiency of the National Payment System (NPS). In addition, effective oversight will ensure financial and technical integrity of the NPS, including its overall robustness against systemic shocks together with its overall, efficiency, accessibility and cost effectiveness through rules, standards, monitoring, analyses and enforcement.
The Bank of Namibia plays pivotal dual roles in the payment system. First, as banker to the government which issues paper instruments that go through the clearing house. Also the Bank issues its own cheques and these go through the normal clearing process.
On the other hand, the Bank is the provider of settlement services. That is, the settlement system, called the NISS, which is owned by and resides at the Bank of Namibia. Settlement takes place in central bank money. Therefore, the Bank acts in dual role of being a settlement and clearing system participant, on one hand, and
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being responsible for the sound and efficiency of the whole payment system, on the other.
9.3 Short description of the processing of payment instructions
Cheque Transactions The cheque clearing in Namibia is based on Code line data. The banks exchange Code line data on the cheque through Namclear. The commercial banks capture Code Line at point of deposit. Code line clearing enables banks to capture the information of a deposited cheque electronically by reading the magnetic code line and transmitting the information via Namclear clearing house to the paying bank for settlement before the paper cheque is delivered to the paying bank for final approval.
EFT transactions All Namibian registered companies and individual clients wishing to make EFT payments will submit their payment instructions to their bank at certain cut-off time. The banks collect all EFT payments for the day and route it to Namclear at certain cut-off time. Namclear process/clear the EFT payments and prepare inter-bank settlement obligations and submit a settlement file to NISS at Bank of Namibia. Settlement of EFT transactions is taking place through NISS in Namibian dollar at Bank of Namibia. Namclear also sort EFT payments per bank and provide each bank with clients’ EFT payments which the banks are posting to their banking systems.
Card transactions All domestic Debit, Credit or ATM card transactions are routed through the Namibian Card Switch (NAMSWITCH) for authorization. However, banks may choose to process “On-Us” card transactions internally. Card clearing and interbank settlement is achieved through the use of NAMSWITCH. Namibian banks are required to switch all interbank domestic card transactions through the NAMSWITCH. All Namibian domestic card transaction are settled in NISS.
9.4 How are non-funded positions settled in the system?
All the commercial banks have a settlement account with the central banks. The daily settlements filter through these accounts. The commercial banks also have intraday credit facilities with the Bank of Namibia. The banks are allowed to draw from these facilities on condition that adequate security is provided. The commercial banks also have access to the money markets where interbank arrangements for the provision of funds take place.
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10. Currency in use
10.1 List of legal tender notes and coins currently issued and in use in the economy
- Currency: The currency in circulation in Namibia is the Namibia Dollar (N$) and the South African Rand (R). The South African Rand is in circulation as a result of its status as legal tender in Namibia. - Notes: South African Rand (R); R200, R100, R50, R20, R10 Namibia Dollar (N$): N$200, N$ 100, N$50, N$20, N$10 - Coins: South Africa: R5, R2, R1, 50c, 20c, 10c, 5c, 2c, 1c - Namibia: N$10, N$5, N$1, 50c, 10c, 5c
11. Other activities of the central bank
11.1 Activities of the central bank not covered above
- The Bank serves as official depository of the Government funds - The Bank manages the issues of Government Securities - The Bank acts as agent for the government agreed between the Ministry of Finance and the Bank - The Bank serves as adviser to the Government on any foreign borrowing by the Government - The Bank may give advances to the Government - The Bank serves as an agent to the Government on the administration of Exchange Controls.
12. The position of the central bank in SADC
12.1 Special relationships with other central banks in SADC (CMA excluded)
The Bank has, on numerous occasions, sent its staff to the SARB for attachments and training. Some staff members have also been on official visits to other countries such as Botswana, Zimbabwe and Swaziland.
The Bank is a member of the SADC Committee of Bank Supervisors (SSBS) and actively contributes to the development of harmonised standards for banking supervision in the region.
The Bank also participates in the various projects of the Committee of Central Bank Governors in SADC.
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13. Publications
13.1 Regularly published publications - Bank of Namibia Annual Reports - Quarterly Bulletins - Monthly Statistical Releases - Monetary Policy Reviews - The Financial Stability Reports - Economic Outlook
13.2 Discussion/Occasional /special publications published since 1990 Since 1990, the Bank has published various discussion/occasional /special publications including the following: - Promoting Microfinance activities in Namibia, 2004 - Central Government Debt Sustainability, 2004 - Viability of Commercial Bank branches in rural communities in Namibia, 2004 - Potential for Diversifying Namibia's Non-Mineral Exports, 2002 - The Structure and Nature of Savings in Namibia - Efficiency of Commercial Banks in Namibia, 2000 - Estimating the Demand for Money in Namibia - Savings and Investments in Namibia, 1999 - Modeling Inflation in Namibia - Monetary Policy Transmission mechanism in Namibia, 2001 - Assessing the Revenue Loss Resulting from the SA/EU Free Trade Agreement, 2001 - Private Equity: Lessons for Namibia, 2005 - Efficiency of Public Expenditure in Namibia, 2001 - Electronic Commerce: Implications for the financial system - How can Namibia Benefits further from AGOA - Property Rights and Access to Credit, 2006 - Namibia Macro-econometric Model, 2004 - Supervisory Authorities Reform, April 1999 - Commercialization and Privatization February 1998 - Privatisation and Commercialisation April 1997 - The Financial System in Namibia, 2002 - Assessing the Potential for the Manufacturing Sector in Namibia, 2008 - Celebrating 20 Years in Central Banking, 2010 - Enhancing the role of factoring and leasing companies in providing working capital to SMEs in Namibia, 2008 - Investigating the role securitisation could play in deepening the financial sector in Namibia, 2008 - The Impact of HIV/AIDS on the Banking Sector in Namibia, 2008 - Unleashing the Potential of the Agricultural Sector in Namibia, 2008 - Namibia Monetary Policy Framework, 2008 - Improving Namibia’s Competitiveness, 2012
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13.3 Various Annual symposium papers:
The Bank has been hosting a series of symposia as follows: - The first symposium took place in November 1999, focused on central banking issues and economic development. Its proceedings were documented in the South African Journal of Economics, Volume 68:1, 2000. - 2nd: The challenges of monetary policy within the context of the Common Monetary Area (CMA) arrangement - 1999 - 3rd: Optimal Financial Structure for Namibia - 2001 - 4th: Raising investment and growth in Namibia - 2002 - 5th: Poverty, Income Inequality, and Economic Development in Namibia - 2003 - 6th: The challenges for the developments of Namibian Government bonds market: Lessons from other countries -2004 - 7th: The benefits of Regional Integration for smaller economies -2005 - 8th: Foreign Direct investment versus Direct Investment in Namibia - 2006 - 9th: Broad-Based Economic Empowerment: Experience from other Developing Countries-2007 - 10th Structural Transformation of the Namibian Economy: Insight from other countries-2008 - 11th Privatization in Namibia-2009 - 12th SME Development in Namibia-2010 - 13th Housing in Namibia-Has the situation changed 21 years after independence?-2011 - 14th Unlocking the Economic Potential of the communal Land – 2012.
Some of these publications can be accessed via Bank of Namibia’s website: www.bon.com.na
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Central Bank of Seychelles
Independence Avenue, Victoria, Mahé P.O. Box 701, Victoria, Mahé, Seychelles Tel: +248 4282000
1. History
In 2002, conscious of the need to restore confidence in the institution, the Central Bank of Seychelles (CBS), in consultation with the International Monetary Fund (IMF), commenced work on updating the Central Bank Act and in December 2004, the National Assembly and President of the Republic enacted the CBS Act 2004 thereby repealing the previous legislation. The Act formally provides the Bank with institutional and operational autonomy. Under the previous legislation, the Governor of the Bank also held the position of Principal Secretary in the Ministry of Finance. This occasionally led to a certain degree of ambiguity in economic policy decision-making as the Bank and government have different agendas. Under the new Act, the Governor of the Bank is no longer allowed to hold the post of Principal Secretary of Finance, giving the Bank more autonomy. Furthermore, a new Board of Directors of the Bank was appointed.
The new Act also explicitly sets out the objectives of the Bank, which were revised in 2008 and 2009, as part of the IMF-supported macroeconomic reform programme so as to be in conformity with current developments. The last amendments to the Act were made in 2011 to set the primary objective of the Bank and replace the post of Deputy Governor with the positions of First Deputy Governor (FDG) and Second Deputy Governor (SDG).
2. Relationship with government
In accordance with the CBS Act 2004, which was last amended in 2011, the Board of Directors currently comprise of eight members namely the Bank’s Governor who is also the Chairperson of the Board, the FDG, the SDG (no voting rights1), the Attorney General2 and four other members. The Governor and the two Deputy Governors are appointed by the President of the Republic “on such terms and conditions as the President may determine”3. Other members of the Board are also appointed by the President but “on the recommendation of the Governor on such terms and conditions as may be determined by the President”4.
1 In the absence of the Governor and/or the FDG, the SDG does have voting right. 2 Who is an ex-officio member of the Board as per section 5 (2) c of the CBS Act and with no voting right. 3 CBS Act, 2004, Section 6 (2) 4 CBS Act, 2004, Section 6 (2)
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The Bank is the banker to government, its adviser on monetary and financial matters and the depository of the official foreign exchange reserves of Seychelles and of government funds. It undertakes the issuance and management of loans publicly issued in Seychelles by government. The Bank may also act as agent for government on such terms and conditions as may be mutually agreed.
3. Structure
The organisation chart of the CBS is annexed to the document.
4. Design and conduct of monetary policy
As part of the IMF supported macroeconomic reform programme adopted by the authorities in November 2008, monetary management in Seychelles is for the time being based on a monetary targeting framework. In this framework, the final target - price stability - is to be achieved by influencing changes in broad money supply. Because monetary authorities can only control money supply indirectly, reserve money - which is more directly controllable by the Central Bank - has been chosen as the operating target of monetary policy. Money supply is linked to reserve money through the money multiplier and the Central Bank aims to control money supply by changing reserve money. As a consequence of the monetary targeting system, monetary price variables, such as interest rates and exchange rates, are in principle free to fluctuate and be determined by market forces. However, the Central Bank is responsible for monitoring closely these variables and intervening as necessary to avoid disruptive fluctuations. Since the start of 2014, the Bank has adopted a more forward-looking approach in its conduct of monetary policy, which allows for greater flexibility in the implementation of monetary policy and strengthening of the transmission mechanism. Operationally, the change now sees the Bank targets an average reserve money position over the course of a quarter, with the target surrounded by a symmetrical band of three per cent in both directions.
4.1 Main objective of monetary policy
Following amendments made in 2011 to the CBS Act, 2004 the primary objective of the Bank is to promote domestic price stability.
4.2 Instruments of monetary policy
The instruments available for the implementation of monetary policy are (a) Deposit Auction Arrangement (DAA), (b) Credit Auction Arrangement (CAA), (c) Reverse Repurchase Agreement (RRA), (d) Standing Facilities, (e) Foreign Exchange Auctions (FEA), (f) Foreign Exchange Swaps and (g) Minimum Reserve Requirement (MRR) on commercial banks’ deposit liabilities, both in local and foreign currencies.
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4.3 The money supply aggregate that plays the main role in monetary policy
Reserve money is the operating target used to manage the money supply.
4.4 Reserve requirements on financial institutions
In accordance with section 31 of the CBS Act 2004, MRR to be maintained by the banks, is based on the daily average of the closing balance. Since September 17, 2014 the hitherto 2-week MRR maintenance period was lengthened to 4 weeks payable in Seychelles Rupee, US Dollar5 and Euro and is currently set at 13 percent6 of deposits. Similar to foreign currency reserves, since July 15, 2011 rupee reserves are no longer remunerated.
5. Structure of the financial markets
Money Market The Seychelles money market is mostly driven by the Treasury Bills (T-Bills) market. T-Bills are also one of the main sources of government funding.
Capital Market In terms of volume, government bonds dominate the capital market with the CBS acting as the issuing agent. CBS may also assist Treasury bond holders wishing to exit before maturity on the bonds being held, with identifying potential buyers. It is important to note that corporate bonds are also issued.
To further develop the capital market, a Securities Act was endorsed in 2007. The Act encourages overseas and local securities dealers to trade in foreign and Seychelles’ securities and provides the legal framework for the setting up of the Seychelles Stock Exchange (SSE). This is expected to develop the domestic securities market, provide a platform to orderly trade shares and other securities and provide listing facilities for the issue and redemption of securities as well as other financial instruments.
Following the enactment of the Act, Trop-X (Seychelles) was incorporated in 2011. It received a license to establish and operate the Seychelles Securities Exchange in 2012 and in August 2013 went live with the first listing on its equities market, providing a platform for companies of any stage to list in any major currency. Later, in July 2014, Trop-X launched the derivatives market. Currently, only limited transactions are being undertaken.
5 Include deposit liabilities of other currencies other than Euro converted into USD. 6 Since April 1, 2011 for rupee deposits and June 1, 2011 for foreign exchange deposits.
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5.1 Instruments used in the Money and Capital Markets
Currently, the primary money market instruments used are T–Bills which are presently being issued on a tender basis. These are in the maturities of 91, 182 and 365 days. The DAA is the main money market instrument used by the Central Bank to implement its monetary policy. These are mainly conducted in the maturities lower than 91 days.
As for the capital market, the main instruments being used are T-bonds. There are also some limited numbers of shares being traded on the stock exchange.
5.2 Type of financial intermediaries operating in these markets
- Banks - Non-bank deposit taking institutions - Foreign exchange dealers - Development Bank - Insurance Companies - Pension Funds - Investment Companies and Trusts - Seychelles Securities Exchange - Housing Finance Company
6. External payment arrangements
6.1 Responsibility for determining exchange rate policy
The exchange rate policy is the responsibility of the Board of CBS in consultation with the President of the Republic7.
6.2 Present exchange rate regime
Since November 1, 2008 Seychelles has adopted a floating exchange rate regime.
6.3 Organisation of the foreign exchange market
The foreign exchange market is totally liberalised wherein banks, foreign exchange dealers and money-changers transact foreign exchange. The CBS is also a player but intervenes in the market only to smooth out excessive volatility as and when required. The intervention currency is the Euro, US dollar and UK pound.
7 Section 25 (5) of CBS Act
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6.4 Management of foreign reserves
The CBS is responsible for the management of foreign exchange reserves.
7. Currency convertibility and exchange control
7.1 Current state of currency convertibility
The Exchange Control Act was repealed in 2009. Both the current account and the capital account of the Balance of Payments are fully convertible.
7.2 Exchange control restrictions on current account transactions
Seychelles has adopted Article VIII, Sections 2, 3 and 4 of the IMF Articles of Agreement. From November 2008, all restrictions on current account transactions were removed.
7.3 Restrictions on capital account transactions
There is no restriction on capital account transactions in respect of both inward and outward flows.
8. The central bank and external debt
8.1 The role of the Central Bank in managing the country's external debt
The CBS acts as intermediary in respect of proceeds and payments of external loans of the government.
8.2 The role of Treasury in this respect
The Ministry of Finance, Trade and Blue Economy (MOFTBE) is responsible for the formulation of the Public Debt Management Act which came into force in December 2008. The Public Debt Unit at the MOFTBE is responsible for daily debt management. However, a National Debt Committee comprising of representatives from the MOFTBE, CBS and other government institutions has the responsibility of approving contraction of debt. MOFTBE has the oversight function of the overall debt management of the country.
9. Supervision of financial institutions
9.1 Banking institutions
9.1.1 Authority responsible for banking supervision
CBS is responsible for regulating and supervising banks in the country.
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9.1.2 Licensing procedures for establishing a new bank
It is a requirement for an applicant of a banking licence to be an incorporated company in Seychelles. If the applicant is an overseas company, it needs to register with Seychelles’ Registrar of Companies. The application should hence include, amongst other things, the Certificate of Incorporation, the Memorandum and Articles of Association along with the applicant’s business plan, a copy of the applicant company’s financials for the past 3 years in operation and in case of a newly formed company, financial projections for the next three years and particulars of the administrators and holders of substantial interest. In cases where foreign financial institutions apply to establish a branch or subsidiary in Seychelles, this should be supported by written confirmation from the foreign supervisory authority that it has no objection for the foreign financial institution to conduct banking business in Seychelles and that the authority exercises consolidated supervision. The supporting documents to the application should be authenticated copies of the original or, in the event that the originals are not in the English language, certified translations in that language should be submitted. The application requirements are set out in an application pack which is the manner in which the application should be submitted to Central Bank.
A licence is granted only if the licensing criteria are satisfied in line with section 6(1) of the Financial Institutions Act, 2004. Central Bank is required to give a decision as to whether a licence has been granted or not within 90 days of receipt of a complete application.
As at the end of June 2015, 9 banks were in operation in Seychelles. These institutions are supervised by the CBS through its offsite and onsite monitoring functions. 2 newly licenced banks in 2015 are expected to start operation in the first quarter of 2016.
9.1.3 Type of licence that exist
Central Bank issues a single banking licence which allows banks to conduct offshore and/or domestic banking business that requires banks to maintain separate records accordingly. For offshore activities, a lower taxation rate of 3% is applicable to income transactions generated by and sourced from a non-resident person (individual and entity) or an entity incorporated or registered in Seychelles which has personal and economic relations or place of effective management outside Seychelles. Note that the taxation rate is 33% on banking activities that includes domestic transactions.
9.1.4 Minimum capital requirements of banks
In 2010 banks’ minimum paid-up/assigned capital requirement for holders of banking business licence was doubled to SCR20 million or equivalent in a freely convertible currency (~USD 1.5 million).
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In addition, banks are required to transfer 20 percent out of net profits each year into a reserve fund until the fund is equal to the paid-up/assigned capital.
9.1.5 Regulations governing current activities of banks
Banks are governed by the Financial Institutions Act 2004 which was last amended in 2011 as part of ongoing efforts to further develop and strengthen the supervisory framework. Regulations and other pronouncements supplementing the Act are summarised below.
Directives on Large Exposure, Credit Concentration and Connected Lending The above-mentioned Directive was revised in 2009 incorporating the relevant amendments to the Financial Institutions Act 2004. It sets limits on credit concentration as follows: - 25 percent of core capital for a single customer or group of closely-related customers - 600 percent of core capital for aggregate credit concentration.
The limits were previously set as a percentage of capital funds which was replaced with core capital given that the former was deemed too restrictive in line with international norms.
Banks are required to seek Central Bank’s approval prior to extending credits representing credit concentration. This requirement does not apply to a transaction with, or guaranteed by, the Government or a foreign Government, a transaction with a public authority, a transaction between financial institutions with a maturity of one year or less the purchase of telegraphic transfers or accommodation granted against telegraphic transfers and the purchase of bills of exchange or documents of title to goods where the holder of those bills or documents is entitled to payment outside Seychelles for exports from Seychelles with a maturity of one year or less bearing the signature of another financial institution, or an accommodation granted against those bills or documents.Banks are required to submit a report on large exposure (credit facilities representing between 10 percent and 25 percent of the financial institution’s core capital)8 and credit concentration to Central Bank on a monthly basis. Credits to entities exempted from requiring Central Bank’s approval also need to be reported if they exceed 25 percent of a bank’s core capital.
The afore-mentioned Directives also prescribe limits on connected lending as follows: - 10 per cent of core capital on the aggregate of lending to administrators and their close relations - 20 per cent of core capital on the aggregate of lending to holders of substantial interest and their close relations
8 For institutions which have less than 10 large exposures, the institution's 10 largest exposures should be reported irrespective of the amount outstanding to core capital' ratio.
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- 25 per cent of core capital on aggregate connected lending, i.e. lending to administrators, holders of substantial interest and their close relations
Such lending is at the discretion of the Board of Directors which needs to be in line with internal policies approved by the Board.
Banks are also required to report connected lending to Central Bank on a monthly basis.
Capital Adequacy The Financial Institutions Act and existing Regulations on capital adequacy require that a bank maintains minimum capital which covers at least 12 percent of a bank’s risk-adjusted assets. The Regulations on capital adequacy were promulgated in the fourth quarter of 2010.
The capital adequacy measure as set out by the Regulations is mainly based on the Basel I framework, although the Basic Indicator approach of Basel II for capturing operational risk has been incorporated. In addition, revaluation reserve has been removed as part of Tier 1 capital and unaudited profits, which was previously omitted, has been included as part of Tier 2 capital.
The Financial Institutions Act also contains a leverage ratio as a measure of a bank’s solvency. With this measure, a bank is said to be insolvent if its capital is 1.5 percent or less of its tangible assets on an unweighted basis.
Banks are required to report their capital adequacy positions to Central Bank each month.
Public Disclosure of Information Banks are required by the Financial Institutions Act to prepare their accounts in line with International Financial Reporting Standards. The audited accounts need to be published (in the Official Gazette and newspaper) and displayed conspicuously at the banks’ premises.
In addition banks are required to regularly notify their customers of the terms and conditions associated with transactions and adhere to disclosure guidelines issued in 2011. Central Bank also requires banks to periodically publish their fees and charges in the local newspaper. A schedule illustrating banks’ comparative fees and charges, for each subsequent quarter, is also published on Central Bank’s website.
Appointment of External Auditors A circular was issued in August 2009 to formalise the way that Central Bank approves the appointment of external auditors. It introduced a form which financial institutions need to get their external auditors to complete including details of the auditor’s experience, qualification and professional proficiency, on the basis of which the application is processed.
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Liquidity The Liquidity Risk Management Regulations were introduced in February 2009. These Regulations require banks to maintain liquid assets in an amount which should not, as a daily average each month, be less than 20 percent of the bank’s total liabilities, the status of which is reported weekly to Central Bank. In addition, the Regulations require banks to practice sound liquidity risk management, which includes establishing a risk management committee, implementing a risk management policy, analysing net funding requirements, conducting stress testing and maintaining an adequate management information system.
Foreign Currency Exposure
The Foreign Currency Exposure Regulations were introduced in January 2009. In view of banks’ positions then, the Regulations set a total long to capital limit of 100 percent whilst the threshold for total short to capital was 20 percent. As of July 2009, the limits as a percentage of capital were revised to 30 percent irrespective of whether long or short, to be in line with international norms.
Credit Classification and Provisioning The guidelines on Credit Policy, Credit Classification for Provisioning and Income Recognition Purposes 2005 were replaced by the Credit Classification and Provisioning Regulations in November 2010 and were further amended in 2011. The Regulations require that credits be classified into five categories; i.e. Pass, Special Mention, Substandard, Doubtful and Loss depending on the status of the facilities. Amongst other things, the Regulations also provide for the reconciliation of differences in provisioning between the regulatory requirements and International Accounting Standards.
Restricted Lending Banks are free to lend to various sectors of the economy without any restrictions, subject to credit concentration limits.
Fit and Proper Persons Central Bank ensures that adequate measures are taken to ascertain the fitness and propriety of administrators (Managing Director, Director and Managing Agent) and holders of substantial interest (10 percent shareholding or more) in financial institutions. It is important to ensure that these key persons are suitable regardless of whether they have entered the financial system via the licensing process or through a later acquisition of shares. A set of guidelines were issued in 2005 detailing the minimum requirements for a person to be deemed as fit and proper to hold key positions in a financial institution. This includes assessment of the person’s professional proficiency, work experience, qualifications and character.
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The Financial Institutions Act requires that Central Bank’s approval be sought prior to appointing an administrator or acquiring substantial interest. Approval is granted only upon Central Bank’s satisfaction that the person is fit and proper.
Anti-Money Laundering Measures Under the Anti–Money Laundering Act 2006 (AML) as amended, the Financial Intelligence Unit (FIU) has the overall mandate in the Seychelles when it comes to prevention of money laundering and terrorist financing. The FIU’s mandate includes ensuring compliance with the AML Act and receiving and analysing suspicious transactions reports from the Reporting Entities. Some of the Anti–Money Laundering Measures taken include the issuance of Guidelines on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) to all Reporting Entities including financial institutions, Corporate Service Providers, Money Remitting Service Providers and Bureaux de Changes, Insurance Companies and Real Estate Agents amongst others, training on AML/CFT provided in collaboration with other Regulators in the different industries.
Furthermore, the AML Act was amended in August 2008 and that amendment amongst other things, provided for a new definition of Money Laundering and under the new definition predicate offences include criminal acts as committed outside of the jurisdiction. Under the amended legislation and in parallel with the enactment of the Proceeds of Crime (Civil Confiscation) Act, the FIU’s remits were expanded to include identifying and recovering the proceeds of criminal conduct through the Civil Courts. A further amendment was made in 2011 which included a cash declaration obligation at borders and new Customer Due Diligence measures in line with international standards and best practices were issued under the AML Regulations in 2012.
Deposit Insurance There is presently no deposit insurance scheme in Seychelles.
Complaints Handling The Complaints Handling Regulations were issued in 2008 setting out the procedures by which complaints should be handled by financial institutions. The Regulations state the timeline in which complaints are to be dealt with and highlight that a complaint should be assessed in a fair, consistent and prompt matter. If a customer is not satisfied with the financial institution’s response to a complaint, the complaint may be escalated to the Central Bank. Financial institutions are required to report statistics on complaints to Central Bank semi-annually. This provides an indication of the areas experiencing customer dissatisfaction and the level of customer service at the institutions.
Licence Fee The Bank Licence Fees Regulations 2010 as amended in 2012 stipulate processing fees of bank applicants and licence fees of banks.
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The revised licence fees take the cost of supervision into account and are on the basis of the institution’s asset base.
Total assets Annual fees Less than SCR300 million SCR250,000 SCR300 million or more, but less than SCR500,000 SCR1 billion SCR1 billion or more, but less than SCR750,000 SCR5 billion SCR5 billion or more SCR1,000,000
As regards to the processing fee, this was revised from SCR20,000 for a banking business applicant to SCR75,000 in 2014.
Abandoned Property As part of its role of protecting depositors’ interest, Central Bank administers banks’ abandoned property. The circulars were revised in 2009 and amongst other things provide for the administration of safe deposit boxes which were previously not included in abandoned property.
9.1.6 Main supervisory practices
Banks are supervised by Financial Services Supervision Division of the CBS through its offsite and onsite supervisory functions. They are required to submit statistical reports at different periodicities. Reports include inter alia, information on their financial position and performance, foreign currency exposure, liquidity, capital adequacy, maturity analysis, credit concentration and connected lending. Statistics are compiled for analysis on both a micro and macro basis and analysed by way of Financial Soundness Indicators. Stress tests are also carried out offsite to assess banks’ vulnerabilities to changes in market fundamentals.
Onsite examination is conducted on the basis of the CAMELS bank rating system. Since 2008, examinations are carried out on a risk-based approach and reports are done by exception. This allows for a focused review of the most critical risk and adopts a more forward looking approach to risk management. Depending on the level of risk that a bank is exposed to, onsite inspections may be limited or full scope.
Onsite and offsite supervision allows for monitoring of banks’ adherence to prudential standards and other requirements as set out by the Financial Institutions Act.
9.1.7 Measures to remedy deficiencies as well as penalties utilised
The corrective actions that Central Bank can take in cases where banks are carrying out unsafe and unsound practices are set out in the Financial Institutions Act. In addition a manual on prompt corrective action is in place which sets out the remedial steps to be taken on the basis of the CAMELS rating that a bank has been assigned.
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Central Bank’s powers include inter alia the issue of written orders to cease from infractions, issue written orders of remedial actions to be taken, suspend administrators and attach conditions to the licence to the extent required to remedy the infraction. Furthermore, pecuniary penalties as well as imprisonment are stipulated in the Financial Institutions Act and are to be invoked upon conviction unless compounded.
9.1.8 Revocation of Licences
The Central Bank may revoke the licence of a bank, where, inter alia, the bank in question: - has obtained the licence on the grounds of false statements or other material irregularities in the licence application; - fails to commence business within a period of 6 months from the date the licence is issued or such additional time period as allowed by the Central Bank; - fails to comply with terms and conditions of the licence or any corrective measures prescribed by Central Bank; - no longer meets the minimum capital requirement and reserves; - is insolvent or apparently insolvent; - is in breach of material provisions of the Financial Institutions Act, Regulations and other relevant pronouncements; - undergoes a merger, consolidation, amalgamation or division; - has ceased for more than 3 months to engage in business of receiving deposits and lending for its own account.
9.1.9 Offences and Penalties
A person or financial institution who commits an offence shall upon conviction be liable to a fine of as high as SCR400,000 and imprisonment for a term of up to one year, if the person or financial institution, amongst others; - a person who conducts banking of foreign exchange business without a valid licence; - a person who knowingly or recklessly furnish information which is materially false; - any administrator, officer, employee or agent of a financial institution who makes, with intent to deceive, any false or misleading statement or entry or omits any statement or entry in any book, account, report or statement of the bank; - obstructs an inspection or examination of the bank under the Financial Institutions Act; - A financial institution which contravenes requirements of the Financial Institutions Act, such as Central Bank directions, non-adherence to prudential measures such as maintenance of required liquid asset and reserve fund requirements.
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9.1.9.1 Central Bank’s Power Over Unsafe and Unsound Practices
Where the Central Bank determines that a financial institution or any of its owners or administrators is conducting an unsafe or unsound operation, the Central Bank can inter alia do the following within its powers: - issue written warnings; - call a meeting of owners and administrators to discuss and agree on remedial measures; - issue written orders to cease and desist from infractions and undertake remedial action; - issue written orders such as to suspend payment of dividends or concerning the rate of interest; - appoint an adviser for the financial institution; - appoint an external auditor at the expense of the financial institution; - suspend administrators; - require owners to dispose of substantial interest; - attach conditions to the licence to the extent required to remedy the infraction; - appoint a reorganising agent; - revoke the licence.
9.2.1 Non-bank financial institutions
9.2.1.1 Responsibility for regulation and supervision of non-bank financial institutions
Non-bank financial institutions which are supervised by the Central Bank include Seychelles Credit Union (SCU), Bureaux de Change (Money changers), Housing Finance Company (HFC), Development Bank of Seychelles (DBS) and leasing companies (as per the new Financial Leasing Act 2013).).).
Of note, oversight over insurance companies and intermediaries was transferred to the Financial Services Authority in July 2013.
SCU was brought under the supervision of Central Bank in 2005 for which Central Bank was legally designated as its regulatory authority in 2009.
As regards to the HFC (provides loans for housing) and DBS (provides loans for development purposes), these are credit granting institutions for which Central Bank was designated as their regulatory authority in 2009.
These institutions are supervised by Central Bank through its offsite and onsite monitoring functions.
9.2.2 Categories of financial institutions and their licensing procedures
Applicants for a banking business license, whether they are undertaking offshore and/or domestic banking activities are both subject to the same licensing criteria.
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Money-Changers (Bureaux de Change) The requirements for a bureau de change licence are set out in the Financial Institutions Act. In 2008, the Act was amended to allow for the streamlining of the licensing requirements for a bureau de change in line with Government’s initiative to bring more competition in the foreign exchange market. This is in line with the on- going IMF supported macroeconomic reform programme. As at June, 2015 there were 24 licensed bureaux de change.
There are two types of bureaux de change; Class B which is allowed to buy and sell foreign currency in the form of notes, coins and travellers cheques and Class A, which in addition to the activities of a Class B bureau de change, is allowed to engage in money transmission activities.
A bureau de change needs to pay an annual licence fee (SCR10,000 for a Class A, SCR5,000 for a Class B) and is required to display a copy of its licence at all times at its premises. Bureaux de change maintains half of their paid up capital as liquid assets and is subject to onsite and offsite surveillance.
Of note is that the National Payment System Act (NPSA) was enacted in 2014. The NPSA makes provision for all services associated with sending, receiving and processing of payment instructions or transfers of money in domestic or foreign currencies. Therefore, legislative amendments will be undertaken, such that licence for Class A bureau de change will no longer be provided. As such, a bureau de change that wants to engage in money transmission will be licenced under the NPSA.
9.2.3 Capital requirements for Bureau de Change
A Class A bureau de change is required to maintain a minimum of SCR500,000 as paid-up capital and a Class B bureau de change is required to maintain SCR50,000. At least half of the capital should be maintained as liquid assets.
10. National Payment System
While the National Clearance and Settlement Systems Act 2010 (NCSS) was suited for the national payment system landscape as it pertained in 2010, its effectiveness was threatened due to certain ambiguity resulting in a number of payment activities not being regulated. To address such issues, the NCSS was repealed by the National Payment System Act, 2014 (NPSA) on 18th August, 2014.
The principal objectives of the NPSA are to provide for (i) a framework for the authorisation of payment, clearing and settlement systems, (ii) licensing of payment service providers in order to ensure that such institutions operate within a regulated environment and (iii) the Central Bank to have the necessary powers to effectively carry out oversight functions. These powers include formulating and adopting a national payment system policy as well as acting as a forum for the consideration of
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matters of policy and mutual interest concerning the national payment system amongst other responsibilities.
The NPSA further aims to reduce any inefficiencies and potential risks in the payment infrastructure, mainly by promoting soundness, safety, efficiency and competitiveness of the country’s national payment system. The Act seeks to combat liquidity, credit, counter-party, legal, systemic, operational and other risks affecting the reliability of the national payment system. Moreover, matters relating to the protection of users of payment systems are also outlined in the NPSA.
The CBS, government, commercial banks and the SCU are the major players in the national payment system. The CBS is currently the main system operator and is operating and managing three payment systems namely, Central Bank of Seychelles Immediate Transfer Service (CBSITS), Electronic Cheque Clearing (ECC) and Seychelles Electronic Fund Transfer (SEFT). Membership to the payment systems is open to all commercial banks and the SCU.
Although commercial banks are more and more aggressive to expand their visibility in the national payment system, currently, only 4 commercial banks locally issue debit cards and only two offer credit card facility. Even so, VISA issued “credit cards” are widely accepted in the country. Others such as Mastercard and American Express are also accepted although to a lesser extent.
With regards to internet banking, only 4 commercial banks offer such type of banking facility to their customers. Whereas for mobile banking, 2 banks are currently offering transaction-based mobile banking services. More recently, the CBS licensed a telecom company to offer mobile money services. However, despite the increased use of these electronic means of payments, due to their convenience, cheques and cash remain the most commonly used instrument for making payments.
10.1 Oversight of the Payment System
As mandated by the NPSA, to ensure the CBS effectively regulates and oversees the national payment system, the Payment Systems Division (PSD) was created in 2014. In addition to providing the legal framework to promote safety, soundness and reliability in payment systems, PSD is also responsible for identifying potential risks in the design and operation of the national payment system and taking appropriate steps to minimise these risks. Moreover, PSD acts as secretariat to the National Payment Council (NPC) and the National Payment Task Force (NPTF) which are two bodies chaired by the Central Bank to discuss strategies and issues surrounding the modernisation of the national payment system. The bodies consist of representatives of commercial banks and SCU.
The division is also guided by the National Payment System Oversight Policy and Framework which describes the objectives and scope of the oversight function and the manner in which the CBS conducts its oversight role as provided for under the
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CBS Act 2004 as amended and the NPSA. This framework provides transparency to the role of CBS as the overseer of payment systems together with ensuring the financial and technical integrity of the national payment system, their robustness against shocks, and that efficiencies are upheld by compliance with international standards that are aimed at guiding the design and operation of payment systems.
10.2 How are the payment, clearing and settlement systems organised?
The clearing and settlement function is currently the domain of the clearing banks and the CBS. The ability of Non-Bank Financial Institutions to participate is facilitated via the member banks. All member banks have the facility to maintain settlement accounts with the CBS in order to participate in interbank clearing. The settlement of rupee transactions is effected on a Deferred Net Settlement basis for the SEFT system and the image-based ECC and on real time basis in the Central Bank Core Banking system for interbank rupee transactions effected through the CBSITS.
10.2 What is the role of the Central Bank in the system?
In addition to the specified roles mentioned above, the CBS further acts as the fiduciary agent of the government and provides facilities such as accepting cash deposits and other receipts and effecting payments on behalf of the government.
Moreover, the Central Bank acts as the banker of the commercial banks and SCU. It provides payment and settlement facilities, such as ECC, SEFT and CBSITS. The Central Bank also provides other banking facilities to commercial banks and SCU such as to issue and accept deposits of currency.
10.3 Short description of the processing of payment instructions
The CBSITS is a straight-through-processing (STP) service operated by the Central Bank designed to securely undertake transfer of funds at an interbank level while also accommodating for third party transfers of a time critical nature using primarily the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. The CBSITS achieves settlement finality of all interbank transfers directly across the General Ledger of the Central Bank on an intraday basis through the Central Bank CORE Banking System. All participants (except for SCU) in the system are SWIFT Enabled users and are required to use the SWIFT Network for this service (with SCU using paper based faxed instructions). Under the CBSITS the STP functionality embedded within the CORE Banking System to receive the SWIFT payment instructions can automatically generate the outgoing SWIFT payment instructions, as well as effecting the accounting entries across the General Ledger and automatically provides email confirmation of each transaction to the concerned participants.
The settlement of transactions is undertaken using the “CBSITS” arrangement at T+0 and the delivery is also on a T+0 basis provided the correct instructions are received within the Transfer Windows. All instructions received after the Cut-off time of the
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Transfer Windows are to be processed on a T+1 basis by 09:00hrs the next working day. Customer accounts should be credited within 2 hours of receipt of the SWIFT instructions from the CBS.
Following the successful implementation of the image-based Electronic Cheque Clearing (ECC) system in August 2012, all cheques (except on-us cheques) are now cleared electronically across all participating institutions that are connected on a real- time basis to the system. Settlement occurs across the books of CBS on a Deferred Net Settlement [DNS] basis at 15:00hrs daily. The ECC system allows for same day clearing and settlement of all cheques provided that they are presented at the receiving participant before the customer cut-off times. All participants are required to maintain settlement accounts with the CBS and should always remain in credit. In the event of shortfall, participants can make recourse to the overnight lending facilities offered by CBS.
The CBS also implemented the first phase of the SEFT system in August 2013. The SEFT system facilitates the local interbank funds transfers and provide a common platform for all participating members to conduct their transfers in an efficient manner. The SEFT system helps to minimise the physical exchange of cash and reduce the cost of local fund transfers which are currently handled primarily through the CBSITS. The system is currently accessible only to participating members and their operations staff in the respective payment departments.
However, the second phase of SEFT currently scheduled to go live in the second half of 2016, will feature the integration with all participants and deployment of an online internet based platform that will allow registered customers and corporate clients to have access to the same system via the comfort of their homes and businesses.
The SEFT system enables timely processing of transactions, facilitate bulk transaction uploads for corporate clients; provide email and SMS notifications and allow participants to view current and past transactions. It also allows for full integration with the CORE Banking Systems and internet banking platforms of participants to further shorten and improve the payment cycles, thus reducing delays and providing real time credits and debits to customers’ accounts. Settlement occurs across the books of CBS on a Deferred Net Settlement [DNS] basis at 15:30hrs daily.
10.4 How are non-funded positions settled in the system?
Non-funded positions have not arisen as all banks are required to maintain a fully funded current account position and strict collateral with the CBS. The CBS imposes strict collateral requirements for extending short-term credit facilities to clearing banks. The collateral required by the Bank is restricted to high quality, liquid instruments, and collateral is currently restricted to T-Bills and T-Bonds. The Central Bank has been taking measures to reduce the reliance by participants on Central Bank credit to cover their exposures and to encourage the development of interbank
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borrowing. This is intended to encourage participants to be more proactive in their treasury operations and risk management activities.
11. Currency in use
11.1 List of legal tender notes and coins currently issued and in use in the economy
Under the CBS Act, the Bank has the sole right to issue legal tender notes and coins denominated in Seychelles rupee and no other person shall in Seychelles issue notes or coins or any documents or tokens which are likely to pass as legal tender.
Currency - Seychelles Rupees (SCR) - 100 cents equal one Seychelles Rupee Notes - 500 Rupees, 100 Rupees, 50 Rupees, 25 Rupees, 10 Rupees Coins - 5 Rupees, 1 Rupee, 25 Cents, 10 Cents, 5 Cents, 1 Cent as well as Commemorative Gold, Silver and Cupro-Nickel coins of different sizes, shapes and face values.
12. The position of the central bank in SADC
12.1 Special relationship with other central banks in SADC (CMA excluded)
The CBS does not have any special relationship with other central banks in SADC. The Bank participates, however, in collaborative projects with other SADC central banks, such as short-term attachments with a view to promoting the mutual exchange of experience.
13. Publications
13.1 Regular published publications
The CBS publishes its Annual Report and a Financial Services Supervision Report by the March 31 and end of each year, respectively. The Bank also publishes Reviews of key selected Economic Indicators and Statistical Bulletins on its official website on a monthly basis.
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South African Reserve Bank
South African Reserve Bank PO Box 427 Pretoria, 0001 South Africa Tel: +27 12 313 3911 Fax: +27 12 313 3925 www.resbank.co.za
1. History
The founding of the South African Reserve Bank (“SARB”) was necessitated by events before and immediately after World War I and formed part of a more comprehensive set of measures dealing with unsatisfactory monetary and financial conditions at that time.
The Currency and Banking Act, 1920 (Act No. 31 of 1920) (“Currency and Banking Act”) provided, among other things, for the establishment of the SARB. The first Governor of the SARB was appointed with effect from 17 December 1920 and the Bank opened its doors for business for the first time on 30 June 1921.
2. Relationship with government
2.1 Independence
The SARB was established by the Currency and Banking Act in the form of a public company. The equity capital of the SARB is held by private individuals and entities, and the government holds no shares in the SARB. The said Act of 1920 was amended and amplified from time to time and re-enacted in the form of the South African Reserve Bank Act, 1944 (Act No. 29 of 1944). This latter Act, in turn, was repealed and substituted by the South African Reserve Bank Act 1989 (Act No 90 of 1989) (“SARB Act”), which Act currently governs the management, powers, functions and duties of the SARB.
Complementary to the provisions of the SARB Act, the status of the SARB as the central bank of the Republic of South Africa and its primary objective is defined as “...to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic” in section 224(1) of the Constitution of the Republic of South Africa, 1996 (Act No. 108 of 1996) (the Constitution). Furthermore, section 224(2) of the Constitution states that the Bank should, in the pursuit of its primary objective, “...perform its functions independently and without fear, favour or prejudice, but there must be regular consultation between the SARB and the Cabinet member responsible for national financial matters”.
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2.2 Appointment of Governor and grounds for dismissal
The Governor is appointed by the President of the Republic of South Africa in terms of section 4 of the SARB Act. This section also provides for the appointment of the Deputy Governors on the same conditions as the Governor. While they must devote all their time to the business of the SARB (section 5(4)), the Governor and Deputy Governors may accept or hold any other office to which they may be appointed by or with the approval of the President of the Republic or the Minister of Finance. In terms of section 5 of this Act, the Governor and Deputy Governors are appointed for periods of five years and are on the expiration of their terms of office eligible for re- appointment. The Governor should be a person of tested banking experience (section 4.2 (a)).
The Governor and Deputy Governors are members of the Board of Directors of the SARB and no person shall be appointed or elected as or remain a director who is: - not resident in the Republic of South Africa; or - a director, officer or employee of a banking or mutual banking institution; or - a member of the legislative assembly of the Republic or one of the provinces.
2.3 Relationship with government in formulation of monetary policy
The SARB is responsible for the formulation and implementation of monetary policy and is responsible for the execution of such policy, whereas the government determines and implements fiscal policy. Regular consultations take place between the Minister of Finance, the Governor of the SARB and between officials of the National Treasury and the SARB. At these meetings, monetary and fiscal policies are co-ordinated and different points of view are taken into consideration.
As discussed below in paragraph 4.2, the Government, after consultation with the SARB, sets an inflation target which guides monetary policy.
The SARB, however, remains solely responsible and accountable for the implementation of monetary policy. The SARB's accountability is ensured by sections 31 and 32 of the SARB Act. Section 32 of the SARB Act requires the SARB to submit the statement of assets and liabilities monthly and annually in respect of its finances to the National Treasury. Section 31 requires it to submit to the Minister of Finance an annual report on its implementation of monetary policy. The annual financial statements and this report must be tabled in Parliament. In addition, the Governor of the SARB may be, and on several occasions has been, called upon to appear before the Parliamentary Portfolio Committee on Finance.
2.4 The Board of the SARB
In terms of section 4 of the SARB Act, the SARB is managed by a Board of fourteen (14) directors, consisting of: - a Governor and three Deputy Governors ;
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- three other directors appointed by the President for a period of three years; and - seven directors elected by the shareholders, also for a period of three years.
Of the directors elected by the shareholders, four must be persons who are or have been actively and primarily engaged in commerce or finance, one must be a person who is or has been engaged in agriculture, and two must be persons who are or have been engaged in industrial pursuits.
2.5 The budget of the SARB
The SARB has its own budget which is funded from profits generated by its activities.
2.6 Relationship with government in terms of finance, equity and development financing
As a relative rarity among central banks today, the SARB's shares are privately held. Its share capital of R2 million, divided into 2 million ordinary shares of one rand each, is held by approximately 670 shareholders, comprising companies, institutions and private persons. Single shareholders are restricted by the SARB Act to a maximum share ownership of 10 000 shares and the annual dividend paid has also been limited to 10 cents per share.
The SARB pays company tax to the government. In addition, 90 per cent of the profit after tax, dividends and transfers to contingency reserves is due to the government. The remaining 10 per cent is transferred to a statutory reserve.
The SARB is not involved in development financing.
2.7 Credit to government
Section 10 (1)(f)(i) of the SARB Act allows for the granting of an unsecured loan to the government. However, section 13(f) of the SARB Act stipulates that the SARB may not hold stocks of the government of the Republic which have been acquired directly from the Treasury by subscription to new issues, the conversion of existing issues or otherwise, a sum exceeding its paid-up capital and reserve fund plus one third of its liabilities to the public in the Republic.
2.8 Main functions of the SARB
The main functions that the SARB conducts are to: - issue bank notes and coin; - facilitate the development and maintenance of an efficient national payment, clearing and settlement system; - act as banker to the government;
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- act as custodian of the country's official gold and foreign exchange reserves; - act as government's funding agent; - formulate and implement monetary and exchange rate policy in co-operation with the National Treasury; - act as lender of last resort for domestically registered banks; - supervise banks and mutual banks; - monitor and promote the stability of the financial system; - administer exchange controls; and - compile and publish macroeconomic data.
2.8.1 Issuing of banknotes and coin
The SARB's first notes were issued to the public in April 1922. The activities of the SARB were extended further in 1989 when the sole right to mint, issue and destroy coins was statutorily transferred to the SARB by the South African Reserve Bank Act, 1989 (Act No. 49 of 1989). In pursuance of this legislation, the South African Mint Company (Pty) Ltd and the South African Bank Note (Pty) Ltd were established as wholly-owned subsidiaries of the SARB to perform these functions.
2.8.2 National Payment System
Section 10(1)(c) of the SARB Act empowers the Bank to perform such functions, implement such rules and procedures and, in general, take such steps as may be necessary to establish, conduct, monitor, regulate and supervise payment, clearing or settlement systems. The SARB provides for the final real-time electronic settlement of interbank obligations, emanating from non-cash payments made in the economy, via the South African Multiple Option Settlement (SAMOS) system. In addition, the SARB oversees the safety and soundness of the national payment system through the introduction of settlement risk-reduction measures as and when required. The settlement risk-reduction measures are aimed at minimising possible systemic risk emanating from, inter alia, settlement default (inability or lack of funds to settle obligations) by one or more settlement banks.
2.8.3 Government's banker
The SARB currently administers four accounts of the central government. The Exchequer and the Paymaster-General account are held in the Bank and no interest is paid to Government on these accounts. However, the bulk of Government’s funds are held in Tax-and-Loan accounts with the four major commercial banks. The main objective of this arrangement is to smooth the money-market liquidity impact of the government’s flow of funds. The SARB also administers the National Treasury Sterilisation Account, an interest-bearing rand-dominated account, funded by the National Treasury and utilised to fund foreign exchange purchases for purposes of foreign reserve accumulation. The SARB, furthermore, administers the foreign currency deposit receipts (FDR), a US dollar-denominated account on behalf of the National Treasury. This account balance comprises the proceeds of foreign
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issuance by the National Treasury and foreign exchange purchases funded by the National Treasury. The FDR is included in the official gross foreign reserves and is used to fund foreign obligations of the government. The SARB also acts as adviser, agent and representative of the government in various ways. This entails giving advice on monetary and financial matters, administering the exchange control regulations and handling of the regular auctions on behalf of government (paragraph 2.8.5). The SARB also takes care of various aspects of South Africa's dealings and relations with institutions such as the International Monetary Fund and the International Bank for Reconstruction and Development.
2.8.4 Custodian of foreign reserves
The SARB acts as custodian of the country's official gold and foreign exchange reserves. The SARB holds approximately 10 per cent of these gold and foreign exchange reserves in the form of gold. The foreign exchange reserves are held mainly in assets denominated in US dollar, euro and sterling pound, but in 2014 the SARB also diversified foreign reserve investment into currencies such as Chinese renminbi, Canadian dollar, Australian dollar, Japanese yen, Korea won and Swedish krona. Foreign reserves are managed conservatively, with safety and liquidity requirements foremost in its policy. A relatively small part of the foreign reserves has been placed with external fund managers. These funds are managed against certain benchmarks and the fund managers have been given specific investment guidelines within which to operate. These guidelines limit the degree of risk which the fund managers may take in their efforts to outperform the benchmarks and within specified risk parameters.
The SARB joined the World Bank’s “Reserves Advisory and Management Program” (RAMP) in 2005, through which the World Bank Treasury provides the SARB with advisory services and training, to assist the SARB in better managing the foreign exchange reserves. The SARB also actively acts as a partner under RAMP whereby resources are provided to assist with the enhancement of reserves management capacity within SADC.
The returns on foreign assets are recorded as income for the Bank. Valuation adjustments into rand of all gold and foreign currency assets, however, are for account of Government through the Gold and Foreign Exchange Contingency Reserve Account (GFECRA).
2.8.5 Government's funding agent
As funding agent of the government, the SARB is responsible for the weekly tenders for Treasury bills, government bonds and special issuances, e.g. floating rate bonds and inflation-linked bonds. The SARB also conducts switch and buy-back auctions on behalf of the National Treasury.. The government uses TBs to fund themselves in the shorter term (money market), while bonds are used for longer-term funding (capital market). TBs are issued on an auction basis with maturities of 91-, 182-,
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273- and 364 days. Government bonds are issued through an auction system of eight primary dealers who have an obligation to participate in the auction and also perform a market-making function.
The auctions for both TBs and bonds are conducted electronically. The SARB uses its wire services (Reuters, Bloomberg and the internet) to communicate all auction related information like invitations and results to market participants. The SARB also conducts surveillance of primary dealers’ activities in the primary and secondary markets.
The SARB plays a leading role in the development and promotion of the efficient functioning of financial markets by supporting efforts to improve the clearing, settlement and safe-custody systems in South Africa. In this regard, the SARB was involved in the formalisation of the South African bond market through its representation on the previous Bond Exchange of South Africa (BESA), which has subsequently merged with the JSE Ltd. The SARB played an important role in the dematerialisation of money market instruments in the South African market. In March 2010, South Africa’s money-market industry officially commenced the electronic issuing, trading and settlement of money-market securities in place of the manual paper-based system. The SARB played a leading role in this initiative by introducing SARB debentures as the first dematerialised money-market instrument to settle via STRATE1. South Africa was the first country in the world to dematerialise money market instruments. The SARB was also a founder member of the South African Futures Exchange (SAFEX), which subsequently also became a division of the JSE.
The motivation for the SARB's participation in the creation and maintenance of formal markets is to enable the government to issue bonds at the lowest possible rates and to encourage foreign investors to participate in a liquid market which is relatively free of settlement and systemic risks. Furthermore, a formal market offers trade reporting, price discovery and transparency. These characteristics enhanced the standing of the domestic bond market as an efficient and sophisticated market, effectively integrated into world financial markets.
2.8.6 Monetary and exchange rate policy
The SARB is responsible for the formulation and implementation of monetary policy. However, the exchange rate policy, and the implementation thereof, is the responsibility of the SARB in close consultation with the National Treasury. Since the beginning of 2000, South Africa has adopted an inflation-targeting regime.
1 STRATE Ltd. is the only registered securities depository for equities, bonds and money market instruments in South Africa.
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Monetary policy is determined on the basis of the SARB's assessment of current and prospective economic developments, against the background of its primary task of maintaining of price stability.
The South African exchange rate is based on a freely floating system where the value of the rand is determined by the market forces of supply and demand. The SARB, consistent with its inflation-targeting monetary policy framework, has no intermediate policy targets or guidelines regarding the level of the exchange rate. The SARB’s operations in the foreign exchange market, therefore, represent normal prudent management of the SARB’s balance sheet and are in no way directed at seeking to influence the level of the rand. The SARB’s participation in the foreign exchange market is aimed at building the official foreign exchange reserves and the conducting of foreign exchange swaps to manage liquidity in the money market.
Purchases of foreign exchange by the SARB naturally affect the domestic money market. For every transaction executed by the SARB in dollars in the foreign exchange market, there is a rand counterpart. Dollars purchased by the SARB will increase the amount of rand liquidity available in the domestic money market. In order to sterilise the liquidity impact of these purchases, the SARB applies a range of open-market operations instruments. These instruments, amongst others, include the issuance of SARB debentures, the conducting of long-term reverse repos and money market swaps in foreign exchange (See paragraph 4.3).
2.8.7 Supervision of banks
In 1985, a department for bank supervision was established in the SARB to monitor the activities of South African banking institutions. The mission of the department is to promote the soundness of the banking system and contribute to financial stability.
The Bank Supervision Department (“BSD”) is a function within the SARB and is headed by the Registrar of Banks (“Registrar”), who is responsible for the administration of the Banks Act, 1990, the Mutual Banks Act, 1993, and the Co- operative Banks Act, 2007. The BSD is responsible for the regulation and supervision of banks which includes the registration of banks, mutual banks and co- operative banks. The Registrar has to report annually on his/her activities to the Minister of Finance, who in turn has to table this report in Parliament. The mission, philosophy, principles, approach and prudential requirements applied by the Registrar complies with the standards set by international standard-setting bodies such as the Basel Committee on Banking Supervision. The implementation of the revised capital framework (Basel II, Basel 2.5 and Basel III) and the compliance with the Basel Committee’s amended Core Principles for Effective Banking Supervision bears testimony to the department’s mission.
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2.8.8 Promoting financial stability
The Financial Sector Regulation Bill (2015), which is expected to be promulgated in 2016, gives primary responsibility for protecting and enhancing financial stability to the SARB. The Bill requires the SARB to monitor and keep under review the strengths and weaknesses of the financial system and any risks to financial stability, including the nature and extent of those risks. The SARB also needs to take steps to mitigate risks to financial stability and regularly assess the observance of principles in the country developed by international standard setting bodies for market infrastructures. The SARB is, however, not the sole custodian of financial stability and contributes towards a larger effort involving government and other regulators.
The approach to contributing to financial stability is twofold: Firstly, to identify inherent weaknesses in the financial system environment and initiate projects to enhance the system’s robustness and ability to withstand shocks. Secondly, to identify through quantitative analyses the build-up of exogenous and endogenous risks to the broader domestic financial system and to mitigate them. Should financial sector crises occur, the SARB plans and co-ordinates the authorities’ responses, develops and maintains safety-net policies and procedures and co-ordinates contingency planning for systemic crises resolution.
The SARB also publishes the Financial Stability Review, a semi-annual publication representing an endeavour to enhance the understanding of financial stability issues and to encourage informed debate on matters affecting the stability of the financial system.
2.8.9 Exchange control
Exchange controls in South Africa are administered by the Financial Surveillance Department (“FinSurv”) of the SARB in terms of powers delegated to it by the Minister of Finance (“Minister”). The name of the Department was changed from the Exchange Control Department to FinSurv with effect from 2010-08-02. In terms of the Exchange Control Regulations, the Minister bears the ultimate responsibility for exchange controls and therefore, for exchange control policy, on which he is advised by the Governors of the SARB. The mandate of FinSurv is to administer the exchange control system on behalf of the Minister and supervise compliance by Authorised Dealers in foreign exchange with limited authority (“ADLAs”) in terms of the Financial Intelligence Centre Act, 2001 (Act No.38 of 2001) (“FIC Act”).
To assist in the provision of the day-to-day foreign exchange requirements of the public, the Minister has appointed a number of banking institutions as Authorised Dealers in foreign exchange (“ADs”). These banks are authorised to buy and sell foreign currency within certain parameters and subject to the conditions laid down by the SARB. Any request by the public to the ADs and ADLAs, which falls outside the limitations prescribed by the SARB, is forwarded to the exchange control
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authorities for adjudication. All cross-border transactions undertaken by the ADs and ADLAs are reported to FinSurvfor statistical and monitoring purposes. Inspectors from the SARB also visit the branches of ADs and ADLAs regularly to ensure that their foreign exchange transactions comply with the prescribed guidelines.
3. Structure
3.1 Branches
The SARB has seven branches, situated in Bloemfontein, Cape Town, Durban, East London, Johannesburg, Port Elizabeth and Pretoria North.
3.2 Functions of branches
In terms of the SARB Act, the issuing of banknotes is one of the primary functions of the SARB. It is the branches’ responsibility to ensure that there is an adequate supply of new notes available to meet the demand, and to replace the unfit notes destroyed by a branch.
The collection and delivery of legal tender to the numerous commercial banks are performed by SBV Services (Pty) Ltd, a company started and owned by Standard, FirstRand and the ABSA bank.
In order to provide an efficient service to the banks and satisfy their requirements for banknotes, the SARB has ensured that there is sufficient storage capacity in branch vaults to meet the normal demand, as well as a "buffer" amount to meet exceptional or seasonal demands. The branches all have electronic note-processing machines to sort the banknotes deposited with them for sorting. In this way, the Bank ensures that a good quality of notes remains in circulation. The Bank destroys soiled or "unfit" banknotes in terms of the SARB Act. Each of the branches has off-line or on- line shredder facilities to perform this task. The branches are responsible for the quality of banknotes in circulation in their respective regions.
The branches of the SARB, the South African Police Services and the commercial banks also work together to combat counterfeiting of banknotes. Claims for mutilated banknotes are also settled by the branches on an ad hoc basis.
4. Design and conduct of monetary policy
4.1 Main objectives of monetary policy
The primary objective of the SARB is to protect the value of the currency in the interest of balanced and sustainable economic growth in the country. In pursuing its objective the SARB strives to achieve financial stability, i.e. price stability as well as stable conditions in the financial sector as a whole.
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4.2 Monetary policy framework
During February 2000, the SARB adopted an inflation-targeting monetary policy framework. This means that the monetary authorities now target the rate of inflation directly instead of following the previously applied ”eclectic” monetary policy approach in which intermediate objectives were targeted.
The new inflation-targeting monetary policy framework is primarily concerned with one element of financial stability, i.e. price stability. For overall financial stability it is important that the SARB: - ensures the availability of high quality currency in circulation in various denominations to serve as a reliable means to execute financial transactions in the economy; - facilitates the development and maintenance of an efficient national payment, clearing and settlement system; - encourages the development and efficient functioning of the money, capital and foreign exchange markets; - monitors the financial risks of banks and supports the development of sound and well-managed banking institutions; and - where appropriate, acts as lender-of-last-resort providing assistance to smooth temporary liquidity shortages and safeguard the system from systematic risks.
Inflation targeting is a monetary policy framework characterised by the public announcement of a numerical target for the inflation rate that is intended to be achieved over a specific time period. It is, however, important to note that inflation targeting is a framework and not a rule. Therefore, although the achievement of the target becomes the overriding objective of monetary policy in an inflation-targeting framework, the adoption of an inflation-targeting monetary policy framework does not mean that the central bank must apply rigid rules and is left without any discretion. Exclusive emphasis on inflation goals without a careful analysis of economic conditions can lead to serious distortions in the economy which could result in higher volatility over the long term. A rigorously applied rule will deprive the central bank of its ability to deal with unusual or unforeseen circumstances.
The adoption of an inflation-targeting monetary policy framework provides the SARB with an explicit anchor or ultimate objective for monetary policy. At the same time it enhances the transparency of monetary policy and the accountability of the central bank. With this framework it should be clearer why interest rate or other policy changes are made.
4.3 Instruments of monetary policy
The SARB’s repo-based refinancing system was introduced on 9 March 1998. The refinancing system is reviewed on a continuous basis for efficiency and refinements are effected when necessary. In all revisions, the SARB considers international best
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practice and the enhancement of the functioning of the domestic money and interbank market. The most recent modification was implemented in March 2012. These changes entailed: • Allocating the amounts tendered by banks in the weekly main repo auctions on a pro rata basis, up to the announced average daily liquidity requirement for the week in instances where the auction is over-subscribed; • Conducting two- and five days main repo transactions during the week of the Monetary Policy Committee meetings; • Issuing SARB debentures and longer-term reverse repo transactions with maturities of 7- and 14 days, on top of the 28- and 56 days; and • Automated overnight standing facilities. Banks’ debit balances (short positions) on their SAMOS settlement accounts are settled at repo plus 100 basis points, while credit balances (surplus position) are settled at repo minus 100 basis points.
However, in August 2013 the SARB implemented a new liquidity management strategy. In terms of this strategy, the money-market shortage will be allowed to increase, reflecting the trend growth in notes and coin in circulation outside the SARB and the commercial banks’ required cash reserve balances with the SARB at the start of the maintenance period.
Through a cash-reserve requirement, the SARB creates a shortage in the domestic money market which the banks need to refinance from the SARB at the prevailing repo rate. Banks are offered the opportunity to tender on a weekly basis for central bank funds through repurchase transactions (repos). The repo rate, as the key refinancing rate of the SARB, is determined by the Monetary Policy Committee. Liquidity in the money market is influenced by numerous factors. Some liquidity factors, such as the amount of notes and coin in circulation and movements on the cash reserve accounts, are determined by market forces while others are used by the SARB to manage the amount of liquidity in the market. The instruments that could be utilised by the SARB to manage market liquidity are: - Repos and reverse repos (repurchase agreements). - Spot and swap transactions in the foreign exchange market. - Changes in the minimum reserve balances that banking institutions must hold with the SARB. - Issuing of SARB debentures. - Outright selling of government bonds by the SARB from the Monetary Policy Portfolio (MPP). - Changes in the level of public sector deposits at the SARB and the Corporation for Public Deposits.
In August 2010, the SARB started to use longer-term foreign exchange swaps with maturities of up to 12 months to manage money market liquidity. These swaps will show as an overbought forward position in the monthly release of the official gold
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and foreign exchange reserves, resulting in a decline in gross reserves and an unchanged international liquidity position.
4.4 Types of refinancing as well as collateral used
Using the instruments mentioned in paragraph 4.3, the SARB creates a shortage of cash in the domestic money market. This shortage of cash can be refinanced by the banks by availing themselves to the weekly main repurchase auctions offered by the SARB on Wednesdays at the prevailing repo rate. Any fluctuations in the daily cash requirements of banks are accommodated at square-off through the automated standing facilities, supplementary auctions (ad-hoc) and the utilisation of banks’ cash reserves accounts (averaging).
Liquid assets, which consist of Treasury bills, government bonds, SARB debentures and Land Bank bills, qualify as eligible securities at the main repurchase and supplementary auctions, as well as for utilising the automated standing facilities offered on SAMOS.
An averaging principle applies to the banks’ cash reserve accounts, which implies that although banks have automatic access to their cash balances at the central bank on a daily basis, the average level of reserves during the maintenance period should equal or exceed the minimum cash reserves requirement.
As emergency liquidity assistance (ELA), the SARB can provide accommodation against other forms of security to banks with temporary liquidity problems at a discretionary or negotiated rate and for limited periods of time.
In 2012, the SARB also approved a committed liquidity facility (CLF) for the commercial banks to enable them to comply with the liquidity coverage ratio (LCR) under Basel III from 1 January 2015. Eligible collateral for the CLF includes notes created through the securitisation of residential and commercial mortgages, other loans and advances (which might include vehicle finance), equities and listed debt securities with a minimum credit rating of A- on a domestic rating scale.
4.5 Reserve and liquid asset requirements on commercial banks
Currently the minimum cash reserve requirement that commercial banks need to maintain with the SARB is 2,5 per cent of liabilities as adjusted, on which no interest is paid. The commercial banks are also required to hold 5 per cent of their total liabilities in defined statutory liquid assets, such as Treasury bills, government bonds and SARB debentures. While the cash reserve requirement is applied as a monetary policy instrument, the liquid asset requirement constitutes a prudential requirement.
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5. Structure of the money and capital markets
5.1 Organisation of the money and capital markets
Money market: Defined as that part of the market which deals in financial instruments with a maturity up to twelve months. The money market consists of the following: - Markets in the securities of ultimate borrowers (marketable and non- marketable) - Markets in the securities of financial intermediaries (marketable and non- marketable) - Interbank market
The issuers in the money market can be categorised as ultimate borrowers (corporate and government sectors) or financial intermediaries. The South African money market can be regarded as an informal market. The main participants in the money market are banking institutions (including the Land Bank and the SARB), corporates, portfolio managers, insurance companies and pension funds.
Capital market: The capital market constitutes dealing in securities with an outstanding maturity longer than one year. The capital market comprises: - The fixed interest securities market (mainly bonds). - The variable interest securities market (which is rather undeveloped). - The equity market regulated by the JSE Limited.
The main institutions involved as issuers of securities are the National Treasury, Trans-Caledon Tunnel Authority (TCTA), public corporations (e.g. Eskom) public utilities (e.g. Transnet), local authorities, banks and companies. The main participants as buyers in this market are the Public Investment Corporation, insurance companies, banks, pension funds and unit trust companies. The same institutions are also active in the secondary capital market where they are supplemented by banks, stockbrokers, the SARB (through its open market operations) and money brokers.
5.2 Instruments used in both these markets
The major money market instruments are: - Treasury bills and government bonds (with less than twelve months to maturity); - bankers’ acceptances; - promissory notes; - Eskom commercial paper bills; - Transnet bills and bonds; - Telkom commercial paper notes and bearer coupon stock; - SARB debentures; - Land Bank bills and promissory notes;
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- SA Housing Trust bonds; - negotiable certificates of deposit (NCD’s); and - forward rate agreements; - short-term securities issued by the Trans-Caledon Tunnel Authority (TCTA); and - commercial paper of banks and other corporates.
The major capital market instruments are: - government, inflation-linked and floating rate bonds with more than twelve months to maturity; - bonds issued by public corporations and public utilities; - corporate bonds; and - shares or equities.
In addition to the bond and equity markets, which are both formalised through an exchange, there is also a well-developed derivatives market where futures and options on commodity, money, capital and foreign exchange market instruments are traded.
5.3 Legal frameworks existing for the money and capital markets
The issuing of money and capital market instruments is regulated by either general legislation, specific legislation and/or enabling legislation.
Those money and capital market instruments that can be created by a wide variety of issuers are usually regulated in terms of general legislation. In cases where the issuer is established and/or constituted in terms of specific legislation, such legislation normally contains stipulations regarding the issuing requirements and processing of the relevant instruments.
Exchanges (i.e. formalised markets) are regulated in terms of enabling legislation. The Securities Services Act, no.36 of 2004 regulates the operations of the JSE, and the activities of the South African Futures Exchange (SAFEX) and the Bond Exchange of South Africa (BESA). This is still the case after the JSE had purchased SAFEX in 2001 and BESA in 2009.
The JSE, as a self-regulatory authority, accepts the responsibility for regulating all trade in listed equities, options on equities, and options on equity indices. SAFEX regulates all listed futures contracts and options on these futures, while the BESA regulates trade in listed bonds and options on such bonds. BESA became a wholly- owned subsidiary of the JSE on 22 June 2009, in terms of which the JSE acquired the entire issued share capital of BESA.
The Financial Services Industry in South Africa is regulated in terms of, inter alia, the following legislation:
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- South African Reserve Bank Act, 1989 (Act No. 90 of 1989) - Banks Act, 1990 (Act No. 94 of 1990) (“Banks Act”) - Mutual Banks Act, 1993 (Act No. 124 of 1993) (“Mutual Banks Act”) - Co-operative Banks Act, 2007 (Act No. 40 of 2007) (“Co-operative Banks Act”) - Pension Funds Act, 1956 (Act No. 24 of 1956) (“Pension Funds Act”) - Financial Services Board Act, 1990 (Act No. 97 of 1990) (FSB Act”) - Competition Act, 1998 (Act No. 89 of 1998) (“Competition Act”) - The National Credit Act, 2005 (Act No. 34 of 2005) - The Income Tax Act, 1962; Stamp Duties Act, 1968 - Value Added Tax Act, 1991 - Estate Duty Act, 1955 - Tax on Retirement Funds Act, 1996 - Capital Gains Tax - Securities Services Act, 2004 (Act No. 36 of 2004)(“SSA”) - Collective Investment Schemes Control Act, 2002 (Act No. 45 of 2002) (CISNA) - Long-Term Insurance Act, 1998 (Act 52 of 1998) (“Long-Term Insurance Act) - Short-Term Insurance Act, 1998 (Act No. 53 of 1998) (Short-Term Insurance Act) - Financial Advisory and intermediary Services Act, 2002 (Act No. 37 of 2002) (“FAIS Act”) - Financial Intelligence Centre Act, 2001 (Act No. 38 of 2001) (“FICA”) - Protection of Constitutional Democracy Against Terrorist and related Activities Act, 2004 (Act No. 33 of 2004) (“POCDATARA”) - Friendly Societies Act, 1956 (Act No. 25 of 1956) (“Friendly Societies Act”) - Inspection of Financial Institutions Act (Act No. 8 of 1998) (“Inspection of Financial Institutions Act”)
5.4 Type of financial intermediaries operating in these markets
Money market: - Registered Banks - 17 as on 28 February 2014 - Mutual Banks - 3 as on 31 31 January 2014 - Local branches of foreign banks - 14 as on 28 February 2014 - Foreign banks with local representative offices - 43 as on 28 February 2014
Bond market: - Bond Exchange bank members - 12 as on 11 May 2015 - Bond Exchange broking members (including IDBs) - 26 as on 31 May 2015 - Other members (asset managers, Eskom, SARB, among others) - 13 as on 31 May 2015 - Primary Dealers - 9 as on 31 May 2015
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6. External payment arrangements
6.1 Determination of the exchange rate policy
The SARB assists the National Treasury and Minister of Finance in the formulation and autonomously implements exchange rate policies.
6.2 The present exchange rate system
The SARB allows the rand to float freely against international currencies. As noted above in section 2.8, the SARB may purchase foreign currency from the market from time to time to supplement reserves.
6.3 Organising the foreign exchange market
There are 25 banks in South Africa which act as ADs as well as 18 ADLAs. The supply of and demand for foreign exchange through these dealers may affect the value of the rand. The foreign exchange market may be described as a well- structured, professional market.
6.4 The central bank's involvement in managing foreign exchange reserves
The SARB also acts as custodian of the official gold and foreign exchange reserves. It acts as principal in exercising this function, with the assets appearing on its balance sheet. Interest income is for the SARB’s account. The National Treasury also receives interest income on the portion of reserves that it has purchased.
7. Currency convertibility and exchange control
7.1 Current state of currency convertibility
South African residents may purchase foreign currency for current transactions and limited capital transactions, within certain parameters, without exchange control approval. Requests that fall outside of these parameters require approval from FinSurv. South Africa is a member of the Common Monetary Area, along with Lesotho, Namibia and Swaziland, and transactions between these countries are effected freely without exchange control restrictions.
7.2 Exchange control restrictions on current account transactions
There are virtually no exchange control restrictions on current account transactions. With a few exceptions, limits were abolished on transfers of foreign exchange for current account transactions. Accordingly the International Monetary Fund is satisfied that South Africa effectively has no exchange controls on current transactions. South Africa complies, in other words, with the IMF's Article VIII status.
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7.3 Exchange control restrictions on capital account transactions
There are no restrictions on inward investment and disinvestment by non-residents.
Outward corporate foreign direct investment is permitted within certain guidelines, but there are no restrictions on the amount of foreign currency that may be transferred abroad for such investments. Requests, however, for outward investments exceeding R1 billion require approval from FinSurv. Furthermore, each transaction is viewed on its own merits, taking into account the nature and purpose of the investment.
Institutional investors are permitted, within certain guidelines, to make portfolio investments by means of currency transfers.
Private individuals (natural persons) may invest up to R10 000 000 per calendar year abroad, subject to certain conditions. Requests for the transfer of funds by private individuals, in excess of R10 000 000, will be considered by FinSurv.
7.4 Retention rules for foreign exchange earned or owned by residents
Foreign exchange earned by private individuals (natural persons) after 1997-07-01, by way of income, dividends and services are permitted to be retained abroad, but the proceeds of merchandise exports must be sold to an AD within a period of 30 days from receipt. The foreign exchange proceeds of merchandise exports and service receipts of corporates must similarly be repatriated, but South African entities (legal persons) operating Customer Foreign Currency (“CFC”) accounts may retain funds in their CFC accounts, without the obligation to convert the funds into Rand.
8. The central bank and external debt
8.1 The role of the central bank in managing the country's external debt
The SARB is officially represented at the National Treasury’s debt management committee. Currently the SARB holds no foreign debt on its balance sheet.
The SARB administers exchange controls on behalf of the Treasury. South African residents may borrow abroad, subject to certain criteria. Such applications are authorised by an AD and reported to FinSurv via the Loan Reporting System.
8.2 The role of the National Treasury in this respect
In South Africa, the National Treasury fulfils an important function in co-ordinating foreign borrowing by the public sector.
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9. Supervision of financial institutions
9.1 Banking institutions
9.1.1 Authority responsible for banking supervision
The Registrar of Banks is the responsible authority for the supervision of commercial banks and mutual banks, while the supervisor of co-operative banks is responsible for the regulation and supervision of co-operative banks. Both authorities have offices in the SARB.
9.1.2 Registration for establishing a new bank and failure to register
- The registration of banks and of branches and representative offices of foreign banks is governed by the Banks Act,1990 (Act No.94 of 1990) (the Banks Act) - In terms of section 11 of the Banks Act it is an offence for any person to conduct the business of a bank without being a public company and registered as a bank in terms of the Banks Act. - In terms of section 18A of the Banks Act it is an offence for a foreign institution to conduct the business of a bank by means of a branch without the prior written authorisation of the Registrar of Banks. - Application for authorisation to establish a bank has to be made in terms of section 12 of the Banks Act. Application for registration as a bank is governed by section 16 of the Banks Act. - The registration of mutual banks is governed by the Mutual Banks Act, 1993 (Act No. 124 of 1993) (“The Mutual Banks Act”) - The registration of co-operative banks is governed by the - Co-operative Banks Act, 2007 (Act No. 40 of 2007) (“Co-operative Banks Act”)
9.1.3 Types of registration that exist
- Registration as a bank, mutual bank or branch of a foreign institution, which allows the entity to conduct the business of a bank in the Republic of South Africa. - Registration as a representative office, which allows the registered representative office to represent locally the business interest of overseas banking institutions but not itself to conduct the business of a bank in the Republic of South Africa. - The Cooperative Banks Act, 2007 governs the registration and supervision of cooperative banks.
9.1.4 Minimum capital requirements for the different types of banks
Capital requirements are laid down in SA Rand in terms of section 70 of the Banks Act for banks and branches of foreign banks. The current requirement for banks and branches of foreign banks is the greater of R250 million or an amount which
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represents a prescribed percentage of risk weighted assets determined as per the Regulations relating to Banks. Directive 5 of 2013 issued in terms of section 6(6) of the Banks Act, 1990, sets out the capital framework for South Africa based on the Basel 3 framework issued by the Basel Committee on Banking Supervision (BCBS). This directive sets out the prescribed minimum ratios at a total capital adequacy level, as well as for common equity tier 1 and tier 1 capital level over the next couple of years, as some additional buffers and requirements are phased-in. The prescribed percentages are above the minimum requirements prescribed by the Basel 3 framework. Currently the minimum prescribed ratio will be no less than the 8 per cent prescribed by the BCBS and has been set at 10 per cent for the banks operating in South Africa for 2014. Co-operative banks have to maintain a minimum capital adequacy of 6 per cent of total assets plus an additional 2 per cent of total loans. A co-operative bank must have least 200 members and hold at least one million Rand of members’ deposits.
9.1.5 Statutory provisions governing current activities of banks
Concentration risk: Section 73 of the Banks Act precludes a bank from making any investments with, or granting loans or advances or other credit to, any person exceeding a prescribed percentage (currently 10 per cent) of its qualifying capital and reserve funds without obtaining the prior approval of either the board of directors or a committee appointed for that purpose by the board of directors and the composition of which should be approved by the Registrar.
Any investments with or loans or other credit granted by the bank to any person, which either alone or together with others results in the prescribed percentage (currently 10 per cent) of qualifying capital and reserve funds being exceeded must be reported to the Registrar of Banks. This reporting is done through the submission, on a quarterly basis, of the statutory form BA 210, duly completed and signed, to the Office of the Registrar of Banks in terms of section 75 of the Banks Act.
Furthermore section 73 of the Banks Act precludes a bank from making an investment with or grant a loan, advance or other credit to any private sector non- bank person in excess of 25 per cent of its qualifying capital and reserve funds without obtaining the prior written approval of the Registrar.
Section 73 of the Banks Act provides that "person", for the purposes of that section, includes two or more persons related to each other by way of control, or by being regarded as a single exposure due to interconnectedness.
Statutory provisions governing the activities of mutual banks include, among others, the following: • Matters to be included in the articles of association of mutual banks – section 32 • Minimum share capital – section 48
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• Minimum reserve balance – section 49 • Minimum liquid assets – section 50 • Large exposure restrictions – section 51 • Restrictions in respect of investments with, or loans and advances to, certain associations – section 56 • Various prescribed undesirable practices – section 59 • Restrictions in respect of investments in insurance companies – section 60 • Etc.
Co-operative banks may not, without the approval of the Supervisor, make an investment with any one person or related person or grant a loan to any one person or related person which investment or loan exceeds the lessor of 10 per cent of total assets held or 25 per cent of the capital of the co-operative bank. External borrowings may not exceed 15 per cent of total assets of the co-operative bank.
Capital adequacy: Please refer to paragraph 9.1.4 above.
Liquid asset requirement: In terms of section 72 of the Banks Act and the Regulations promulgated thereunder, banks are required to hold, in the Republic, an average amount of liquid assets as defined, to the value of not less than 5 per cent of the average amount of its liabilities as specified in the Regulations.
Co-operative banks have to maintain a minimum of 10 per cent of total deposits in prescribed investments with a tenure not exceeding 32 days which is convertible into cash at any time.
Open foreign currency position: The current maximum permissible aggregate effective net open position(s) in foreign currencies that may be maintained by any bank is 10 per cent of net qualifying capital and reserve funds.
Restricted lending: Section 76 of the Banks Act provides that when a bank invests in immovable property or shares or lends money to any of its subsidiaries whose main objective is the acquisition and holding or development of immovable property, the bank has to manage such transactions in a manner that ensures that the sum of the amounts of the bank's investments in immovable property plus amounts invested in shares (excluding preference shares not convertible into ordinary shares), taken at the price at which they were acquired, plus the amount owing to it by any subsidiary in respect of any loan or advance of the nature referred to above, granted by it, does not exceed a prescribed amount. Currently the prescribed amount is the sum of the bank's net qualifying capital and reserve funds relating to risks other than market risk.
Investments with, and loans and advances to, Associates: In terms of section 77 of the Banks Act a bank has to ensure that the sum of amounts:
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- invested in debentures or preference shares of associates (excluding subsidiaries in terms of Section 76(1) above, a bank or mutual building society); - owing to the bank by such associates in respect of loans or advances it has granted to such associates; and - of guarantees provided by the bank in respect of liabilities of such associates, does not exceed 10 per cent of the bank’s aggregate amount of deposits, current accounts and other creditors as specified in the Regulations.
9.1.6 Main supervisory practices
The Office of the Registrar of Banks discharges its supervisory obligations by applying a risk-based supervisory approach comprising a combination of off-site and on-site supervisory practices. Furthermore, a supervisory matrix structure is applied, comprising frontline supervisors, referred to as a relationship team, responsible for the supervision of individual banks, assisted by specialist risk support teams, responsible for, among other things, detailed risk assessments across the banking industry.
The off-site component of the supervisory approach primarily entails the collection of relevant and reliable data from banks in the form of statutory returns submitted by banks in terms of the Regulations relating to Banks and Mutual Banks. In addition, information is gathered from various other sources, such as banks’ audited financial statements, financial analyst reports, questionnaires, and financial media; as well as information gathered during meetings held with banks.
The on-site component of the supervisory approach firstly entails regular meetings with banks during the supervisory cycle in terms of the supervisory programme of the individual banks. These meetings could include, amongst others, meetings with banks’ risk managers, product heads, and chief executive officer. In addition, annual meetings are held with the board of directors, audit committee, external auditors, internal auditor and compliance officer of banks. During these interactions particular facets of banks’ business and the management practices and governance structures of banks, among other things, are assessed.
Secondly, more in-depth on-site reviews are conducted in respect of specific risk areas or themes identified at particular banks or across the industry. Furthermore, on-site reviews might also be conducted to assess banks’ ability to comply with the statutory requirements pertaining to the application of advanced approaches for assessing banks’ exposure to, for example, credit risk, market risk and operational risk. In addition, banks’ adherence to anti-money laundering and combatting the financing or terrorism are also assessed by means of on-site inspections.
The above-mentioned supervisory practices all form part of the supervisory framework applied by the Office of the Registrar of Banks, referred to as the
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Supervisory Review and Assessment Process (SREP). The SREP comprise six main steps as depicted in the following diagram:
9.1.7 Measures to remedy deficiencies as well as penalties utilised
In terms of section 74 of the Banks Act, if a bank fails to comply or is unable to comply with any provision pertaining to the minimum share capital and unimpaired reserve funds or the minimum liquid assets it is required to maintain, the bank shall report its failure or inability to the Registrar of Banks ("the Registrar") stating the reasons for such failure or inability. The Registrar may either take immediate action (which involves the imposition of a fine) against the bank or may condone the failure or inability and afford the bank the opportunity, subject to certain conditions as determined by the Registrar, to comply with the relevant provisions within a specific period.
Section 91 of the Banks Act provides that a person can be found guilty of an offence in any of the following situations: - Any person who fails to comply with a directive issued by the Registrar in terms of section 7 of the Banks Act which relates to the furnishing of information by banks and controlling companies. - Any person who in the completion of any questionnaire, that is to be returned to the Registrar, knowingly furnishes the Registrar with information that is untrue or misleading.
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- Any person who contravenes or fails to comply with various other provisions of the Banks Act. - Section 91A of the Banks Act also empowers the Registrar to impose administrative penalties on banks and controlling companies for a contravention or failure to comply with the Act - It must be noted that the imposition of an administrative penalty is not a conviction in respect of the offences created – however no subsequent prosecution for the contravention or non- compliance will be possible.
9.1.8.1 Implementation of Basel III
On 1 January 2013 South African banks were obligated to comply with domestic regulations that implemented global banking standards known as Basel III. The framework introduces additional standards for leverage and liquidity and enhances the capital banks are required to hold in terms of its quality and quantity.
The South African regulatory framework is divided into the following tiers:
- The top tier is the Banks Act which contains the enduring principles and an overarching enabling framework for licensing and oversight of banks. Only Parliament is empowered to amend the Banks Act.
- The middle tier is the Regulations relating to Banks, which contains the prudential regulations and standards. The Minister of Finance is empowered to amend these regulations.
- The bottom tier comprises directives, circulars and guidance notes, and is used to deal with interpretive, instructional and operational matters that may change frequently or require immediate action. The Registrar of Banks is empowered to issue this tier of legislation.
In preparation for implementing prudential regulations aligned with Basel III, the Bank Supervision Department requested all banks to participate in a readiness assessment to facilitate correct reporting and compliance with the enhanced standards.
Internally, the department modified its supervisory processes; upgraded its information technology database; and offered informational training to the banking industry on regulatory requirements for reporting against the new standards.
9.1.8.2 Monitoring of banks’ compliance with anti-money-laundering legislation
In June 2003, South Africa was admitted as a member of the Financial Action Task Force (FATF), established by the Group-of-seven summit in June 1989 to examine measures to combat money laundering. The retention of South Africa’s membership has been assessed in August 2008 and confirmed. In terms of the FATF
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Recommendations, countries are required to ensure that financial institutions in their jurisdictions are: subject to adequate regulation and supervision in respect of anti- money laundering and combating the financing of terrorism (AML/CFT); and effectively implementing the FATF Recommendations.
The Bank Supervision Department, in keeping with current global expectations to optimise compliance with AML/CFT, have taken proactive steps in supervising compliance with the Financial Intelligence Centre Act, 2001 (FICA), and the related exemptions. This entails reviewing bank’s systems and processes; having regular meetings with banks; and maintaining a close working relationship with the Financial Intelligence Centre.
The scope of supervisory duties of Bank Supervision Department was expanded in terms of the amended Financial Intelligence Centre Act (the FIC Act – which was amended in 2010) to include more pro-active assessments of whether banks comply with the provisions of the FIC Act, inclusive of both on-site and off-site supervisory work.
Two new teams (currently comprising 11 permanent positions) have been established in BSD for the purpose of conducting, on a continuous basis, onsite inspections pertaining to banks’ adherence to AML/CFT requirements. The onsite inspections cover all registered banks and verify banks’ level of compliance with the FIC Act, as well as other directives and guidelines issued by the Financial Intelligence Centre (FIC). The AML Review team of BSD also holds prudential AML/CFT meetings with the five large banks to discuss AML/CFT compliance- related issues, as well as periodic AML/CFT prudential workshops with smaller banks during each calendar year. Representatives from the FIC are also invited to these meetings.
BSD also receives and analyse information from all banks regarding statistics on suspicious and unusual transactions and AML/CFT training provided by the bank. Consequently, BSD has undertaken a total of 18 on-site inspections to date, wherein it has issued notices of remedial action required by the inspected bank at the outcome of each of the inspections conducted.
In addition, section 43A of the amended FIC Act also empowers BSD to issue directives to banks relating to AML/CFT compliance. BSD also recommends sanctions to be imposed by the Registrar of Banks for those banks that fail to comply with the provisions of the FIC Act. The SARB has imposed administrative sanctions during April 2014 on Absa Bank Limited, FirstRand Bank Limited, Nedbank Limited, and The Standard Bank of South Africa Limited.
FinSurv is responsible for the monitoring and supervision of compliance with anti- money laundering legislation in respect of ADLAs in terms of the FIC Act.
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9.1.8.3 Compliance with the revised Core Principles for Effective Banking Supervision (Core Principles)
In September 2012 the Basel Committee on Banking Supervision issued revised Core Principles for Effective Banking Supervision.
The Bank Supervision Department has maintained constant attention to the principles and has ensured that its supervisory processes are as closely aligned to the principles as possible and where alignment with regulatory standards are specified, to comply where practical within the national legal policy framework. Under its Financial Sector Assessment Programme, the International Monetary Fund (IMF) conducted a review of the department’s compliance with the core principles in the second quarter of 2014. Whilst the results have not been published at the date of drafting this document, they are expected to be a fair assessment of the BSD’s compliance.
9.2 Financial institutions
9.2.1 Responsibility for supervision of financial institutions
The Financial Services Board is responsible for the supervision of non-bank financial institutions registered under the following statutes: - Pension Funds Act, 1956 (Act No. 24 of 1956) (“Pension Funds Act”) - Financial Advisory and Intermediacy Services Act, 37 of 2002 (FAIS) - Friendly Societies Act, 1956 (Act No. 25 of 1956) (“Friendly Societies Act”) - Securities Services Act, 2004 (Act No. 36 of 2004)(“SSA”) - Collective Investment Schemes Control Act, 2002 (Act No. 45 of 2002) (CISNA) - Long-Term Insurance Act, 1998 (Act 52 of 1998) (“Long-Term Insurance Act) - Short-Term Insurance Act, 1998 (Act No. 53 of 1998) (Short-Term Insurance Act) - Inspection of Financial Institutions Act (Act No. 8 of 1998) (“Inspection of Financial Institutions Act”)
The Financial Intelligence Centre is responsible for administering the following statutes: - Financial Intelligence Centre Act, 2001 (Act No. 38 of 2001) (“FICA”) - Protection of Constitutional Democracy Against Terrorist and related Activities Act, 2004 (Act No. 33 of 2004) (“POCDATARA)
The Competition Commission, the Competition Tribunal and the Competition Appeal Court (together the “Competition Authorities) are responsible for administering the following statute: - Competition Act, 1998 (Act No 89 of 1998) (“Competition Act”)
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9.2.2 Categories of financial institutions and their licensing procedures
The Financial Services Board is the statutory body responsible for supervising non- bank financial institutions and it is mandated by the Financial Services Board Act, 1990.
The licensing procedures are as follows for the respective institutions:
Long-Term Insurance and Short-Term insurance Companies: Insurance companies are registered subject to the provisions of Part II, Sections 7 to 14 of both the Long- Term and Short-Term Insurance Acts. The prospective insurer is required to submit a form R.V.1, Application for Registration as an Insurer, which requires certain information to be disclosed.
Pension funds: Pension Funds are registered subject to the provisions of section 4 of the Pension Funds Act. The prospective fund is required to submit rules which are subject to the provisions of Regulation 30 of the Pension Funds Act. Friendly societies: Friendly societies are registered subject to the provisions of the Friendly Societies Act.
Collective Investment Schemes: Unit trust management companies are registered subject to the provisions of section 5 of the Collective Investment Schemes Control Act, which provides that only a person registered as a “manager” of collective investment scheme, or a person authorised as an “authorised agent” by the registered manager, or a person who is exempt from complying with the Collective Investment Schemes Control Act, may administer a collective investment scheme.
The JSE Limited: An application for a stock exchange license is made subject to the provisions of sections 8 to 10 of the Securities Services Act.
The South African Futures Exchange: An application for a financial market licence is made subject to the provisions of sections 8 to 10 of the Securities Services Act. The South African Futures Exchange is no longer an institution on its own, but a division of the Johannesburg Securities Exchange.
Bond Exchange of South Africa: See South African Futures Exchange.
Collective Investment Schemes: Granting of participation in mortgage bonds is subject to the provisions of section 53 of the Collective Investment Schemes Control Act.
9.2.3 Information as requested under 9.1 which is applicable to non-banking institutions
The following types of licences and minimum capital requirements exist:
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- Insurance Companies Long-term: - Life R10 000 000 - Sinking fund R5 000 000 - Home service (Funeral) R5 000 000
Short-term: - Miscellaneous } - Fire } - Marine } R5 000 000 irrespective of the - Motor } class of business written - Guarantee } - Personal accident }
- Pension funds General certificate of registration No specific capital requirements
- Friendly societies Only the rules are registered and No specific capital requirements must comply with the Act - Unit trusts Unit trust company is registered A minimum capital of R2 000 000 is required, of which 10 per cent must be invested in each unit trust under management. There is a cap of R1 000 000 per unit trust
- The Johannesburg Securities Exchange General certificate of registration. No specific capital requirements as it has to be an on-going concern
- The South African Futures Exchange General certificate of registration No specific capital requirements as it has to be an ongoing concern
- Participation bonds Operates under an exemption granted No specific capital in terms of section 37 of the requirements Unit Trusts Control Act
All of the above-mentioned companies are supervised by the Financial Services Board in accordance with the Acts governing them. The Financial Services Board has an inspectorate division which is responsible for the on-site inspection of the institutions supervised by the Board. The inspectorate's mandate is the Inspection of Financial Institutions Act.
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10. National payment, clearing and settlement system
10.1 How is the payment, clearing and settlement system organised?
The South African National Payment System Framework and Strategy document, as agreed to between the South African banking industry and the SARB and published in November 1995, laid the groundwork for the organisation of the National Payment System. Subsequently further documents were issued for 2010 and 2013 to guide the development of the payment system. The functions and responsibilities of the role players are as follows:
10.1.1 The SARB and its role in the payment systems
The role of the SARB in the national payment system (NPS) is specified in the SARB Act, section 10(1)(c)(1) and the National Payment System Act, 1998 (Act No. 78 of 1998) – (NPS Act) as amended. The SARB Act states that the SARB may perform such functions implement such rules and procedures and, in general, take such steps as may be necessary to establish, conduct, monitor, regulate and supervise payment, clearing or settlement systems. The NPS Act provides for the management, administration, operation, regulation and supervision of payment, clearing and settlement systems in South Africa and connected matters.
10.1.2 The National Payment System Department
The National Payment System Department of the SARB oversees the safety and soundness of the national payment system and implements risk-reduction measures in the payment system to reduce systemic risk. In doing so, the Department plays a significant role in supporting the mission of the SARB. Following the implementation of strategies set out in the initial Framework and Strategy document (known as the Blue Book - 1994 to 2004), the Vision 2010 published in 2006, sets the strategies for the period until the year 2010. Beyond 2010, Vision 2015 was published to set out strategies for the period up to the year 2015. The SARB provides an inter-bank settlement service via the real-time electronic settlement system, the South African Multiple Option Settlement (SAMOS) system. Besides single inter-bank settlement instructions generated by the participant banks, SAMOS is also used for the settlement of obligations arising out of the retail payment clearing environment, as well as the securities market instruments including equities, bonds and money market securities.
10.1.3 The Payments System Management Body and its role in the payment system
In terms of Section 3 of the NPS Act, the Payments Association of South Africa (PASA) is recognised as the payment system management body with the object of organising, managing and regulating the participation of its members in the payment system.
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PASA is an association of South African payment clearing participants. It is established by a formal constitution, and is governed by a council drawn from amongst its participants.
PASA, in terms of Section 4 (2) of the NPS Act, also provides a forum for consideration of matters of policy and may act as a medium of communication between its members and government, the SARB and other bodies.
10.1.4 The Payment Clearing Houses (PCHs) in the NPS
PCHs are arrangements between two or more payment clearing system participants, governing the clearing of payment instructions between those participants.
Within a PCH, payment instructions are sorted, the values accumulated, and the financial obligations between its member banks determined. The obligations that arise are then sent to the SARB for subsequent discharge (settlement) in the SAMOS system.
10.1.5 The Payment Clearing Houses Participant Groups (PCH-PG) in the NPS
A PCH-PG is a formal committee of participants engaging in the acceptance and clearing of payment instruments constituting a particular payment stream. A payment stream refers to payment instructions that are homogeneous in terms of their nature, risk and processing requirements and that have the same legal basis.
Each PCH is governed by a PCH Agreement that stipulates the rules and processing requirements relevant to that PCH. The PCH Agreements form part of the overall legal structure used to administer and manage payment system issues.
The PCH Agreements are administered by the PCH-PGs and form part of the overall structure of PASA.
10.1.6 The Payment-processing infrastructure operators in the NPS (“NPS operators”)
A PCH System Operator does not have to be a bank, but must be licensed by PASA to provide processing services to two or more SARB settlement system participants. A PCH System Operator accepts operational responsibility only according to the agreed-upon service level and cannot be held responsible for the financial risk associated with the clearing process. The ownership of the infrastructural components is separate from their utilisation.
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10.1.7 Third party payments providers in the NPS
The payment system is not the exclusive domain of the banking industry. Individual business enterprises and/or markets collectively are enabled and encouraged to interface with the payments system. In principle, the NPS has to be accessible to whom-ever wishes to process payment instructions.
A System Operator is a person authorised to provide services to any two or more persons in respect of payments, while a Third Party Payment Provider is any person that, as a regular feature of that persons business accepts money or payment instructions from another person for the purposes of making payment on behalf of that person to a third person to whom the payment is due.
To ensure that the scope, roles and responsibilities of System Operators and Third Party Payment Providers are clearly understood and acted upon, directives issued in terms of the NPS Act will govern these entities.
10.2 Short description of the processing of payment instructions
Since the inception of the Automated Clearing Bureau (ACB) in 1973, now known as BankServ, the clearing procedures have changed considerably. Apart from the processing of cheques, which takes place at BankServ in Johannesburg, information relating to amongst others Electronic Funds Transfers (EFTs), Card, and ATM transactions is transmitted electronically to BankServ for consolidation and the determination of the banks’ Interbank obligations.
The obligations that arise in each of the PCHs are submitted to the SARB’s SAMOS system on a daily basis, some at intervals during the day, whereupon settlement takes place immediately.
The SAMOS system settles all transactions on a same-day basis, thereby ensuring settlement on the day of value.
10.3 How are funds obtained in the SAMOS System?
The SAMOS system settles all transactions on a pre-funded basis.
Apart from utilising the balances in their settlement accounts, participating banks may utilise a portion of their liquid assets requirements as well as their reserve account balances to fund the settlement of transactions.
The SAMOS system has been so designed that should a bank have insufficient funds available in its settlement account to settle a transaction, the SAMOS system will automatically grant a loan to the bank against acceptable collateral reserved for this purpose.
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10.4 Inclusion of the RAND as a settlement currency on the Continuous Linked Settlement (CLS) System
The Rand was included as a settlement currency in the CLS system on 6 December 2004. The inclusion of the Rand reduced the settlement risk for foreign exchange transactions considerably. In this regard, the Rand became one of the seventeen major currencies that settle in CLS. The CLS system is overseen by the Federal Reserve Bank of New York as the lead overseer while the SARB, together with other central banks of currencies settled in the CLS system, is a member of the co- operative oversight team.
10.5 SADC Payment Systems
The SARB is charged with the responsibility of coordinating development of payment systems within the SADC region. A major focus of this work is currently on the integration of payment systems in the region. The SARB is currently hosting an integrated settlement system for the region.
10.6 Message carriers in the payment system
SWIFT is the main message carrier in the NPS. SWIFT V-copy is used in the SAMOS settlement system for all settlement transactions.
A web based interface application that also uses SWIFT as a message carrier has been implemented to enable access to some functionality of the settlement system by its participants.
11. Currency in use
11.1 List of legal tender notes and coins currently issued and in use in the economy
- Currency: - Rand - Notes: - R10, R20, R50, R100, R200 - Coins: - 5c, 10c, 20c, 50c, R1, R2, R5
11.2 Common Monetary Area (“CMA”)
Lesotho, Namibia, South Africa and Swaziland form the Common Monetary Area which constitutes a single monetary and exchange control territory.
12. Other core activities of the central bank not covered above
None.
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13. The position of the central bank in SADC
13.1 Special relationships with other central banks in SADC
The Committee of Central Bank Governors in SADC is co-ordinated by the SARB, and the Governor of the SARB is the Chairperson of this Committee.
14. Publications
14.1 Regularly published publications
Annual publications: - Annual Economic Report - Report of the Ordinary General Meeting of Shareholders - Governor's Address at the Ordinary General Meeting of Shareholders - Bank Supervision Annual Report - Institutional Sector Classification Guide - Annual Financial Statements
Semi-annual publications: - Financial Stability Review - Monetary Policy Review
Quarterly publications: - Quarterly Bulletin
Two-monthly publications: - Bankindaba
Monthly publications: - Monthly Release of Selected Data - Financial Statements - Monthly statements of assets and liabilities of the SARB - Monthly release of the official gold and foreign exchange reserves of the SARB.
14.2 Occasional/special publications published since 1990
- Occasional papers - Inflation and how to combat it - List of Bank directors - The Bank Art Collection - History of the Quarterly Bulletin - Departmental studies - Media releases - Speeches
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- Mission statement - Brief introduction to the Bank and its functions - Departmental pamphlets - Exchange control manual - NPS booklet - NPS update - Fact sheets - NPS Position and Information Papers. - Operational notice pertaining to money market operations
14.3 Directives, Circulars, Guidance Notes and Media releases
- Bank Supervision Directives, Circulars and Guidance Notes - Public Awareness Initiatives - Monetary Policy Statements - Information on South African banknotes - Exchange Control Circulars
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Central Bank of Swaziland
Central Bank of Swaziland PO Box 546 Mbabane, Swaziland Fax: + 268 40 40013 Tel: + 268 40 82000
1. History
The King's Order-in-Council cited as the Monetary Authority of Swaziland was enacted by the King in collaboration with the Council on 22 March 1974, and officially began its operations on 1 April 1974. The Order-in-Council was amended on 18 July 1979, replacing the previous Monetary Authority with the Central Bank of Swaziland.
2. Relationship with government
There is no specific law guaranteeing the independence of the central bank. Functionally, the Bank falls under the Ministry of Finance but has its own structure which is independent of Government. Also, in the execution of its duties, the Bank operates independently as a parastatal organisation. The Bank has statutory powers, but recommendation and clearance by the Finance Minister on such policies as exchange rate and staff salaries are sought before implementation.
The Governor is appointed by the King in consultation with the Prime Minister and on recommendation by the Finance Minister for a period of 5 years (renewable). Grounds for dismissal include mental or physical incapabilities, insolvency, conviction of an offence involving dishonesty, gross misconduct in relation to his duties, or suspension from practising his profession. There are seven members of the Board of Directors, composed of the Governor, the Deputy Governor and five other Directors. The five Directors and Deputy Governor are appointed by the Minister of Finance. The Principal Secretary of Finance serves as ex officio member of the Board. The Bank has its own budget which has to be approved by the Board, and has full authority to decide on its finances.
The Bank and the Ministry of Finance consult frequently on matters affecting the financial system and budgetary situation. A committee-type of structure is also in place to enhance co-ordination on monetary and fiscal issues.
The Bank serves as adviser to Government on monetary and financial matters. It is also the duty of the Bank to inform and advise the Finance Minister about any matter that is likely to affect the achievement of its objectives. The Minister may at any time request the Bank to give advice on matters relating to monetary and
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financial issues. In addition, the Bank performs the following services to the Government: - Issue, service and redemption of public domestic debt - Administration of exchange controls - Management and service of public external debt - Issue of notes and coin - Management of external reserves - Formulation and implementation of monetary policy - Regulation and monitoring of commercial banks and other financial institutions
The central bank does not directly extend any form of credit to the Government, but on certain occasions, it does hold government securities and Treasury bills and also allows for limited overdrafts to government.
3. Design and conduct of monetary policy
3.1 Main objectives of monetary policy
The main objectives of monetary policy are to promote monetary stability and a sound financial structure so as to foster financial conditions conducive to the orderly and balanced economic development of Swaziland.
3.2 Instruments of monetary policy
The main instruments of monetary policy used by the Central Bank of Swaziland are the discount rate, reserve and liquidity requirements, open market operations and moral suasion.
3.3 Types of refinancing as well as collateral used
Refinancing in the form of rediscount of commercial (and agricultural) paper against government stock, Treasury bills and Central Bank bills as collateral.
3.4 The money supply aggregate that plays the main role in monetary policy
Money supply aggregates are underestimated due to the unknown volumes of South African rands in circulation. The use of money supply aggregates (M1 and M2) for monetary policy purposes are therefore inadequate as the proportion of South African rands in circulation is believed to be significant. The MO aggregate plays the main role and constitutes currency in circulation (about 55 per cent) and bankers’ deposits (about 45 per cent).
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3.5 Reserve requirements on financial institutions
The reserve requirement had been held at 6 percent of total public deposits with each bank from December 1976 to April 1992. On the latter date it was reduced to 5 percent until January 1994 when the requirement was increased again to 6 percent of the public's deposit liabilities held by banks. Since 1999, the Central Bank has been gradually reducing the reserve requirement to be in line with regional trends as well as to reduce the punitive effect it has on banks’ intermediation activities. Since August 2003, the reserve requirement has been maintained at 2.5 percent. Reserves can only be held as deposits with the Central Bank. Cash holding of reserves was also ceased in August 2003.
4. Structure of the financial markets
4.1 Organisation of the money and capital markets
Money market: Dealings in the money market are done by the commercial banks and the central bank.
Capital market: All dealings in the capital market are carried out by the Swaziland Stock Brokers (LTD), African Alliance of Swaziland Securities (LTD) and Interneuron Swaziland (PTY) (LTD).
4.2 Instruments used in both these markets
The major instruments used in the money market are - Treasury bills; (active) - Central Bank bills; - Bankers’ acceptances; and - Negotiable certificates of deposits.
In the capital market the instruments used are - Debentures and bonds; - equities; and - unit trusts.
4.3 Legal frameworks existing for the money and capital markets
Money market: Consists of mainly commercial banks that are regulated by the Financial Institutions Order of 1975.
Capital market: Government debt is issued in accordance with the Treasury Bills and Government Stocks (Amendment) Order, 2003. Stock Exchange activities are regulated using the Financial Institutions Order of 1975. The Securities Bill has been approved by both Houses of Parliament and currently waits to be assented by the Head of State, hopefully during the current financial year 2010/2011.
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4.4 Type of financial intermediaries operating in these markets
Money market: - Commercial banks (3) - Swaziland Development and Savings Bank - Swaziland Building Society - Central Bank of Swaziland
Capital market: - Government of Swaziland - Parastatals - Stockbrokers (African Alliance Swaziland Securities (LTD), Swaziland Stockbrokers (LTD) and Interneuron Swaziland (PTY) (LTD) - Asset Managers (African Alliance of Swaziland and Stanlib Swaziland) - Private sector - Swaziland Stock Exchange (SSX)
5. External payment arrangements
5.1 Determination of the exchange rate policy
The responsibility for determining the exchange rate policy of Swaziland is entrusted to the Central Bank of Swaziland, in consultation with the Minister of Finance. Swaziland is a member of the Common Monetary Area (CMA) and the lilangeni is pegged at par to the South African rand.
5.2 The present exchange rate system
At present, Swaziland is using a fixed exchange rate regime, pegging its currency, the lilangeni, at par with the South African rand under the auspices of the Common Monetary Area (CMA) arrangement. CMA membership consists of South Africa, the larger partner, and the peripheries namely Swaziland, Lesotho and Namibia.
5.3 Organising the exchange market
By virtue of being a member of the CMA, Swaziland's foreign exchange market is closely linked to the South African market. The Central Bank of Swaziland therefore imports its credibility in terms of exchange rate policy, from the South African Reserve Bank.
Owing to the currently sustainable level of external debt exposure, Swaziland's reserves tend not to be strictly matched according to liabilities. The market is fairly free, with placements made in various reserve currencies mainly driven by the prime objective of maintaining the purchasing power of Swaziland's lilangeni as provided by the statute.
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5.4 The central bank's involvement in managing foreign exchange reserves
Legally, the Central Bank of Swaziland is the custodian of the country's foreign exchange reserves. However, the Treasury also manages and places some of its funds in offshore markets such as the South African market.
6. Currency convertibility and exchange control
See South Africa.
7. The central bank and external debt
7.1 The role of the central bank in managing the country's external debt
The central bank plays an important role in external debt management and externalising the payments of the central Government borrowing on instructions by the Treasury Department. The Bank requires the debt data for forecasting the balance of payments, reserves management and compilation of statistical information as it has a debt unit in the Research Department. The Bank together with the Ministry of Finance uses the Commonwealth Secretariat Debt Recording and Monitoring System for recording and management of the country’s debt (both external and domestic) contracted by both the public and private sector.
7.2 The role of Treasury in this respect
The Treasury Department is responsible for the servicing of the external debt after instructions are received from the Ministry of Finance. The Treasury Department, in turn, instructs the Central Bank to externalise the payments. Once the payments have been made’ the Bank advises both the Ministry of Finance and the Treasury Department by sending them copies of the debit note.
8. Supervision of financial institutions
8.1 Banking institutions
8.1.1 Authority responsible for banking supervision
The Central Bank of Swaziland is responsible for banking supervision.
8.1.2 Licensing procedures for establishing a new bank
The applicant must be a company registered in Swaziland. The application must be made in writing and must include the company's memorandum and articles of association; details of head office, directors and chief executive; business proposal; recent financial information and any other information which may be required by the Central Bank of Swaziland. The Central Bank must be satisfied as
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to the financial integrity and history of the applicant, character and experience of management, capital adequacy, how it would benefit the community and its effect on existing banks.
In the operating plan of the institution the applicant must explain to the Central Bank what activities the proposed bank will engage in, how they will be conducted and the resources available to the group. The plan has to give more than just the bare statistics and therefore also has to analyse the competition in the market. The plan must also explain the business strategies the proposed bank will follow to capture a share of each product market as well as the projected results.
8.1.3 Types of licences that exist
General banking licences and credit institutions licenses exist.
8.1.4 Minimum capital requirements for the different types of banks
Legislatively a bank incorporated in Swaziland, shall have initial capital in the form of paid-up shares of not less than E15 million or such other sum in paid-up shares and reserves being not less than the greater of E15 million or 5 per cent of its liabilities to the public in Swaziland in terms of the most recent balance sheet. The Central Bank may, in its discretion, require a larger sum than the sum stipulated in the legislation. In essence, a bank is required by these statutes to maintain a level of capital relative to the size and nature of its liabilities. The Central Bank requires each bank to maintain a minimum capital ratio of not less than 8 percent of total risk weighted assets.
8.1.5 Regulations governing current activities of banks
- Large credit exposure: Under the provisions of the Financial Institutions Act, 2005, a bank incorporated in Swaziland should not employ assets (both on and off the balance sheet) amounting to more than 25 percent of its capital resources with any one client or what is considered by the central bank to be a connected group of clients. Banks are required to seek the explicit approval of the Central Bank to exceed this limit. Banks should notify the Central Bank of all such large exposures on a quarterly basis. However, there are exemptions to this rule e.g. when a credit facility is secured by cash held in a segregated deposit account by the lending bank or the credit facility is guaranteed in writing by the government of Swaziland.
- Capital adequacy: A bank is required by statute to maintain a level of capital relative to the size and nature of the bank's liabilities. The Central Bank requires each bank to maintain a minimum capital ratio (capital fund as a proportion of risk weighted assets) in relation to credit risk of 8 percent (or such higher levels as the Bank may determine on a case-by-case basis). A bank, incorporated in Swaziland, shall have initial capital in the form of paid-
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up shares of not less than E15 million or such other sum in paid-up shares and reserves, being not less than the greater of E15 million or 5 percent of total liabilities to the public in Swaziland. A sum equal to not less than 10 percent of a bank's net profits will be transferred to a statutory reserve account until the balance in the statutory reserve account is equal to its minimum paid-up capital.
- Liquidity ratio: Banks should establish appropriate and prudent policies for the management of their liquidity. They should ensure to the satisfaction of the Central Bank that adequate internal systems exist to monitor and control maturity mismatches between their assets and liabilities. The law provides that the Central Bank may from time to time, by notice published in the Gazette prescribed that every financial institution of a given class or classes shall maintain liquid assets amounting to not less than a prescribed percentage not exceeding 25 per cent of the total of its liabilities to the public in Swaziland.
- Liquid assets mainly comprise notes and coins, certain inter-bank deposits, net balances held with the Central Bank and other securities as approved by the central bank including certain Government securities. - a minimum ratio of liquid assets, as specified by the Central Bank, to total liabilities to the public in Swaziland of 13 percent in the case of commercial banks and 10 percent in the case of the development bank.
- Open foreign exchange position: The Computation of Risk Assets Returns, based on the Basle Minimum Standards on capital adequacy, provides for weighted risk on hedged or covered positions and captures the counterparts’ risk involved.
- Provision for bad debts: All banks in Swaziland are required by law to make provisions to the satisfaction of the Central Bank and the auditor of such institutions for bad and doubtful debts (to be calculated at least once in each calendar year) and including accumulated bad debts not written off. From October 1999, the Central Bank issued Inspection Circular No. 8 on Non Accrual, Classification and Reserve requirements for Loans and other Assets which is to provide a uniform guideline to financial institutions on provisions. The Inspection Circular on provisions is currently being revised to be in line with international banking supervision practices.
- Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT): Banks are guided by the Money Laundering (Prevention) Act of 2001 which awaits promulgation of further amendments to incorporate Combating the Financing of Terrorism (CFT) and other shortfalls under the current Act. The Central Bank as supervisory authority issued guidelines to financial
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institutions in 2002 to give them guidance in the setting up of internal controls to detect and deter Money Laundering Activities and promote compliance. A circular was thereafter issued requesting banks to submit quarterly reports on progress made in the Know Your Customer drive. This also serves as a tool for off-site monitoring purposes.
- Restricted lending: Lending is not restricted.
- Deposit insurance: Currently there is no deposit insurance scheme yet, but this is under discussion with banks with the aim of determining its feasibility.
8.1.6 Main supervisory practices
It is a generally accepted regulatory practice that supervision of banks and their associated enterprises should be carried out on a consolidated basis. The Central Bank's policy on consolidated supervision is as follows: - The various ratios and limits enshrined in the Financial Institutions Act, 2005, are applied on a consolidated basis to each bank under the Central Bank's supervision.
- From the subsidiaries of all international banks, the Central Bank will require undertakings within the group to provide such information as is necessary to enable it to carry out its supervisory functions effectively.
- The main areas of supervision are the off-site monitoring and on-site inspections. Off-site monitoring is carried out through analysis of monthly statements showing assets and liabilities at the close of business on the last business day of the preceding month and quarterly statements giving an analysis of its income and expenses of the last business day of the quarter.
- Banks are required to draw up their annual accounts in accordance with the provisions of the Financial Institutions Act, 2005, which requires the Balance Sheet and profit and loss account to be prepared in accordance with standard banking practice.
- Legislation stipulates that the external auditor of every bank is required to report to the shareholders of each bank whether in his/her opinion the balance sheet and profit and loss account have been prepared in accordance with standard banking practices, whether they fairly represent the bank's affairs and whether the auditor has obtained satisfactory explanations and information in the performance of the audit.
8.1.7 Measures to remedy deficiencies as well as penalties utilised
If the Central Bank is of the opinion that a financial institution is conducting its business in an unlawful or unsound manner or that it is otherwise in an unsound
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condition, the bank in question may be required to take such corrective measures as the Central Bank may consider necessary to rectify the situation. The Central Bank may also appoint a person, who in its opinion has proper training and experience, to advise the bank on measures to be taken to rectify the situation. The current Financial Institution Act, 2005 also stipulates other enforcement actions the Bank may invoke as well as the penalties chargeable on violation of the Act.
8.2 Non-banking institutions
8.2.1 Responsibility for supervision of non-banking financial institutions
Non-banking institutions are currently not supervised but the insurances and pension funds administrators are supervised and regulated by the newly established Office of the Registrar of Insurances and Pensions. The Ministry of Agriculture and Co-operatives is currently responsible for Co-operative Unions. The Ministry of Finance is responsible for all other non-banking financial institutions. A study was done and finalized in January 2004 by the IMF through FIRST whereby it is recommended that a new and independent regulatory agency known as the Financial Services Regulatory Authority (FSRA) be established. The bill aiming to enact a law that would empower FSRA to supervise Non Banks Financial Institutions (NBFIs) is still in parliament awaiting promulgation.
8.2.2 Categories of financial institutions and their licensing procedures
- Banking institutions. Licensing procedure: i) Adhere to the procedures- checklist. ii) Conduct a preliminary conference. iii) Receive a banking license application. iv) Conduct an in-depth evaluation of the banking license application. v) Prepare a written recommendation. vi) Obtain necessary review and approvals. vii) Consult with the MOF. viii) Submit a banking license application to the Board of Directors of CBS. ix) Notify the applicant of the CBS decision. x) Publish notice of the new license.
- NBFIs. - Other Financial institutions.
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9. National payment, clearing and settlement system
9.1 How is the payment, clearing and settlement system organised?
The Central Bank of Swaziland in conjunction with commercial banks successfully implemented Real Time Gross Settlement (RTGS) system from 15 June 2007. In order to create significance and distinguish the system from other payment systems, the system was named “Swaziland Interbank Payment and Settlement System (SWIPSS)”. The systems is owned and administered by the Central Bank of Swaziland through the National Payment Systems Division in the Operations Department.
The Ministry of Finance Module (MOF) on the Real Time Gross Settlement (RTGS) platform was successfully implemented in February 2010. Government, through the Treasury Department, is now able to capture transactions directly onto RTGS, marking a major milestone in the development and modernisation program of the country’s NPS.
The MOF module is expected to greatly enhance reduction of financial risk associated with paper-based instruments and facilitate speedy settlements for time critical payments for the Swaziland Government
By design, SWIPSS is aimed at processing settlements of high value and time critical payments on real time basis. The system would also facilitate settlement for future payment systems as they would be progressively introduced in the country. SWIPSS also facilitates settlement of other net interbank settlements of cheques and EFTs generated from the Swaziland Automated Electronic Clearing House (SAECH).
SAECH is a body corporate owned by five participant banks at 20per cent shareholding for each participant member including the Central Bank. SAECH is responsible for operating, regulating, supervising the processing of paper-based instruments (cheques) and EFTs for settlement in accounts held at the Central Bank.
9.2 The role of the Central Bank in the system
Central Bank is responsible for ensuring that the system’s start of day and end of day are done on time and that there are smooth operations throughout the day. Central Bank, as provider and administrator of the system, is also responsible for attending to participants’ problems with the system.
The Central Bank is also the custodian of statutory reserve accounts for each participating bank in the clearing system through which settlement obligations are honoured, and has an important role in the oversight of the National Payment
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System by ensuring safe and efficient payment system in the country including operations of SAECH.
9.3 Short description of the clearing processes
Member banks send electronic input files containing data on outward clearing to SAECH for every clearing session through a transport server/client. These files are processed by the SAECH payment SWITCH, which then produces the output files containing data on inward clearing for each bank, which are then transmitted electronically to the paying bank. Participating banks then download these files on to their systems for automatic update of their customer’s accounts.
A consolidated net settlement file, which contains settlement obligation for each bank is also produced, which is electronically sent to the Central bank for settlement.
The Central bank then uploads the file into SWIPSS where the banks’ accounts are debited or credited. Final and irrevocable settlement takes place when each bank’s account is debited or credited with the net settlement figure, from the consolidated settlement file downloaded by the Central Bank.
Representatives from clearing member banks assemble at the SAECH on a daily basis for the exchange of paper based instruments. The clearing session is supervised by the SAECH Administrator, who facilitates smooth flowing of the operations. On completion of each clearing session, each member representative is given a certificate, showing the net settlement position for that session. SAECH provides two clearing sessions per day, that is, at 09:00 and 15:00 hours Monday to Thursdays. Friday clearing sessions are at 09:00 and 14:30 hours.
9.4 How are non-funded positions settled in the system?
The Central Bank extends an Intraday Liquidity Facility (ILF) to participants in order to fund intraday liquidity requirements in SWIPSS. The ILF must be fully secured by eligible collateral securities and such collateral shall be 110per cent of sought funding unless the Central Bank prescribes otherwise.
The Central Bank establishes the amount and collateral arrangements for the ILF with each Participant, which is reviewed monthly based on moving three (3) preceding months’ average of highest debit settlement amounts per participant. All participant banks are required to restore the intra-day repo by the end of each SWIPSS operating day. No interest charges apply to intraday lending facilities at the moment.
Participant banks are currently allowed to utilize their minimum reserve requirements (MRR) for funding of their SWIPSS transactions. Participants are also required to restore used-up MRR by the end of each SWIPSS operating day.
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Participant banks are also eligible to overnight lending facilities (OLF) at the Central Bank to facilitate funding short positions for participants’ settlement accounts. However, participants are expected to first utilize the inter-bank money market and only to approach the Central Bank as a last resort. The overnight facilities also require collateral before grant.
In the following morning, by 9.00 a.m., the Central Bank debits the loaned bank’s settlement account to reverse the repo and thereby settle the obligation to clear the facility. Failure to obtain available funds in the settlement account to settle the obligation would prompt the Central Bank to liquidate the pledged security(ies) to enable settlement of the outstanding debt.
10. Currency in use
10.1 List of legal tender notes and coins currently issued and in use in the economy
- Currency: - Lilangeni (E) - 100 cents equals one Lilangeni - Notes: - E200, E100, E50, E20, E10 - Coin: - E5, E2, E1, 50 cent, 20 cent, 10 cent, 5 cent
11. Other activities of the Central Bank
11.1 Activities of the Central Bank not covered above
Other activities also include the management of the Development Finance Department, which comprises the following offices: - Export Credit Guarantee Scheme; - Small Scale Enterprise Loan Guarantee Scheme; and - Public Enterprise Loan Guarantee Fund.
Capital Market Development Unit whose functions include:- - Development of capital markets in Swaziland; - Creation, maintenance and regulation of the markets in which securities can be issued and traded in an orderly, transparent and efficient manner; - Protection of investors; and - Promotion of cooperation with other financial exchanges in other countries.
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12. The position of the central bank in SADC
12.1 Special relationships with other central banks in SADC (CMA excluded)
Special relationships are more pronounced with CMA banks under the CMA arrangements. Outside the CMA, the Central Bank of Swaziland has a relationship with the Bank of Botswana as it maintains a correspondent account, mainly to fund students at the University of Botswana.
The Central Bank of Swaziland and COMESA Central Banks communicate with one another when there is a need to purchase each other's currencies and for transactions done through the clearing house.
13. Publications
13.1 Regularly published publications
Monthly Statistical Release, Quarterly Review, Annual Report and Governor’s Annual Policy Statement.
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Bank of Tanzania
Bank of Tanzania P. O. Box 2939 Dar es Salaam, Tanzania Fax: +255 22 2234217 Tel: +255 22 2234494-97
1. History
The Bank of Tanzania (BOT) was established in 1966 by the BOT Act of 1965. The Act provided for the establishment, constitution and functions of BOT as a central bank to take over the functions and operations of the then East African Currency Board (EACB) founded in 1919 to manage currency supply and exchange in the then British colonies of East Africa and neighboring countries. However, the BOT Act of 1965 was repealed in 1995 and was replaced with the BOT Act of 1995. The BOT Act of 1995 was a landmark in Tanzania’s monetary history by adopting a single policy objective, i.e. price stability and moving away from multiple-policy objectives. The new BOT Act 2006 was enacted in 2006 when the BOT Act of 1995 was repealed.
According to the BOT Act of 2006, the principal functions of the Bank are: - To formulate, implement and be responsible for monetary policy, including exchange rate policy; - To issue currency; - To regulate and supervise banks and financial institutions including mortgage financing, development financing, lease financing, licensing and revocation of licenses; and - To deal, hold and manage gold and foreign exchange reserves of Tanzania.
The primary objective of the Bank is to achieve the economic objective of maintaining domestic price stability conducive to a balanced and sustainable growth of the national economy. The Bank is responsible to ensure the integrity of the financial system and support the general economic policy of the Government and promote sound monetary, credit and banking conditions conducive to the development of the national economy.
2. Relationship with Government
The new BOT Act (2006) provides that the Central Bank is autonomous in pursuit of its objectives and performance of its tasks. The Bank is therefore an independent corporation despite the fact that the Governor and Deputy Governors are appointees of the President of the United Republic of Tanzania. The Act provides that the Minister of Finance and the Governor shall, where circumstances require, consult each other with a view to exchanging information and seeking coordination on economic and financial matters.
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2.1 Appointment of Governor, Deputy Governors and Board Members
According to the BOT Act of 2006, the President appoints the Governor and three Deputy Governors for a term of five years and they are eligible for re-appointment for a further term of five years only. The appointment of the Deputy Governors is made on the basis that at least one of the appointees hails from either side of the United Republic. The President can also dismiss the appointees for a good cause or disqualification.
The Governor is a Chairperson of the Board of Directors and the Deputy Governors are Deputy Chairpersons in the order determined by the Governor. Other Members of the Board are: - The Representative of the Permanent Secretary to the Treasury of the Government of United Republic of Tanzania, - The Principal Secretary to the Treasury of the Revolutionary Government of Zanzibar, and - Three non-executive Directors appointed by the Minister of Finance for a three-year term and eligible for re-appointment. - The Secretary to the Bank of Tanzania.
The Board of Directors determines the policy of the Bank and approves the Bank budget.
2.2 Bank of Tanzania as a banker and fiscal agent
The Bank is a banker and fiscal agent of both Governments of the United Republic of Tanzania and Zanzibar. The Bank may, subject to such arrangements as may be made with the authority concerned, act as a banker and fiscal agent for any public authority.
The Bank in its capacity as banker and fiscal agent of the Governments or of any public authority may be the official depository of the Governments or public authority concerned and accept deposits and effect payments for the account of the Governments or public authority. Further, the Bank performs the following functions: - Maintain and operate special official accounts in accordance with arrangements made between the Bank and the Government or public authority concerned; - Perform as an agent of the Government for servicing the public debt, including the issuance of, payment of interest on, and the redemption of bonds and other securities of the Government; - Pay, remit, collect or accept for deposit or custody funds in Tanzania or abroad; - Purchase, sell, transfer or accepts for custody cheques, bills of exchange and other securities;
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- Collect the proceeds, whether principal or interest resulting from the sale of Government securities or other property; and - Purchase, sell, transfer or accept for custody gold or foreign exchange.
2.3 Credit to Governments
The Bank may, for the purpose of offsetting fluctuations between receipts from the budgeted revenues and payment of the Government: i. make direct advances to the Government for the purposes of offsetting fluctuations between receipts from the budgeted revenues and payments of the Government ii. Purchase, hold and sell negotiable stocks, bonds or similar debt obligations or other securities issued by the Government which shall bear interest at such market rate as determined by the Bank and which mature not later than twelve months from the date of issue.
Each advance made to the Government under the above provisions shall be made solely for the purpose of providing temporary accommodation to the Government and shall accordingly be repayable within one hundred and eighty days. The total amount outstanding at any time of advances made and the Treasury bills and other securities held by the Bank shall not exceed one eighth of the average budgeted revenues of the Government.
2.4 Ownership of the Bank
The Government of the United Republic of Tanzania is the sole subscriber and holder of the share capital of the Bank. The authorized share capital of the Bank is at one hundred billion shillings. The Bank capital may be increased by such amount as may be determined by the Board, and authorized by the Minister of Finance.
3. Formulation and implementation of monetary policy
3.1 Main objectives of monetary policy
The primary Mission of the Bank of Tanzania is to maintain price stability that is conducive to the attainment of macroeconomic stability and achievement of a sustainable rate of real economic growth. In conducting monetary policy, the Bank of Tanzania follows the modalities stipulated in the Bank of Tanzania Act, 2006. The Bank uses a combination of indirect instruments to contain liquidity within desired levels. These include the sale of Treasury bill and Treasury bond; and sale of foreign exchange. Also, the Bank actively uses repurchase agreements (REPOs) to manage short term liquidity movements. The liquidity management efforts are further supplemented by periodic adjustments in the pricing of the liquidity windows at the central bank - namely the bank rate and the Lombard rate, to ensure a consistent level of liquidity in the economy.
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3.1.1 The Bank of Tanzania Inflation Control Strategy
The Bank of Tanzania has the responsibility of ensuring that it establishes monetary conditions that are consistent with low and stable inflation.
i. Low inflation allows the economy to function more efficiently, thereby contributing to a better overall economic performance. ii. The Bank of Tanzania focuses on the Consumer Price Index (CPI) as a measure of inflation. The rate of change in the overall CPI is referred to as the HEADLINE INFLATION RATE. iii. However, the inflation rate that excludes food and energy prices, which is referred to as UNDERLYING INFLATION is used as a measure of policy induced inflation and to some extent as a measure of long-run inflation. Underlying inflation, which is also sometimes referred to as CORE INFLATION, is normally obtained by excluding from the headline measures the prices of certain items that are thought to be volatile enough to obscure long-term movements of inflation. The price index "excluding food and energy" is one well-known example. Several countries compute such indices and consider them in the setting of policy. iv. In Tanzania, the underlying inflation excludes food and energy prices as well because of their volatility, which depends on the supply side factors and believed to be short lived. v. The Bank of Tanzania also monitors food and energy prices and their index. This is because though most of times are affected by non-monetary factors like drought, floods and prices in the global market, can affect inflation substantially regardless of the stance of monetary policy. vi. The Bank further believes that inflation control is not an end in itself, but rather, the means by which monetary policy contributes to overall economic performance. vii. Central banks control inflation by influencing the growth of money supply. The Bank of Tanzania focuses on the growth of reserve money, which is defined as liabilities of central bank, which include currency outside the central bank and deposit money banks’ reserves held by the central bank. Reserve money is chosen because through the money multiplier, its expansion determines the potential growth rate of the broad money supply.
3.1.2 The Modalities of Monetary Policy Implementation
i. At the beginning of every fiscal year, the Bank of Tanzania sets annual monetary policy targets in its Monetary Policy Statement, in line with the broader macroeconomic policy objectives of the government. The targets are reviewed at mid-year. ii. The statement is approved by the Board of Directors of the Bank of Tanzania and submitted to the Minister for Finance of the Government of United Republic of Tanzania, who in turn submits it to the Parliament
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iii. The same procedure is followed in the mid-year review of the Monetary Policy Statement, which shows progress in the implementation of the monetary policy and the outlook for the remaining period. iv. The Monetary Policy Committee of the Board of Directors of the Bank of Tanzania, chaired by the Governor, is responsible for setting the monetary policy direction bi-monthly, consistent with the ultimate objective of maintaining domestic price stability. v. At the operational level, the Liquidity Management Committee, chaired by the Governor, monitors progress on monetary policy implementation on a weekly basis and decide on appropriate measures. vi. At the Bank, the Surveillance Committee, also chaired by the Governor, meets daily to evaluate progress in monetary policy implementation and approve appropriate measures for liquidity management. vii. A Technical Committee reviews liquidity developments on daily basis and advises Surveillance Committee on appropriate daily measures for liquidity management.
3.2 Specific monetary policy objectives for 2012/13
In support of the broader macroeconomic policy objectives of the Government, monetary policy of the Bank of Tanzania will remain focused on attaining price stability, through maintaining appropriate level of liquidity in the economy. Specifically, the Bank aims at achieving the following targets in 2012/13:
i. Annual growth of average reserve money not exceeding 16.0 percent; ii. Annual growth of M3 of 18.0 percent; iii. Annual growth of private sector credit of 20.0 percent; and iv. Accumulation of gross official reserves adequate to cover at least 4.5 months of projected imports of goods and services.
3.3 The monetary policy instruments
In implementing the monetary policy, the Bank employs indirect instruments to influence the level of money supply as: - Open Market Operations (OMOs): This is the main instrument conducted at the initiative of the Bank on behalf of the Government, which involves the sale or purchase of securities (e.g. Treasury bill, Treasury bond) with voluntary participation by individual counterparties in the banking system. This is done in order to withdraw or inject liquidity into the economy to influence the reserve money; - Foreign exchange market operations (FEMO): This instrument involves sale or purchase of foreign exchange by the Bank to or from the economy; - Bank rate: The rate of interest the Bank of Tanzania charges on loans it extends to commercial banks. At present, it is also the interest rate charged on government overdraft from the Bank of Tanzania;
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- Standing facilities: These are borrowing or deposit facilities available at the initiative of banks, usually within limits set by the Bank of Tanzania e.g. Stand-by Lombard and Intraday facility. This is a “safety valve” mechanism for banks to borrow from the Bank but usually a penal rate to discourage frequent use—lending by the Bank is usually collateralized; - Statutory minimum reserve requirement: These are balances which banks are required to keep with the Bank of Tanzania, determined as a percentage of their total deposit liabilities, and their short-and medium-term borrowing. An increase in reserve requirements forces the banks to hold more balances at the central bank; subsequently helps to control liquidity in the system; - Moral suasion: This is an instrument of monetary policy whereby the Bank of Tanzania attempts to influence the behavior of certain economic units in the market (e.g. government, banks, non-banks), using all available means of communication (reports, studies, speeches, etc) in an effort to achieve its objectives.
3.4 Reserve requirements on commercial banks
Reserve requirements in Tanzania are the percentage of commercial banks’ total deposit liabilities1 (both private and government) and their short-term to medium- term borrowings, which are required to be held as reserves at the Bank of Tanzania. The reserves are used for both prudential and for monetary policy purposes. The Bank does not pay interest on these reserves. The prevailing reserve requirement ratio is 10 and 30 percent of total private deposits and Government deposits (including foreign currency deposits) with depository corporations, respectively.
3.5 Refinancing types and collateralization
There are two kinds of refinancing policy—discount policy and Lombard policy, which are used in the execution of monetary policy by the Bank. These monetary policy instruments help the Bank to extend loans to commercial banks at the discount rate and the Lombard rate, respectively, for the purpose of liquidity management in the banking system. The Bank may buy Treasury bill, Treasury bond and other securities from commercial banks at a rate (discount rate) set by itself.
Since December 2003, the Bank introduced Intraday and Lombard standby credit facilities, which provides collateralized loans to commercial banks that have signed master repurchase agreement and subject to short-term liquidity problems. However, the collateral should not be more than 91 days. As collateral for refinancing (Lombard facility), the Bank uses Government securities i.e., Treasury
1 Effective June 9, 2008, government deposits held by banks and financial institutions started to be subjected in the determination of statutory minimum reserve requirements, as it is for other total deposit liabilities and short-and medium-term borrowing.
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bill and bond with maturity exceeding the loan duration, and the amount is more than 100 per cent of the total loan.
4. Structure of the financial markets
4.1 Organisation of the money and capital markets
4.1.1 Money Markets
Tanzania introduced the financial market in August 1993 as part of the financial reforms, the main objective being to manage liquidity in the economy and to finance the government budget deficits. The rates obtained in the government securities market also serve as a benchmark for the determination of interest rates in the market therefore paving the way for market-determined rates. The market is essentially dealing with short-term financial instruments with maturities not exceeding one year, e.g. Treasury bills and repurchase agreements (REPOs).
The Bank is committed to ensure development of efficient financial markets in the country; maintenance of an optimal and stable exchange rate; management of the country's domestic public debt; development of policy framework and strategy for provision of special development finance services and fund management for both the government and the Bank. The following are the measures that the Bank is pursuing: i Strengthen daily open market operations (OMO) ii Development of Secondary Markets: • The Bank will support the development of the secondary market in government securities, so as to deepen the money markets and enhance the liquidity and marketability of government securities. iii Development of New Instruments • Consistent with the growing demands of open market economy, the Bank will support the development of new financial instruments in the market. iv Coordination of the Foreign Exchange System • Due to the growing needs of the economy, the Bank will promote and co-ordinate the development of markets in the economy. v Improvement of Reserves Management • In order to maximize the income of the Bank from its operations, more effort will be directed towards the development and consolidation of reserve management skills and policies in the Bank. vi Facilitate effective management of government debt: • The aim is to build resilient markets, so BOT will be more proactive, i.e. take initiatives and make timely judgement, so as to anticipate market's future outlook with a clear vision. vii Improve Responses to market signals:
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• Responses to market signals of changes in macro-economic conditions, which impact market behavior, need to be improved. viii Further Development of Foreign Exchange Market: • Institute an intervention policy to clearly qualify BOT's actions in the market (trader of last resort, OMO or normal foreign exchange transactions); • Ensure day-to-day monitoring and execute timely and clearly intervene in the IFEM with the view to smoothen out exchange rate movements; • Review the rules and regulations in IFEM operations; • Foster efficiency by facilitating introduction of new instruments in the foreign exchange market; • Enhance and intensify market research and surveillance (local and international); • In collaboration with other market participants, facilitate introduction of electronic trading in the IFEM; and • Analyze and closely monitor linkages between market operations and foreign exchange market developments to guide proper OMO and intervention strategies. ix To accumulate and maintain sustainable level of external reserves: • Participation in the Inter-bank foreign exchange market will be geared towards maintaining a sustainable level of reserves in close collaboration with the Directorate of Economics and Policy. At the same time, the Bank intends to maximize investment interest while minimizing interest cost on borrowing.
4.1.2 Instruments used and structure of the market
The Bank issues government securities to the public through fortnightly auctions (for Treasury bills) and one bond per month (for Treasury bonds) in the primary market. The securities include: - The 35-day and 91-day 182-day, 364-day Treasury bills; - Two-year, five-year, seven-year and ten-year Treasury bonds; and - Repurchase Agreements (REPOs).
Treasury bills are auctioned under a multiple price system in which bidders pay for the price quoted. Settlement for both Treasury bonds and Treasury bills successful bids is T+1 implying that successful bidders are required to pay within one day after the date of the auction.
Primary Dealership The primary dealership system was introduced in January 1999 and the structure of the market is such that participation in the primary market is limited to licensed primary dealers (commercial banks and broker dealers). Public then bids through the primary dealers. Previously, participants with bids worth over TZS 100.0 million were allowed to participate directly, the amount was later reduced to TZS50
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million. In 2006, the Bank allowed participation of direct investors2 and reduced the minimum threshold from TZS50 million to TZS5 million in Treasury Bills/Bonds. To date, there are 18 registered dealers out of which 13 are commercial banks and 5 are broker dealers.
However, the system has failed to perform well, thus suggesting that a lot need to be done in improving the market. This includes linking the primary market to the secondary market. The main reasons for the dismal performance could be due to: - lack of demand for securities as pension funds and insurance companies participate directly in the primary market; - commercial bank dealers purchase and hold securities up to maturity for their own liquidity management objectives; - low capital base by broker/dealers of TZS10 - 20 million as compared to TZS1 billion (minimum) for commercial banks dealers. This makes it difficult for the Bank to enforce requirement of two-way quotation by dealers. In the absence of a two-way quote price system it is difficult to have a dynamic secondary market trading; and - low yields, declining from a level of about 12 per cent, when the system was established in 1999, to the current level of about 5 per cent thereby reducing the trading margins for dealers.
Thus, the Bank continuously reviews the primary dealership system with a view to address the above factors.
Treasury Bonds Two and five - year Treasury bonds were introduced in 1997 and 2002, respectively; and are auctioned by the Bank on behalf of the Government. The seven and ten - year Treasury bonds were launched in August and October 2002, respectively. Initially, the two-year bond was issued fortnightly before it was changed to weekly and allocation was based on uniform pricing. However, currently all Treasury bonds are issued one bond per month through a multiple price bidding system. These bonds are traded at the Dar es Salaam Stock Exchange (DSE).
4.1.3 Capital Markets
The Act establishing the Capital Market and Securities Authority (CMSA) of 1994 provides the authority with a mandate to promote and facilitate the development of an orderly, fair and efficient capital market and securities industry in the country. Two years later, DSE was incorporated but effectively commenced its operations in 1998. Until July 2008, there are about eleven companies indicating that the stock exchange is experiencing a modest growth in terms of listing, market capitalization and trading activities. Out of the listed companies, seven are locally listed:
2 These include pension funds, insurance companies, non-bank financial institutions and individuals.
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- Tanzania Oxygen Limited - Tanzania Breweries Limited - Tanzania Tea Packers - Tanzania Cigarette Company Limited - Tanga Cement Company (SIMBA) Limited - Dar es Salaam Airport Handling Company Limited - National Investment Company (NICOL) - National Micro Finance Bank
Three are cross-listed from Nairobi Stock Exchange namely; - Kenya Airways Limited, - East African Breweries Limited, and - Jubilee Holdings Limited (JHL)
In addition to these companies, the DSE listed six corporate bonds, namely; - EADB bonds, - PTA Bank bonds, - Standard Chartered Bank bonds, - BIDCO bonds, and - Barclays Tanzania bonds.
The 2-year, 5-year, 7-year and 10 year Treasury bonds are also listed.
4.2 Legal Framework
While the Government Loans, Guarantees and Grants Act of 1974 govern Treasury Bills, short-term deposits, inter-bank placements and bank loans are governed by the Banking and Financial Institutions Act of 2006.
4.3 Participating institutions in the money market
- Deposit Money Banks (Commercial Banks) - Insurance Companies - Pension Funds - Non-Bank Financial Institutions - Dealers and Broker Dealers - Investment Advisers - Individuals
5. External payment arrangements
5.1 Determination of the exchange rate policy
BOT is responsible for determining the country's exchange rate policy.
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5.2 The present exchange rate system
Tanzania implements a managed float exchange rate system.
5.3 Conduct of foreign exchange market
The daily Inter-bank Foreign Exchange Market (IFEM) is conducted on Reuters dealing system. The market session starts from 08:30 to 15:00 Hrs during the working days. During the session, sellers and buyers (commercial banks and non- bank financial institutions excluding bureaux) are obliged to quote two way prices (bid/ask). BOT intervenes by selling and buying only to smooth fluctuations.
5.4 BOT as a custodian of foreign exchange reserves
The BOT Act of 2006 has mandated the Bank to manage the gold and foreign exchange reserves of the country.
6. Currency convertibility and exchange control
6.1 Current state of currency convertibility
The Tanzanian shilling is not easily convertible outside East Africa. Within the region, a currency convertibility agreement was reached in 1995. The agreement stipulates that the currency conversions are dealt with commercial banks and foreign exchange bureaux in the region.
Furthermore, commercial banks in the region have to establish special arrangement such that they open and maintain, in their books, currencies of their partner banks in the respective countries. Under the agreement, residents of the East African States are allowed to use their respective national currencies in cross-border transactions; thereby crossing the borders of the three countries with any amount in the three currencies (Rwanda and Burundi are new entrants in the EAC).
6.2 Exchange control restrictions
In July 1996, Tanzania liberalized its current account and currently the exchange rate regime is market determined. The liberalization of the current account is according to IMF’s Article VIII that requires all restrictions on current account transactions with the rest of the world removed. Now, Tanzania operates a free trade and exchange regimes.
6.3 Restrictions on capital account transactions
Currently, Tanzania has not fully liberalized its capital account, a situation that has resulted to limited movement of investment to and from the country. However, the
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country intends to implement a careful, gradual and well sequenced capital account liberalization process in order to ensure that the country benefit mostly from its liberalization. For example, foreign investment in Treasury bills is not allowed. Also, outward investment is not allowed. However, some restrictions have been lifted. For instance, the existing regulations allow non-residents investors to transact in shares and corporate bonds traded in the Dar es Salaam Stock Exchange and not in government Treasury bills and bonds. Foreign investors may purchase up to 60% of the shares issued. The existing regulations also allow residents to enter into foreign loan agreements without prior approval from the Central Bank. Private individuals’ investment abroad is totally restricted, unless approval is obtained from the Central Bank.
6.4 Retention rules for foreign exchange
According to the Foreign Exchange Act of 1992, Tanzania has no regulations on foreign exchange retention.
7. Management of the country’s debt
The responsible institutions that are collaborating in the management of the external debt include the Ministry of Finance, the BOT, Planning Commission, and the Attorney-General Chambers. However, the overall responsibility for the formulation of the country’s debt policies for all Government loans, contracts and accounting remains with the Ministry of Finance.
7.1 The role of the Central Bank in managing the country's debt
Since 1988, the Bank of Tanzania has been charged with the role of recording, monitoring and assisting in the management of Tanzania's debt which covers Government, parastatals and private sector debt (including trade credits).
The Bank therefore implements the country debt policy by: - Collecting comprehensive data on the private sector external debt; - In collaboration with Ministry of Finance, undertake analysis on a comprehensive debt database; - Participating in bilateral loan negotiations and providing advice on the appropriate borrowing terms; - Managing all external debt reductions, debt re-organization arrangements and operations such as the Debt Conversion Program, Debt Buyback and Debt Rescheduling; - Determining priorities for the externalization of debt service payments; and - Managing Government domestic debt.
The Bank employs a computerized debt management system, namely the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS 2000+) in managing the country’s external debt.
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7.2 The role of the Treasury
The Minister for Finance is mandated by the Loans, Grants and Guarantees Act of 1974 (and the amendment Act of 2003), on behalf of the Government to: - Raise foreign and local loans, - Issue guarantees, and - Receive grants.
These funds are aimed at financing Governments budgetary activities.
8. Banking Supervision
8.1 Legislation Governing Banking Business
There are two key pieces of legislations governing banking business in Tanzania namely Bank of Tanzania Act, 2006 and Banking and Financial Institutions Act, 2006. These legislations give powers to Bank of Tanzania to license and supervise banks and financial institutions with the purpose of instituting proper banking practices in the banking system for financial sector development.
In addition to Bank of Tanzania Act, 2006 and Banking and Financial Institutions Act, 2006, the Bank also issued various prudential regulations which intend to institute prudent practices in different areas of banks operations. These regulations set limits to various banking operations so as to reduce the risk exposure facing banks and financial institutions
8.2 Main Supervisory Practices
- BOT uses both on-site examinations and off-site surveillance in supervising banks and financial institutions. In on-site examinations, examiners visit institutions for the purpose of performing risk management review and CAMELS analysis. At the moment supervisory cycle of on site examination for every institution is once a year. In addition, supervisors do verify compliance with laws and regulations and assess the effectiveness of the institutions' internal control system.
- In off-site surveillance analysis of statutory returns is made to assess the financial condition of individual institutions and the industry as a whole. The statutory returns are submitted periodically (i.e. weekly, monthly, quarterly, semi-annually and annually or on ad hoc basis if the circumstances so demand).
8.3 Minimum Capital Requirement
8.3.1 Every bank shall commence operations with and maintain at all times a minimum of core capital of not less than five billion shillings or such higher amount as the
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Bank may prescribe by order published in the Gazette. In addition, at all times every bank shall maintain core capital and total capital of not less than ten per cent and twelve per cent of its total risk weighted assets and off balance sheet exposures respectively.
8.3.2 For the purpose of encouraging provision of banking services to underserved communities in the rural and in the urban, the Bank may establish categories of financial institutions and prescribe capital requirements that may differ from the requirements as stated above, so long as the Bank determines that such capital requirements are reasonable. Tables below indicate initial capital requirements for regional Unit financial institutions and regional unit banks.
Table 1: Initial capital for Regional Unit Financial Institutions Location of Head Office Minimum Capital requirement (TZS) Any regional capital classified as municipality 100,000,000 Any regional capital classified as town and any other 75,000,000 municipality outside the regional capital Any town outside the regional capital 50,000,000
Table 2: Initial capital for Regional Unit Banks Location of Head Office Minimum Capital requirement (TZS) Any regional capital classified as municipality 200,000,000
Any regional capital classified as town and any other 100,000,000 municipality outside the regional capital Any town outside the regional capital 50,000,0000
8.3.3 Every financial institution other than regional units shall commence operations with a minimum core capital of not less than five hundred million Tanzanian Shillings (TZS500,000,000) and shall maintain this minimum amount at all times.
9. National payment, clearing and Settlement system
The national payment system modernisation project in Tanzania commenced in the 1990s following the financial sector reforms with the objective of promoting economic growth and stability of the financial system. The Bank of Tanzania plays a pivotal role in modernization of payment systems in the country. In its facilitation capacity, the Bank has developed efficient payment and settlement systems (Real- Time Gross Settlement Systems (RTGS)), clearing systems (Electronic Clearing House) and encouraged the market to establish retail clearing switches for card payments (domestic and international transactions). The securities systems also include the Central Securities Depository (CSD) Systems for the bond and equity markets. The Bank also oversees the development and implementation of the payment and securities clearing and settlement systems to ensure that they
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comply with the international standards issued by the Bank of International Settlement.
The Bank continues to enhance the national clearing and settlement systems in tandem with market demands and changes in technology. In recent years, mobile phone technology has immensely contributed in bridging the financial access divide in Tanzania. The service is offered by banks and non-financial institutions contributing to financial access of at least 40% of the population hitherto unbanked.
9.1 How is the Payment, Clearing and Settlement system organized?
9.1.1 Payment Systems
Payment systems in Tanzania are categorized into two major streams. These are the large value payment system and retail payment systems: • Large value payment system The large value payment system in Tanzania is a Real Time Gross Settlement System (RTGS) known as Tanzania Interbank Settlement System (TISS). This system processes settlement of large value and time sensitive payments, such as inter-bank net settlement obligations, money market and foreign exchange market settlement transactions.
• Retail payment systems Retail payment systems include cheques, interbank electronic funds transfer (EFT) system, card payments schemes for accessing payment at automatic teller machines (ATMs) and point of sales (POS). Card Payments include debit and credit cards issued by commercial banks. Some commercial banks are issuing proprietary cards and while others issue VISA and Mastercard branded cards. Internet banking and mobile banking services are also offered for payment purpose by commercial banks in the country. Mobile phone payments schemes are deployment by banks and non-banks. Banks offer the bank led mobile banking services using telcos platforms, while Telcos on the other hand are also permitted to deploy mobile payment services. Currently there are four telcos (Vodacom, Airtel, Tigo and Zantel) that aggressively compete in the market.
Remittance services are two fold, domestic and cross-border. Domestic money transfers are provided Tanzania Postal Services. These include moneyfax, Giro and Postal orders. International remittances are offered by commercial banks in partnership with international remittance companies (such Western Union, Money Gram, Travelex, and Coinstar Money Transfer). Western union have also partnered with the telcos offering money services to offer inward remittances services through mobile phone.
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9.1.2 Clearing and Settlement Systems
Final settlement of interbank transactions is effected in the books of accounts held at the central bank through TISS. Interbank payments include net obligations arising from the cheques and EFT clearing houses and card switches.
Inter-bank payments are cleared between banks through local clearing arrangements on bilateral or multilateral arrangements through bankers clearing houses. Bilateral arrangements are practiced where clearing houses do not exist. Currently there are five clearing houses located in the Bank of Tanzania premises at the head office and at its four branches in Mwanza, Zanzibar, Arusha and Mbeya. The Electronic Clearing House (ECH) system was first introduced at the Dar es Salaam Clearing House in 2004, and then rolled over to the other clearing houses.
The ECH facilitate clearing of interbank cheques and EFT credits to produce net settlement obligations for the members. The system is managed by the Bank of Tanzania and member of the clearing houses who are commercial banks. The net settlement obligations from the four clearing centers across the country are the submitted to the Dar es Salaam ECH for consolidation and final settlement in TISS. For risk management purposes, cheque capping is applied in the clearing systems thereby reducing values processed in the net clearing system.
There are two types of cheque clearing systems in Tanzanian. These are the local currency and United States Dollar (USD) cheques clearing.
Card clearing switches facilitate multilateral clearing of net obligation of members of a card switch that arise from interbank card transactions of the issuing commercial banks’ customers. There are three card switches in Tanzania. Domestic switch for proprietary cards owned by a consortium of commercial banks (UmojaSwitch), Visa cards (Tanzania National Net Settlement Services for local visa card) and Master Card switch (for local transactions). Final settlement obligations for TNNSS, UmojaSwitch and MasterCard are settled through members’ accounts held at the central Bank.
9.2 What is the role of BOT in the National Payment Systems?
The Bank plays a dual role in payment systems. These are participatory and regulatory roles.
The participatory role include provision of the core payment infrastructure for clearing and settlement services and provision of risk free assets to ensure finality of payments and stability of the financial system. Specifically, the Bank participates in payments systems as a participant on its behalf and the Government, and provides clearing and settlement services for interbank payments through accounts held at the Banks. The Bank also provides settlement
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services for payment obligations emanating from the clearing houses and card switches.
The regulatory role includes payment systems oversight which involves coordination of the development of the legal and regulatory framework for supporting national payment system, monitoring and assessing the country’s payment systems so as to foster safety and efficiency of national payment systems. In response to financial service developments, the Bank also facilitate development of new payment instruments and infrastructure through provision of policies and guidelines that promote competition, innovation, safe and efficient payments systems. The Bank also provides consultative advice to payment system operators.
The Bank is actively involved in the regional harmonisation workgroup forums for payment systems in the Southern Africa Development Corporation (SADC) and the East African Monetary Affairs Committee (MAC). The Bank also cooperates with central banks of other countries for harmonisation of standards and oversight functions.
For the purpose of involving stakeholders the Bank conducts workshops and awareness programs on the development of payment systems
9.3 Short description of the processing of payment instructions
Payment instructions are either on gross or net basis. Gross payment instructions are made through the large value system TISS on real time interbank payment instruction effected from the paying commercial bank to the TISS on a credit instruction basis where its account in TISS is debited and the receiving banks account in TISS is credited on real time. TISS uses SWIFT network to facilitate secure interbank payment flows.
Net payment processes for interbank is effected using debit instruments such as a cheque or EFT debit. The paying banking account is debited in the net clearing obligation in the BOTECH after final settlement of the net clearing batch in TISS. Origination of the payment instruction is captured at the paying bank in electronic file and routed to the clearing house using the SWIFTnet FileAct for production of net settlement file for final settlement in TISS. The settlement cycle is averaged at T+3.
The Bank in collaboration with Clearing House members in Tanzania are now subjected to a complete automation on its payment clearing operations by moving towards a Cheque Truncation System (CTS) using image based clearing. The system will enhance safety and efficiency in clearing operations for both cheques and EFT payments. The anticipated benefits include reduction of the cheque clearing to up to same day clearing, centralised clearing across the country,
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standardisation of cheques with added security features, reduced operational risks by securing the transmission route as well as reduced cheque handling costs.
The Tanzania Automated Clearing House project is currently at initial phase of implementation and is anticipated to be completed by 2013.
9.4 How are non-funded positions settled in the system?
In principle, settlement is done only where the participant has sufficient funds. The net settlement figures sent from BOTECH to TISS in a batch is not processed for settlement until all banks have sufficient funds to clear their settlement obligations. Banks which do not have sufficient funds or have debit balances in their accounts at the end of clearing periods, are supposed to make funding arrangement for their accounts before 15.30. The arrangement includes borrowing from inter-bank market or approach the Bank of Tanzania for a collateralized Intra-day Loan Facility (ILF) or Overnight lending (Lombard) funding as a last resort. As a mitigating measure for failure to settle the threshold value limit for payment instruments processed through the clearing houses is TZS10 Million local curreny instrument and US$5 000 for USD denominated cheques. Further, the Defaulters Pay Failure to pay mechanism has been adopted to ensure timely completion of daily settlement in the event of an inability to settle by the participant with the largest single settlement obligation.
This mechanism requires all members to pledge collateral which are treasury bills of less than ninety days before maturity. Pledging is conducted before participating in the settlement process. Pledging collateral in advance ensure members of the clearing system that settlement will takes place without any loss to the remaining participants regardless failure of a member to settle its net obligation. The mechanism also ensures that the defaulter bears own obligations as each participant collateralizes fully its own debit position.
10. Currency in use
The BOT Act of 2006 provides the Bank with a sole right of issuing notes and coins, which are the legal tenders for use in the economy. The unit of currency in Tanzania is shilling where 100 cents equals one shilling.
The Banknotes series are in the denominations of Tanzania Shillings 500, 1000, 2000, 5000 and 10000.
The current coins in circulation are as follows: 5 cents, 10 cents, 20 cents, 50 cents, 1 shilling, 5 shillings, 10 shillings, 20 shillings, 50 shillings, 100 shillings and 200 shillings.
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11. Other activities of the BOT
According to the BOT Act of 2006, other functions of the Bank include: - The bank of issue BOT has the sole right to issue notes and coins which are the only legal tender in Tanzania. This role is aiming at directly influencing money supply in the economy for the objective of controlling inflation. - The bank for commercial banks and other financial institutions BOT accepts deposits of commercial banks, issues discounted commercial and Government papers, and the lender of last resort to banks. It also provides central clearance facilities for inter-bank transactions. - The Governments’ bank BOT is the banker and fiscal agent for the Governments and other public authorities. At that capacity, BOT may be the official depository of the Governments and the public authorities’ funds. - The adviser to the government BOT advises the Governments (both Union and Zanzibar) on any matters relating to the Bank and Governments functions, powers and duties. - The custodian of the country’s international reserves BOT is the depository of the official external assets of Tanzania, including gold and foreign currency reserves. - Supervision of banks and financial institutions BOT ensures that commercial banks and other financial institutions conduct their business on internationally acceptable practices. - Promotion of financial stability BOT establishes and promotes an effective financial system, and facilitates financial transactions necessary for the smooth functioning of the economy.
12. Participation in SADC
12.1 Special relationships with other central banks in SADC (CMA excluded)
The BOT supervises operations of the financial institutions in the country and facilitates transactions between Tanzania and the rest of the world. In so doing, it has to establish and maintain close relations with other central banks in the world. In the SADC region, BOT has special relations with central banks in the member States. The Bank participates actively in the regional economic and financial matters through the Committee of Central Bank Governors (CCBG) and exchanges information through publications and the SADC interactive web.
In addition, BOT co-operates with other central banks in areas of training and attachments in order to enhance knowledge, technical skills, exposure and gathering of experience among staff in fields that the Bank determines potential for improving economic and financial sector management.
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13. Bank’s Publications
13.1 Periodic publications - Monthly Economic Review - Quarterly Economic Bulletin - Monetary Policy Statement - Economic and Operations Annual Report - Tanzania Investment Reports (in collaboration with Tanzania Investment Centre and the National Bureau of Statistics) - Tanzania Tourism Sector Survey Report (in collaboration with the Ministry of Natural Resources and Tourism and the National Bureau of Statistics) - Risk Management Guidelines for Banks and Financial Institutions - Financial Stability Reports
13.2 Occasional/special publications
The Bank publishes a number of special and occasional publications, including: - Report on the Proceedings of the Bank of Tanzania Silver Jubilee Symposium, 1991 - Establishment of Rural Community Banks in Tanzania, 1991 - Tanzania Debt Portfolio Review, 1986-1995 - Explaining Inflation, 1995 - Bank of Tanzania - Its Functions and Monetary Policy Instruments, 1995 - The sixth Gilman Rutihinda Memorial Lecture, August 2011 - The Role of Central Banking in Economic Development - The 1st Generation Financial Sector Reforms – 2000 - National Payment Systems Vision And Strategic Framework – 2000 - Tanzania Clearing House: Paper Instrument Standards – 2000 - Export Credit Guarantee Scheme - Operational Guidelines & Document; Third Finance Policy Document (2001) - Criteria for Approving and Registering External Auditors of Licensed Banks and Financial Institutions, 2003 - The Second Generation Financial Sector Reforms (Volumes I & II) – 2007 - National Payment System – Newsletters 1999 – 2007 - Tanzania Mainland’s 50 Years of Independence – A review of the Role and Functions of the Bank of Tanzania (1961 to 2011), June 2011
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Bank of Zambia
Bank of Zambia P.O. Box 30080 Lusaka, ZAMBIA Fax: +260 1 221722 Tel: +260 1 228888 / 228903
1. History
The Bank of Zambia (Bank) was established by an Act of Parliament, under the Bank of Zambia Act of 1964 as amended by the Bank of Zambia Act No.43 of 1996.
2. Relationship with Government
The Bank of Zambia is mandated, under the Act, to formulate and implement monetary and supervisory policies. The powers of the Bank are vested in the Board of Directors who are responsible for policy formulation and general administration of the Bank. The President appoints the Governor and two Deputy Governors for a contract period of five years. The Minister of Finance appoints the members of the Board. The Bank has its own budget and decides on its own finances.
The Bank formulates monetary policy while the Government through the Ministry of Finance formulates fiscal policy.
The Bank acts as banker and fiscal agent of the Government. It also acts as adviser to the Government on matters related to economic and monetary management.
The Government is the sole subscriber to the Bank’s capital.
3. Design and Conduct of Monetary Policy
3.1 Main Objectives of Monetary Policy
The primary objective of monetary policy in Zambia is to ensure the maintenance of price stability in order to promote macroeconomic stability which is a key pre-requisite for sustainable economic growth and development.
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3.2 Instruments of Monetary Policy
In response to the changing financial environment and global consensus, the Bank of Zambia places greater emphasis on market-based (indirect) monetary instruments such as open market operations rather than direct instruments (such as reserve requirements and core liquid asset ratios) in its conduct of monetary policy. This shift from heavy reliance on direct instruments of monetary policy was a central part of the extensive measures taken to liberalise the economy that began in earnest in 1992.
Since January 1993 the Bank has employed both direct and indirect instruments, with a greater reliance on the latter. These are as follows:
Indirect instruments:
Government Securities (Treasury bills and bonds) Auctions Daily Open Market Operations; The discount window; The Overnight Lending Facility (OLF); and Foreign exchange dealings.
Direct instruments:
Core Liquid Asset Ratio Statutory Reserve Ratio
3.3 Types of refinancing as well as collateral used
Daily Open Market Operations, introduced in March 1995, are conducted through the sale of Term deposits of varying maturities and the sale of Treasury bills for outright purchase by the commercial banks when the central bank wants to withdraw liquidity. In addition Repurchase Agreements (Repos) are also used as a liquidity withdrawal instrument. The Treasury bills used in this instance are those on the Bank of Zambia’s trading portfolio. When the central bank intends to inject liquidity into the banking system, it provides secured loans, which are backed by either Treasury bills or Bonds.
3.4 Monetary Policy Implementation Framework
Prior to April 2012, reserve money was the operating target of monetary policy, while broad money, defined as including foreign exchange deposits of commercial banks (M3), was the intermediate target of monetary policy. In April 2012, the Bank of Zambia introduced a policy rate signalling a shift in the monetary policy framework from targeting monetary aggregates (quantities) to targeting interest rates (prices). The Bank of Zambia policy rate is a short-term interest rate used to signal the monetary policy stance. The interbank rate
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effectively becomes the operating target with other interest rates being the intermediate target.
3.5 Reserve requirements on financial institutions
There are two types of reserve requirements for commercial banks in Zambia. These requirements can be summarised as follows: - Statutory reserves ratio on commercial bank deposits; these are unremunerated reserves that commercial banks must keep with BoZ calculated as a percentage of total deposit liabilities (including central government and Vostro Account deposits). The ratio was adjusted upwards by 6 percentage points in March 2014 to 14 per cent from 8 per cent on both Kwacha and foreign currency deposits.
- Core liquid assets ratio; this is the ratio of eligible liquid assets to total deposit liabilities including bills payable (excluding central government deposits). Eligible assets that can be held by commercial banks as core liquid assets include those that are interest bearing such as Treasury bills, Repurchase Agreement (Repos) and Term deposits. Since November 2011 to date, the ratio has been at 6 per cent from 9 percent in July in 2006.
4. Structure of the Financial Markets
4.1 Organisation of the Money and Capital Markets
The financial markets in Zambia, like elsewhere, are composed of money and capital markets. The development and enhancement of these markets over the years have been in part influenced by the shift in policies from reliance on direct to market based monetary policy instruments.
The Money Market Money markets in Zambia are dominated by commercial banks that mainly trade in short-term financial instruments. Currently the main instruments being traded are Treasury bills, Commercial paper, Term deposits and Repurchase Agreement (Repos).
a) The Government Securities Market
The main instruments being traded in this market are Treasury bills and Government bonds. The Treasury bills are offered in four maturity categories, namely 91-day, 182-day, 273-day and 364-day Treasury bills. In January 2012, the frequency of the Treasury bill auctions was changed from weekly to fortnightly. The Bonds are offered in the following tenors: 2, 3, 5, 10 and 15 years portfolios. The 7, 10 and 15 year portfolios were introduced in August 2008 with the view to
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elongating the yield curve and facilitate benchmarking of private pricing of long dated financial instruments. In April 2012, the frequency of government bond auctions was changed from monthly to quarterly. The reduction in the frequency of auctions for both the Treasury bills and government bonds was aimed at promoting the development of the secondary market. The primary market for Government securities is open to banks, non-bank financial institutions and the non-bank public while settlement of transactions is done through banks that maintain accounts at Bank of Zambia. There are also off-tender sales to the non- bank public through authorised dealers. b) The Inter- bank Money Market
The inter-bank market is operated by commercial banks with settlement accounts at the Bank of Zambia. The market activities largely involve borrowing and lending of short-term funds on an overnight basis, although, lending for longer periods is also possible. Commercial banks use the inter-bank facilities for adjusting their reserve positions. The inter-bank market is an avenue through which the central bank monitors and manages liquidity conditions. Broadly, the Bank of Zambia through its daily open market operations via debit or credit auctions (Secured loans, Repos and Term deposits) influences liquidity conditions in the inter-bank market. Banks short of liquidity can purchase funds from the Bank of Zambia by pledging Treasury bills as collateral in the case of secured loans. Alternatively, the Bank of Zambia purchases funds from commercial banks by offering them interest bearing Term deposits with a view to removing excess liquidity from the banking system. c) The Foreign Exchange Market
The structure of the foreign exchange market has evolved over time in line with the policy changes that saw the removal of foreign exchange controls and ultimately the full liberalisation of both the current and capital accounts in 1994. With these developments it was imperative to establish new structures to improve the allocation of foreign exchange. To this end, the Bank of Zambia Dealing Window was established in 1993. This was a wholesale market for commercial banks and major suppliers transacting amounts above US$100,000 per week. The allocation was done through a bidding system.
To enhance the role of the market, the wholesale market was in July 2003 transferred to the commercial banks through the introduction of a Broad Based Interbank Foreign Exchange (IFEM) System. The rationale for introducing the IFEM system was to address the shortcomings in the previous system (BoZ dealing window), in particular, the multiple exchange rates exhibited in the various segments of the foreign
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exchange market. The general public can either buy or sell foreign exchange to commercial banks and bureaux de change.
The Capital Market The most significant development in the capital market was the establishment of the Lusaka Stock Exchange that started operating in February 1994. Currently, there are 22 listed and 78 quoted companies on the stock exchange (Table 1). Other participants are the institutional investors, such as the pension schemes and provident funds which have invested in floated shares. In addition, over-the-counter (OTC) or private trading in shares and bonds for quoted companies has been evident in the recent past.
Table 1 Listed companies Quoted companies African Explosives Zambia PLC Barclays Bank Zambia British American Tobacco Zambia Chibuluma Mines PLC Bata Shoe Company PLC Nanga Farms PLC PUMA Chambeshi Metals PLC Cavmont Capital Holding Zambia PLC Kansanshi Mines PLC Copperbelt Energy Company PLC Konkola Copper Mines PLC Celtel Zambia (ZAIN) PLC Mopani Copper Mines PLC Lafarge Cement PLC REIZ Real Estate Investments ZAMBIA PLC (REIZ) Prima Re-Insurance PLC Investrust Bank PLC National Breweries PLC Pamodzi Hotels PLC Standard Chartered Bank PLC Shoprite Holdings Limited - RSA Zambeef Products PLC ZAMEFA Zambian Breweries PLC ZCCM Investment Holdings PLC ZANACO Zambia Sugar PLC
Government bonds are also traded on LuSE (since March 1998) with a view to enhancing liquidity in the financial system and to develop an active secondary market for Government bonds.
4.2 Instruments used in both these markets
The instruments being traded in the money market are Treasury bills, Commercial paper, Term deposits and Repurchase Agreements (Repos). In the capital market, Government bonds, shares or equities and bonds are the main instruments traded.
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4.3 Legal frameworks existing for the money and capital markets
The legal framework that exists for the capital and money markets in Zambia is found in the Banking and Financial Services Act, Cap 387 of the laws of Zambia as amended in 2000, Securities Act, Cap 354 of the laws of Zambia, Loans and Guarantees Act, Cap 366 of the laws of Zambia, Companies Act, Cap 388 of the laws of Zambia. In addition, the Bank of Zambia issues guidelines to commercial banks from time to time.
4.4 Type of financial intermediaries operating in these markets
Commercial banks, non-bank financial institutions and the public operate in the money markets while non-bank financial institutions such as insurance companies, pension funds, the Lusaka Stock Exchange and other private licensed dealers and the public operate in the capital market.
5. External Payment Arrangement
5.1 Determination of the Exchange Rate Policy
The Bank of Zambia is responsible for determining the exchange rate policy in conjunction with the Ministry of Finance and National Planning.
5.2 The Present Exchange Rate System
At present, the exchange rate is fully market-determined depending on supply and demand conditions in the interbank foreign exchange market.
5.3 Organising the Exchange Market
The foreign exchange market has been liberalised since 1992. This led to the repealing of the Exchange Control Act, CAP 593 in January 1994. Exporters are now allowed to retain 100 percent of export proceeds. There are three segments in the foreign exchange market, namely: - The Broad Based Inter-bank Foreign Exchange Market System (introduced in July 2003); - Commercial banks; and - The foreign exchange bureau market.
The exchange rate is market determined in all these segments of the market. Furthermore, the introduction of a more transparent Broad Based Inter-bank Foreign Exchange Market has improved information flows to the general public and narrowed the spread between the wholesale and retail markets considerably.
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5.4 The Central Bank’s Involvement in Managing Foreign Exchange Reserves
The Bank of Zambia is responsible for the management of the country’s foreign exchange reserves and only participates in the market for purposes of either purchasing foreign exchange to build up reserves or selling/purchasing to smoothen out any swings in the exchange rate.
6. Currency Convertibility and Exchange control
There are no exchange controls on current or capital account transactions. The currency is fully convertible regionally and internationally.
7. The Central Bank and External Debt
7.1 The Role of the Central Bank in Managing the Country’s External Debt
The Bank of Zambia is responsible for monitoring and recording private sector external debt. In addition, the Bank maintains data on the country’s overall external debt position. Further, it is responsible for ensuring that the Government’s external debt service obligations are processed and payment is effected on time. The Bank works closely with the Government on various debt reduction strategies such as the Debt Sustainability Analysis (DSA) and the National Debt Strategy to guide debt management
7.2 The Role of the Treasury
The Treasury dictates the terms and conditions for managing the country’s external debt. The Government through its External Resources Mobilisation (ERM) Department is responsible for contracting external loans and maintenance of all data pertaining to these loans. The external loans are also repaid by Government through the External Resource Mobilisation Department which gives instructions to the Bank of Zambia to effect debt service payments.
8. Supervision of Financial Institutions
8.1 Banking Institutions
8.1.1 Authority responsible for Banking Regulation and Supervision
The Bank of Zambia is responsible for the supervision of banks as provided in the Banking and Financial Services Act of 1994 as amended in 2000.
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8.1.2 Licensing procedures for establishing a Bank in Zambia
The applicant submits a completed application form (Form BF1) provided by the Bank of Zambia together with a non-refundable application fee, currently nine (9) million Kwacha (approximately US$1 900). The application requirements include the following: - A business plan with full particulars of the business the applicant proposes to conduct and three years’ financial projections; The company’s articles of association; - Addresses of the head office and branches; directors, details of proposed board; chief executive officer and chief financial officer; and shareholders with holdings in excess of one per cent; Start-up capital; and - Such assurances and evidence of the foregoing as the Registrar may require to be given by the applicant.
The Registrar shall examine the application within 180 days after receipt of a completed application for a banking license taking the following into consideration: - Capital adequacy of the applicant; - The applicant and his associates and affiliates’ financial condition, resources and history; - The character and experience of directors and management and major shareholders; - Convenience and needs of the community to be served by the business; and - Prospects of profitable operation of the business.
If no reply is received by the applicant within 180 days, the application is deemed to have been successful.
8.1.3 Types of licenses that exist
- Banking licenses; and - Financial institutions licenses.
8.1.4 Minimum Capital Requirements for the different types of Banks
Revision of the Capital Adequacy Framework - On 30 January 2012, the Bank of Zambia announced higher minimum capital requirements for commercial banks. The minimum primary capital was raised from K12 billion to K104 billion (approximately US$20 million) and K520 billion (approximately US$100 million) for local and foreign owned banks, respectively. In addition, the primary capital shall be made up of at least 80% in nominal paid-up common shares. The banks have been given up to 31 December 2012 to progressively build up their primary capital to the required amount.
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8.1.5 Regulations governing current activities of Banks
- Large credit exposure: Statutory Instrument No. 96 of 1996 - Large Loan Exposures Regulations. - Capital adequacy: Statutory Instrument No. 184 of 1995 - Capital Adequacy Regulations. - Liquidity ratio: S41 (1) (a) Bank of Zambia Act 1996 - Circular No. SCH/CB/1/98. - Open foreign exchange position: Statutory Instrument No. 57 of 1996 - Foreign Exchange Risk Management and Exposure Regulations. - Provision for bad debts: Statutory Instrument No. 142 of 1996 – Classification and Provisioning of Loans Regulations. - Cost of borrowing regulation: Statutory Instrument No. 179 of 1995. - Payment of fees regulation: Statutory Instrument No. 180 of 1995. - Return of unclaimed funds regulations: Statutory Instrument No. 181 of 1995. - Reserve account regulations: Statutory Instrument No. 182 of 1995. - Disclosure of deposit charges and interest regulations: Statutory Instrument No. 183 of 1995. - Fixed assets investments regulations: Statutory Instrument No. 185 of 1995. - Restricted lending: Statutory Instrument No 96 of 1996 - Large Loans Exposures Regulations. - Statutory Instrument No. 97 of 1996 - Insider Lending Regulations
8.1.6 Main supervisory practices
The two main supervisory practices used are as follows:
a) Off-site inspections which entail receiving and analysing the following returns: - Balance sheets; - Income statements; - Capital position computations; - Classification of loans and provisions; - Large loans; - Insider loans; - 20 largest loans; - Sector analysis of loans; - Foreign exchange risk management and exposure; - 20 largest depositors; - Investments is fixed assets (bi-annual); and
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In addition, off-site reviews are complimented by external audit reports on capital adequacy, loan loss provisioning and corporate governance issues, to mention a few.
b) On-site inspections entail actual visitation by inspectors to investigate the banks and financial institutions at their premises and provide inspection reports on the soundness of these institutions.
8.1.7 Measures to remedy deficiencies as well as penalties utilised when implementing supervisory actions
The measures that constitute supervisory actions used to remedy deficiencies and institute penalties are as follows:
- Restriction of operations except with the Bank of Zambia approval, e.g. lending expansion through opening of new branches, purchases of fixed assets, e.tc; - Removal of erring officers; - Restrictions on the payment of dividends, management fees and other capital related payments; - Bank of Zambia takes possession of the bank; - Revocation of banking licenses and restructuring of the bank with Bank of Zambia approval; and - Penalties in the form of fines and imprisonment or both for breach of any part of the provisions of the Banking and Financial Services Act.
8.2 Non-banking financial institutions
The Banking and Financial Services (Amendment) Acts of 2000 and 2005 (BFSA) extended the Bank of Zambia’s regulatory and supervisory mandate to non-bank financial institutions, whether or not licensed by the Bank of Zambia, providing regulated financial services prescribed under the BFSA. Thus, non- bank financial institutions, such as development banks, building societies, and savings and credit banks, which were established under separate statutes and were previously not supervised by the Bank of Zambia, are now regulated and supervised by the Bank.
Furthermore, the provisions of the Building Societies Act, the Development Bank of Zambia Act, and the National Savings and Credit Act, were harmonized with the BFSA in 2005 through respective amendments to the Acts. Microfinance institutions were brought under the regulation and supervision of the Bank of Zambia with the passing of Statutory Instrument No.3 of 2006, the Banking and Financial Services (Microfinance) Regulations, on 30 January 2006.
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The Bank of Zambia co-operates with other financial sector regulatory and supervisory agencies in discharging its duties. These include: - The Pensions and Insurance Authority (PIA): this is the independent regulator set up under the Pensions and Insurance Act to regulate the operation of insurance and pension schemes; and - The Securities and Exchange Commission (SEC) which is responsible for supervising the stock exchange.
The supervisory bodies for non-bank financial institutions and applicable laws are shown in the Table 2 below:
Table 2: List of Supervisory Bodies and Applicable Laws and Regulations Financial Supervisory Applicable laws and regulations Service Provider body Banks Bank of Zambia Banking and Financial Services Act as amended, regulations listed under 8.1.5, the Prohibition and Prevention of Money Laundering Act of 2001, National Payment systems Act of 2007, supporting regulations and directives. Leasing Bank of Zambia Banking and Financial Services Act as amended, companies regulations listed under 8.1.5, the Prohibition and Prevention of Money Laundering Act of 2001, supporting regulations and directives Bureaux de Bank of Zambia Banking and Financial Services Act as amended, the change Bureaux de Change Regulations of 2003, the Prohibition and Prevention of Money Laundering Act of 2001, supporting regulations and directives Development Bank of Zambia The Banking and Financial Services Act as amended, finance the Development Bank of Zambia Act of as amended, institutions the Prohibition and Prevention of Money Laundering Act of 2001, supporting regulations and directives. Building societies Bank of Zambia The Banking and Financial Services Act as amended, the Building Societies Act as amended, the Prohibition and Prevention of Money Laundering Act of 2001, supporting regulations and directives. Savings and Bank of Zambia The Banking and Financial Services Act as amended, credit institutions the National Savings and Credit Bank Act as amended, the Prohibition and Prevention of Money Laundering Act of 2001, supporting regulations and directives. Microfinance Bank of Zambia The Banking and Financial Services Act as amended, institutions the Microfinance Regulations of 2006, the Prohibition and Prevention of Money Laundering Act of 2001, supporting regulations and directives. Credit reference Bank of Zambia The Banking and Financial Services Act as amended, bureaux the Prohibition and Prevention of Money Laundering Act of 2001, supporting regulations and directives. Insurance and Pensions and Pension Scheme Regulation Act No. 28 of 1996 and pension funds insurance the Insurance Act no 27 of 1998 authority Securities and Securities and Securities Act, 1993 exchange exchange institutions Commission
8.2.2 Categories of non-bank financial institutions and their licensing procedures
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The licensing procedure for non-bank financial institutions is the same as that for banks, with the major differences being the capital and shareholding requirements. The minimum capital requirements for the various non-bank financial institutions supervised by the Bank of Zambia are shown in Table 2 below.
The provisions for the minimum capital requirements can be found in the following documents: • Banking and Financial Services (Capital Adequacy) Regulations, 2005 (with amendments); • Banking and Financial Services (Microfinance) Regulations, 2006; • The Banking and Financial Services (Capital Adequacy) Notice, 2006; • Circular No. 6/2003 for Bureaux de Change.
Application and annual licence fees for the various categories of non-bank financial institutions can be found in Table 3 below.
Table 3: Minimum capital requirements for non-bank financial institutions Application Annual Institutional type Minimum capital requirements fee licence fee Development K7.5 million or 10% of risk weighted K5,400.00 K2,700.00 finance institution assets, whichever is higher Leasing companies K1.5 million or 10% of the risk weighted Deposit taking K5,400.00 K2,700.00 assets, whichever is higher. K500,000 or 10% of the risk weighted Non deposit taking K5,400.00 K2,700.00 assets, whichever is higher. Microfinance institutions K250,000 or 15% of the risk weighted Deposit taking K5,400.00 K2,700.00 assets, whichever is higher. K25,000 or 15% of the risk weighted Non deposit taking K1,000.00 K600.00 assets, whichever is higher. K2.0 million or 10% of the risk weighted Building societies K5,400.00 K2,700.00 assets, whichever is higher. Savings and credit K2.0 million or 10% of the risk weighted K5,400.00 K2,700.00 institutions assets, whichever is higher. Bureaux de change K40,000.00 K5,400.00 K10,800.00 Credit reference K1.0 million K5,400.00 K2,700.00 bureaux
The maximum shareholding limit for all non-deposit taking non-bank financial institutions is 50 per cent of the total voting shares per person as stipulated in the Bank of Zambia (Limitation of Voting Control for Financial Businesses) Directive, 2006. The maximum shareholding limit for deposit taking non-bank financial institutions is 25 percent of the total voting shares per person as stipulated in the Banking and Financial Services Act.
The BFSA, as well as related subsidiary laws, apply to all categories of non- bank financial institutions. Laws and regulations that are specific to the non-
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bank financial institutions supervised by the Bank of Zambia can be found in Table 2.
9. National Payment, Clearing and Settlement System
9.1 How is the payment, clearing and settlement system organised?
The Bank of Zambia, working with the key stakeholders, has worked to reform the payment system in Zambia to embrace the international standards of risk control. Risk management has been a key feature of the modernisation and reform of the payment system in Zambia.
The independent clearing house i.e. the Zambia Electronic Clearing House processes two payment streams namely Cheque Image Clearing system and Electronic funds transfers.
• Cheque Image Clearing System This is a predominantly retail payment stream implemented on 1st February 2013 which enables cheque images to be exchanged between banks through the ZECHL and settled on the Zambia Inter-Bank Payment and Settlement System (ZIPSS) at Bank of Zambia. Automation of cheque clearing has resulted in shortening and standardisation of the clearing and settlement period for cheques across the country to between one (T+1) and two days (T+2) from the previous three to ten days.
Cheque Truncation is also expected to enhance customer service, reduce the scope for clearing related frauds, minimize cost of clearing cheques, reduce reconciliation problems as well as eliminate logistical problems.
• Electronic Funds Transfers Clearing (EFT) The DDACC payment stream that was implemented in October 2001 was enhanced in 2013 to a new system namely the Eelectronic funds transfers’ payment stream. The Eelectronic funds transfers’ payment stream is a retail payment stream that include both direct debits and direct credit instructions. The payment system operates on the Credit Push principle with multiple settlements per day. This enables banks to manage their positions better with advance information from the system. The service is used mainly to settle utility bills and pay salaries. Customer payment instructions are settled and effected to beneficiaries’ account within the same day.
• Zambia Interbank Payment and Settlement System As part of the reforms the Bank of Zambia implemented the ZIPSS in 2004. The ZIPSS enable commercial banks to effect high value and time critical funds transfer electronically in real time. ZIPSS is typically based on agreements among the participants to transfer funds using agreed technical infrastructure. Settlement is effected in central bank money. Settlement instructions are, pre- funded, on a credit push basis, final, irrevocable and exposures are visible.
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In order to participate on the ZIPSS, commercial banks are required to have pledged collateral for use to ensure settlement of gross transactions and/or clearing obligations at the designated time. Further, the Bank of Zambia has in place intraday and inter-day loan facilities for access by the commercial banks so as to ensure settlement of transactions.
Other payment streams include:
• Card schemes - Card schemes are the main providers of credit and debit card transactions including automated teller machines and point of sale terminals. The main players include the commercial banks which provide these services to their customers. • Mobile payments/Electronic money (e-money) – E-money is a monetary value (claim on the issuer) which is stored in an electronic device (mostly mobile phones) and is accepted as means of payment by undertakings other than the issuer. E-money can take the form of pre- paid cards, or it can be stored on a device. The mobile payments services cater for commercial banks, financial institutions, corporate companies, government as well as the general public. • Electronic Funds Transfer (EFT)/SWIFT - This is the system used to make foreign payments. Swift also processes local currency transactions that settle on the ZIPSS/RTGS system. This service is mainly provided by the banks.
9.2 What is the role of the central bank in the payment system?
The National Payment Systems Act of 2007 provides for the management, administration, operation, supervision and regulation of payment, clearing and settlement systems in Zambia. The Act empowers the Bank of Zambia to develop and implement policy so as to promote efficiency, stability and safety of the financial system in Zambia.
Under the Act the Bank of Zambia is given the responsibility of designating and overseeing payment systems and payment systems businesses so as to promote efficiency and safety in the national payment systems. The responsibilities of the Bank of Zambia include the following: • Formulation of policies and regulatory framework • Implementation of policies, laws, regulations etc. • Designation of payment systems and payment systems business • Payment systems oversight • Promote payment systems developmental issues • Provision of settlement services through the Real Time Gross Settlement system.
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9.3 Short Description of the Processing of Payment Instructions
• Physical Inter- bank Clearing (PIC) The Cheque Image Clearing Payment stream is hosted by the Zambia Electronic Clearing House (ZECH) which AT END OF EACH BUSINESS DAY nets obligations of commercial banks for cheque images exchanged between banks. There is only one clearing Centre, and each participating bank has one central clearing Centre.
Banks maintain settlement accounts at Bank of Zambia (BOZ) and through these accounts; settlements instructions are debited or credited based on the net settlement position.
Settlement of obligations between banks arising from the cheque image clearing stream are settled once at end of close of business day.
• Direct Debit and Credit Clearing (DDACC) The EFT payment stream is a simple, safe and speedy way to pay salaries, regular bills and subscriptions electronically from a customer’s bank account. The payment platform is hosted by ZECH.
It has two streams - Direct debits and Direct credits. The direct debit stream is an efficient way for organisations to collect regularly occurring payments in batched form from a numbers of customers. The direct credit enables the customer to make payments directly into a bank account.
Settlement of obligations between banks arising from the electronic funds transfers’ stream is settled every two hours and is done within the business day.
• ZIPSS/RTGS Real-Time Gross Settlement processing and settlement of transactions takes place continuously in real time (processing transactions at the time they are received rather than later) on a transaction by transaction (gross). This allows risks to be managed immediately and continuously. All transactions are on CREDIT PUSH.
9.4 How are non-funded positions settled in the system?
Non-funded positions are settled through borrowing in the inter-bank money market, Bank of Zambia open market operations, the re-discount of Treasury bills and liquidation of collateral deposited with the Bank of Zambia. For settlement of clearing house obligations, all the above sources are used. Additionally, a bank is required to deposit collateral specifically for the clearing house obligations. In case of default and the clearing house collateral is utilised, the defaulting bank will be excluded from the clearing if the liquidated collateral was not replaced until such condition is met.
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10. Currency in use
10.1 List of legal tender notes and coins currently issued and in use in the economy
Currency: - Kwacha (K) 100 Ngwee equals one Kwacha Notes: - K100; K50; K20; K10; K5; K2 Coins: - K1; 50 Ngwee; 10 Ngwee; 5 Ngwee
Rebased K50 000/1000 = K50 K20 000/1000 = K20 K10 000/1000 = K10 K5 000/1000 = K5 K1 000/1000 = K1 Coin K500/1000 = K0.50 Coin K100/1000 = K0.10 Coin K50/1000 = K0.05 Coin
11. Other Activities of the Central Bank not Covered Above
The Bank has the sole right to issue and regulate all matters relating to the currency of the country.
12. The Position of the Central Bank in SADC
12.1 Special Relationships with Other Central Banks in SADC (CMA excluded) None, except through decisions taken by the Committee of Central Bank Governors in SADC.
13. Publications
13.1 Regularly published publications
- Bank of Zambia Annual Report - Quarterly Financial and Statistical Review - Quarterly Business Opinion Survey - Fortnightly Statistics Bulletin - The Bank of Zambia Reader published annually starting 2003
13.2 Occasional / special publications published since 1990
The History of the Central Bank 1964 – 1994
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Reserve Bank of Zimbabwe
Reserve Bank of Zimbabwe 80 Samora Machel Avenue P. O. Box 1283 Harare, Zimbabwe Tel: + 263 4 703000 Fax: + 263 4 705890 or 263 4 705979 www.rbz.co.zw
1. History
The Reserve Bank of Zimbabwe (Reserve Bank) has its origins in the Bank of Rhodesia and Nyasaland, which was established in 1956 as a Central Bank for the Federation of Rhodesia and Nyasaland. The Bank of Rhodesia and Nyasaland was the successor to the Central Currency Board. The dissolution of the Federation of Rhodesia and Nyasaland saw the establishment of the Reserve Bank of Rhodesia in 1964, which was thereafter succeeded by the Reserve Bank of Zimbabwe at independence in 1980.
2. Relationship with Government
The Reserve Bank of Zimbabwe Act [Chapter 22:15] defines the Bank’s relations with the State. The Reserve Bank is answerable to the Minister of Finance and Economic Development, who has the power to give general directions on all policy issues and determines the budget of the Reserve Bank. Consequently, the Reserve Bank enjoys a limited degree of autonomy with which it performs its statutory functions.
The President of the country appoints the Governor and his two Deputies for renewable five year terms, not exceeding two terms. The Board of the Reserve Bank consists of the Governor, Deputy Governors, a representative of the Ministry of Finance and Economic Development and not fewer than five or more than nine Directors, who are appointed by the President after consultation with the Minister.
The Reserve Bank is banker to the Government, and also advisor to the Government on all financial and economic matters. While the Reserve Bank is still the sole issuer of local currency, this function is currently not being undertaken since the adoption of the multicurrency regime in February 2009.
In addition, the Reserve Bank manages the Government debt and is responsible for issuing Government bonds and Treasury bills.
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3. Structure
The Reserve Bank specialises in central banking operations. Its structure is, therefore, consistent with this mandate.
4. Design and conduct of monetary policy
4.1 Payment Systems Oversight and Operations
The Reserve Bank has a significant interest in ensuring that the development of payment systems evolves in an orderly manner which promotes electronic transactions, consumer protection, interoperability and financial inclusion in the country. Oversight of payment systems influences the designing and functioning of financial market infrastructures in the economy. In view of that, the payment systems oversight activities continued to be guided by regulatory requirements and international best practices which embrace the public interest objectives of safety and financial stability. Additionally, the Bank collaborates with other regulatory bodies locally, regionally and internationally which are key in the development and oversight of payment systems.
The cheque system is one of the oldest payment streams as denoted by the Bills of Exchange Act of 1895 governing its operations. Technological advancements and economic deregulation of the telecoms sector in the 1990s resulted in the development of the card system with ATM and Point of Sale (POS) transactions. Subsequent collaboration by the banks led to the creation of a local card switching platform Zimswitch offering ATM and POS transactions across banks. In addition, local banks were certified as acquirers of ATMs and POS and issuers of VISA, MasterCard cards and recently China Union Pay. This enabled international card transactions.
Notable strides were registered in modernizing and diversifying payment systems through collaborative efforts with the banking industry and other stakeholders. Pursuant to that, the National Payment Systems Steering Committee (NPSSC) and the National Payment System Project were formally constituted in 1997 under the NPS Steering Committee. The committee recommended the establishment of The National Payment Systems (NPS) function in the Reserve bank in 1998. This was in response to the increasing awareness on the need, by Central Banks, to pay undivided attention to payment systems issues.
To ensure that the National Payment System has a sound legal basis, the National Payments Systems Act [Chapter 24:23] was passed into law in November 2001. It authorizes the Reserve Bank to operate the settlement system and to recognize and oversee payment systems. The Central Bank is currently in the process of reviewing banking laws in order to align them to new developments in the market brought about by the improvements in
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technology. In November 2002, the Real time Gross Settlement (RTGS) System called the Zimbabwe Electronic Transfer and Settlement System (ZETSS) was set up in line with international best practice of reducing risks associated with clearing and settlement of large value transactions.
Retail payment streams like internet banking applications, SMS banking applications and bulk payments were adopted by the market. The Reserve Bank has continued to deepen and widen the payment systems landscape through the promotion of electronic retail payment streams such as mobile financial services. The financial services sector embraced this development by leveraging on the high mobile phone penetration rate.
The Centralized Securities Depository (CSD) for Government Securities, which facilitates the achievement of Delivery Versus Payment (DvP) and is interfaced with ZETSS, was established in 2006. The CSD is meant to reduce risks associated with the security settlement systems. Following the introduction of the multicurrency system, all clearing and settlement systems were realigned to the use of United States Dollar (USD) as the settlement currency. Subsequent to that, in 2014, the CSD for equities operated by Chengetedzai Depository Company was set up to ensure efficiency in securities settlement systems.
Efforts to encourage financial inclusion saw the Zimbabwean market embracing the mobile financial services and other electronic means of payment on a larger scale as an alternative to manual and cash-based payment stream. Since 2009, notwithstanding other measures in place, payment streams have largely remained key drivers of financial inclusion agenda through digital payment systems.
4.2 Instrument of monetary policy
Under the multicurrency framework, the instruments of monetary policy have not been used as the role of the Central Bank has largely been limited to financial sector stability, administration of the national payment systems, Exchange Controls and Policy Advice to the Government on financial matters and the development of interbank markets.
4.3 Reserve Requirements - Statutory reserves
The statutory reserve policy was undertaken as part of liquidity risk management measures in the banking system. With effect from 28 July 2010, the Reserve Bank of Zimbabwe abolished the statutory reserve requirements for all banking institutions in an effort to release more resources for lending to banks.
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5. Structure of the financial markets
As at 30 June 2015, there were 18 operating banking institutions, comprising thirteen (13) commercial banks, three (3) building societies, one (1) merchant bank, one (1) savings bank and 147 microfinance institutions. This follows the cancellation of the banking licence for one commercial bank on 24 February 2015. The Reserve Bank has also under its purview the Small & Medium Enterprises Development Corporation (SEDCO) and the Infrastructure Development Bank of Zimbabwe (IDBZ), following amendments to the Banking Act, [Chapter 24:20] to provide for their supervision by the Reserve Bank.
In its efforts to promote financial inclusion the Reserve Bank established deposit taking microfinance institution dedicated to support low income and micro, small & medium enterprises. In this regard, the Reserve Bank has so far licenced two deposit taking microfinance institutions.
5.1 Organisation of the Money and Capital Markets
Money market Prior to the adoption of the multicurrency regime the Zimbabwe money market was well developed trading instruments that include Treasury bills, Bankers Acceptances, Commercial paper and NCDs. The issuer base for securities deep comprised of the Government, Banks, local authorities, public enterprises and corporates. The money market had an active secondary market.
The liquidity crunch currently prevailing in the money market coupled with counterparty risk has resulted in depressed secondary market activity. At the beginning of the multi-currency regime secondary market trading was stifled by lack of acceptable security with Bankers Acceptances being the main instruments of trade. Initially, the Government operated a strict cash budgeting framework. Of late Government securities in the market have been used as collateral for inter-bank borrowing. Secondary market trading of securities has remained subdued.
Interbank Market Facility Following the adoption of the multicurrency system in 2009, the banking sector increasingly became segmented with a two tier system emerging with some banks having excess liquidity while others were short. The interbank market was therefore not functioning appropriately largely due to risk considerations. In order to unlock the excess liquidity at the surplus banks for the benefit of the short institutions, a regional financier came in to provide a guarantee. Instruments belonging to the regional financier, which is BBB rated were issued to the surplus banks and the funds raised were then on-lend to the
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banks requiring liquidity. The arrangement has worked more like the lender of last resort facility of the Central Bank.
Treasury Bill auctions Prior to the adoption of the multiple currency framework in February 2009, Treasury bill auctions were held to fund Government requirements, as well as for open market operations (OMO). These auctions were announced in advance to the market and conducted periodically. Government tenders were, however, synchronized with Central Bank tenders for OMO bills, in order to strengthen the congruency and effectiveness of both fiscal and monetary policies. OMO Treasury bills were issued on a daily basis; to mop-up any projected excess liquidity inflows into the market.
From 1 January 2012, the Government issued 2 to 4 year Government bonds against outstanding statutory reserve balances at the Reserve Bank. During 2013, several treasury bills with tenor ranging from 91 days to 1 year were issued to finance various Government operations. The Treasury bill auctions, have been ad-hoc as there is no borrowing programme. Currently, Treasury bill issuances have been through private placements.
5.2 Legal Frameworks existing for the Money and Capital Markets
The Central Bank’s activities are governed by the Reserve Bank of Zimbabwe Act [Chapter 22:15]. The defined functions of the money market are also supported by the country's various other pieces of legislation. The Banking Act [Chapter 24:20], provides for the registration, supervision and regulation of persons conducting banking business and financial activities in Zimbabwe. It is the Banking Act [Chapter 24:20] that regulates the operation of key financial market players like banks and discount and finance houses.
The Banking Act also provides for banking institutions to engage in mortgage lending, subject to approval by the Registrar of Banking Institutions. The Building Societies Act [Chapter 24:02] governs building societies whilst the People’s Own Savings Bank Act [Chapter 24:22] establishes the People’s Own Savings Bank of Zimbabwe (POSB) and provides for its functions and administration. In 2005, the Banking Act was amended to ensure that the POSB became subject to supervision by the Central Bank. In addition, certain sections of the Banking Act also apply to building societies. In addition to the above, there are other pieces of legislation relevant to the operations of the financial sector, and/or applied by the Reserve Bank in the execution of its mandate.
The following are the relevant pieces of legislation: (a) The Bank Use Promotion Act [Chapter 24:24]: seeks to promote the use and suppress the abuse of the banking system. Through the Act, a Bank Use Promotion and Suppression of Money Laundering Unit has been
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established to regulate financial conduct and transactions. The Act also requires financial institutions and cash dealers to take prudential measures to help combat money laundering.
(b) National Payment Systems Act [Chapter 24:23]: provides for the recognition, operation, regulation and supervision of systems for the clearing of payment instructions between financial institutions, for the netting or other settlement of obligations arising from such clearing and the discharge of indebtedness arising from such netting or settlement. It also makes provision for the finality of payments and settlements made in accordance with such systems.
(c) The Securities Act [Chapter 24:25] establishes the Securities Commission and provides for its objectives, functions and powers. It further seeks to control and regulate the marketing of securities and investment in securities, to regulate and register securities exchanges, to regulate and license persons who trade or deal in or manage securities, to provide for the establishment and functions of central securities depositories to facilitate the marketing and transfer of securities, to prohibit individuals who have inside information relating to securities from dealing in those securities and to provide for criminal and civil penalties for such dealing and for other improper practices.
(d) Asset Management Act [Chapter 24:26]: regulates and controls the business of asset management in Zimbabwe. It provides for the appointment and functions of a Registrar of Asset Managers and other officers. The business of asset management falls under the purview of prudential regulation and supervision by the Securities Commission of Zimbabwe.
(e) The Collective Investment Schemes Act [Chapter 24:05]: regulates and controls the promotion and operation of collective investment schemes in Zimbabwe. It also provides for the appointment and functions of a Registrar of Collective Investment Schemes and other officers. The schemes are also supervised by the Securities Commission of Zimbabwe.
(f) The Deposit Protection Corporation Act [Chapter 24:29]: establishes a Deposit Protection Corporation and provides for its management, functions and powers. The Act provides for the establishment of a Deposit Protection Fund for the compensation of depositors in the event of financial institutions becoming insolvent. The Act makes provision for the administration and application of the Fund. The Act has amended the Banking Act [Chapter 24:20] by the repeal in the latter Act of provisions relating to deposit protection.
(g) Troubled Financial Institutions (Resolution) Act [Chapter 24:28]: This Act provides for the administration of troubled financial institutions. There are
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provisions in the Act that seek to provide for formulation and implementation of schemes of resolution in respect of such institutions.
(h) The Export Credit Reinsurance Act [Chapter24:06]: makes provision for the promotion of trade with countries outside Zimbabwe by providing for the reinsurance with the State of insurance contracts in connection with export transactions and loans or similar facilities connected with such transactions.
(i) The Exchange Control Act [Chapter 22:05]: The Exchange Control Act confers powers and imposes duties and restrictions in relation to gold, currency, securities exchange transactions, payments and debts, and the import, export, transfer and settlement of property. The Act and regulations are also applied for purposes connected with the matters aforesaid.
(j) The Zimbabwe Investment Authority Act [Chapter 14:30]: was enacted to make provision for the establishment of the Zimbabwe Investment Authority and its functions. The Act also provides for the promotion and co- ordination of investment. The Act repealed the Zimbabwe Investment Centre Act [Chapter 24:16] and the Export Processing Zones Act [Chapter 14:07].
(k) The Money Lending and Rates of Interest [Chapter Act 14:14] is an Act that regulates money-lending in Zimbabwe.
(l) The Infrastructure Development Bank of Zimbabwe Act [Chapter 24:14] makes provision for the establishment, constitution, duties and powers of an Infrastructure Development Bank of Zimbabwe to assist in and promote the economic development of Zimbabwe.
(m) The Insurance Act [Chapter24:07] regulates the carrying on of insurance business in Zimbabwe.
(n) Money Laundering and Proceeds of Crime Act [Chapter 9:24]: This is an Act whose purpose is to suppress the abuse of the financial system and enable the unlawful proceeds of all serious crime and terrorist acts to be identified, traced, frozen, seized and eventually confiscated.
5.3 Types of financial institutions in the market (30 June 2015)
Category Number Central Bank 1 Commercial Banks 13 Merchant Banks 1 Building Societies 3 Savings Bank 1 Asset Management Companies 14
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Microfinance & Moneylending Institutions 147 Insurance (life, non-life and re-insurance) 55 Insurance Brokers 37 Pension and Provident Funds 1200
The number of commercial banks reduced from 15 to 13, following cancellation of banking licence for two (2) commercial banks in the first quarter of 2015. The number of Asset Management Companies reduced from 15 to 14 after the closure of an Asset Manager which was the subsidiary of bank whose licence was cancelled by the Reserve Bank.
6. External payment arrangements
6.1 Determination of the exchange rate policy
The Minister of Finance, in consultation with the Reserve Bank Board, is responsible for determining the exchange rate policy in Zimbabwe, while the Reserve Bank is responsible for the implementation and management of the policy.
6.2 The present exchange rate system
Since the adoption of the multicurrency system in February 2009, international cross rates obtained from the Reuters Screen, are used for conversions of the various foreign currencies used by the country.
6.3 Organising the exchange market
Under the current regime, the determination and exchange rate adjustments are triggered by international rates as well as bid/offer rates by sellers and buyers of foreign exchange on the market. Authorised Dealers (Banks, Money Transfer Agencies and Bureau de Change) are required to visibly display their bid and offer rates in their banking halls for corporates and individuals wishing to buy or sell foreign exchange.
6.4 The central bank's involvement in managing foreign exchange reserves.
The Reserve Bank is responsible for managing the foreign exchange reserves of the country. Ideally, these should at least cover the cost of three to four months of imports.
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7. Currency convertibility and exchange control
7.1 Current state of currency convertibility
The Zimbabwe dollar is currently not in use, as the country has adopted a multiple currency framework, since February 2009. Under this framework, the country uses the following prescribed currencies, namely, USD, GBP, PULA, ZAR, and EURO. In January 2014, the following currencies were added to the basket; Indian Rupee, Australian dollar and the Chinese Yuan.
7.2 Exchange control restrictions on current account transactions
In line with the SADC protocol and IMF recommendations, the current account has been fully liberalized, with Authorized Dealers being allowed to process import payments as well as exports, irrespective of amounts involved, without seeking Reserve Bank approval. All service agreements including software licenses, franchise, royalty, consultancy, professional etc, however, require prior exchange control registration, after which payments can be made in terms of the granted authority. Authorised Dealers are, however, supposed to report all the transactions to Reserve Bank for statistical compilation purposes.
7.3 Restrictions on capital account transactions
The capital account in Zimbabwe has been partially liberalized and there are continued efforts towards further freeing up the flow of capital through the gradual liberalisation of the capital account. This has resulted in dividends, capital appreciation, profits and loan repayments being freely remittable by Authorised Dealers, without need for prior approval by the Reserve Bank.
Applications pertaining to the receipt or payment of capital transfers and/or acquisition/disposal of non-financial assets as well as transactions associated with changes of ownership in the foreign financial assets and liabilities of the country require prior approval by the Exchange Loans and Exchange Control Review Committee (ELECRC). The Committee came into being following the consolidation of the External Loans Coordinating Committee and the Exchange Control Review Committees, in an effort to streamline the processing of equity and debt transactions. These are now being considered at the same time.
The equity transactions relate to cross-border investments by Zimbabwean companies, investment and disinvestment into existing unlisted entities (Up to 40%), mergers and acquisitions involving companies with foreign shareholding, Restructuring and Rights Issues in companies with foreign shareholding. However, foreign investments in green-field projects require approval by the Zimbabwe Investment Authority.
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As regards external debt, the ELECRC focus is on private sector debt. Currently, all private sector external loans less than USD10 million, are processed by the Authorised Dealers without the need for Reserve Bank approval. Once these loans are registered by Authorised Dealers within the ELECRC terms and limits provided as guidelines, principal and interest repayments become automatic and do not require Reserve Bank approval. All loans above the USD10 million threshold, however, require approval by the ELECRC and once approved, banks can make principal and interest repayments without requiring further approval.
Foreigners are also allowed to freely participate on the local bourse by investing in companies that are listed on the Zimbabwe Stock Exchange up to 10 per cent per investor and 40 per cent per counter by a collective group. Use of derivatives is now allowed, but Authorised Dealers have to enter into such transactions in excess of USD5 million after approval of Exchange Control.
7.4 Retention rules for foreign exchange earned or owned by residents
Exporters as well as holders of free funds (NGOS, Embassies, and International Organisations are allowed to retain 100 percent of their foreign currency earnings for an indefinite period, in their local Foreign Currency Accounts.
These funds are retained for personal use, to effect payments locally and externally. However, exporters are required to repatriate all foreign currency earnings for credit to corporate Foreign Currency Accounts held with local Authorized Dealers.
7.5 Dividends due to foreign investors
Dividends due to foreign investors including former Zimbabwe Residents are remitted 100 per cent on net after tax profits.
8. The central bank and external debt
8.1 The role of the central bank in managing the country's external debt
The Reserve Bank is an agent for the State in the payment of interest and principal payments. As a fiscal agent of Government, the Central Bank is also jointly responsible, with the Ministry of Finance and Economic Development, for the management of the country’s external debt. Further involvement includes the formulation of strategy for external debt management and policy, through the External Loans and Exchange Control Review Committee (ELECRC). Overall, the Reserve Bank advises Government on issues pertaining to prudent external debt management.
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The Reserve Bank is also responsible for overall management of private sector external loans, whose repayments are, however, done through Authorised Dealers, namely commercial and merchant banks. The Reserve Bank also manages other Government guaranteed external loans for public enterprises and quasi-fiscal institutions.
The Government has set up the Zimbabwe Aid and Debt Management Office (ZADMO) in the Ministry of Finance to avoid the diffusion of debt management responsibilities across multifarious agencies within the country. This development will culminate in consolidated responsibilities for managing all aspects of government debt, including monitoring of on-lending, contingent liabilities as well as private sector debt facilitates, thus, facilitating an integrated management of the country’s debt portfolio in a manner that strengthens accountability, reduces information gaps and establishes coordination.
8.2 The role of Treasury in this respect
Treasury plays an important role as a member of the ELCC, and ensures the timely payment, as well as general servicing, of all external Government debt. Treasury also confers borrowing authority to the Reserve Bank, which enables the Bank to arrange and facilitate external lines of credit. The Ministry of Finance is also the parent Ministry for ZADMO.
9. Supervision of financial institutions
9.1 Banking institutions
Authority responsible for supervision of banking and non-banking institutions The Reserve Bank is both the licensing and supervisory authority for banking institutions. Banking institutions are licensed and supervised in terms of the Banking Act [Chapter 24:20]. The Banking Act covers the following classes of banking institutions: (i.e. commercial banks, accepting houses, discount houses, finance houses and microfinance banks).
The Reserve Bank also supervises a savings bank, POSB which was established in terms of section 3 of the People’s Own Savings Bank of Zimbabwe Act [Chapter 24:22].Other institutions supervised by the Reserve Bank include building societies which are supervised in terms of the Banking Act and the Building Societies Act [Chapter24:02], while microfinance institutions are supervised in terms of the Microfinance Act [Chapter 24:29], which was gazetted into law in August 2013 and replaced the Moneylending and Rate of Interest Act [Chapter14:14]. With effect from 1 August 2014, Development institutions such as the Small Enterprises Development
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Corporation (SEDCO) and the Infrastructural Development Bank of Zimbabwe (IDBZ) were transferred from the auspices of the Ministry of Small and Medium Enterprises and Co-operative Development, and Ministry of Finance, respectively to the Reserve Bank.
The vesting of both the licensing and supervisory activities with the Reserve Bank with effect from 2004 strengthened the regulation of the banking sector through the alignment of the licensing and ongoing supervision standards.
Transfer of Supervision of Asset Management Companies In January 2014, the supervision of asset management companies and collective investment schemes was transferred from the Reserve Bank of Zimbabwe to the Securities Exchange Commission of Zimbabwe. This followed the gazetting into law of the Securities Amendment Act No. 2 of 2013 on 30 August 2013, which introduced amendments to the Asset Management Act [Chapter 24:26] and the Collective Investment Schemes Act [Chapter 24:19].
The Securities Exchange Commission of Zimbabwe is also responsible for the regulation of other non-bank financial institutions such as securities companies, while venture capital companies are currently unregulated.
The Insurance and Pensions Commission of Zimbabwe (IPEC) is responsible for supervising insurance companies, pension and provident funds as well as insurance brokers and funeral assurers.
9.2 Licensing procedures for a bank
The Reserve Bank has continued to strengthen the licensing framework for financial institutions under its purview in line with international best practice. The criteria for assessing the fitness and probity of those entrusted with running financial institutions have been enhanced to ensure that financial institutions are run by people of impeccable integrity. The licensing procedures for banking institutions are as follows:
• Completed application forms accompanied by a business plan and other documents as required in terms of the relevant Acts and prescribed regulations are submitted to the Reserve Bank’s Bank Supervision Division together with the payment of application fees. • The submitted documentation and other information is evaluated, with particular emphasis on capital adequacy, shareholding and ownership structure, management, viability and profitability, risk management policies and structures and developmental value of the project.
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• An evaluation report with recommendations is presented before a First Level Licensing Committee, which is made up of representatives from Divisions of the Reserve Bank. • The First Level Licensing Committee reviews the report and can either confirm or vary the recommendations for approval or rejection of the application, or refer the application back to Bank Supervision for additional information and further analysis. • The recommendations of the First Level Licensing Committee are forwarded to the Second Level Licensing Committee, which is made up of Heads of Divisions of the Reserve Bank. This Committee makes its own assessment and can either concur with or vary the recommendations of the First Level Licensing Committee. • The recommendations of the Second Level Licensing Committee are passed on to the Licensing Authority for the final decision. The Licensing Authority is the final Licensing Committee and is made up of the Governor and Deputy Governors. • If the Licensing Authority agrees with the recommendations of the lower committees to approve, then the promoters are issued with an appropriate license in consultation with the Minister of Finance, otherwise a letter is written to the promoters informing them that their application was unsuccessful. • The licensed bank will, however, only open its doors to the public after the Reserve Bank has conducted a pre-opening inspection in terms of section 16 of the Banking Act [Chapter 24:20] to assess its readiness for commencement of banking business.
9.3 Minimum Capital Requirements of Different Institutions
Minimum Capital is defined in the Banking Act as meaning capital representing a permanent commitment of funds by the shareholders of the banking institution (net of any loans and advances given to an insider and borrowed capital) which is available to meet losses incurred without imposing a fixed unavoidable charge on the institution's earnings, and includes such of the following elements as are available to the institution after making any required deductions: • issued and fully paid up ordinary shares or common stock; • paid up non-cumulative irredeemable preference shares; • reserves consisting of: a) non-repayable share premiums; b) disclosed reserves created by a charge to net income in the financial year immediately preceding the current one; c) published retained earnings for the current year, including interim earnings, where these have been verified by external auditors; and d) such other elements as may be prescribed from time to time.
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In order to foster a more stable financial system and in light of the macroeconomic challenges constraining the capitalization initiatives, and in the spirit of Basel III, the Reserve Bank has taken measures to promote strategic groups based on current banking classes, in line with Section 6 of the Banking Act.
Accordingly, the Reserve Bank has come with three segments, namely Tier I, Tier II and Tier III for banks’ compliance with minimum capital requirements. The strategic groups, the applicable minimum capital requirements and the respective activities are shown in Table 5 below:
Segments Type of Institution Capital requirements Activities
Current Proposed
Tier I Commercial banks & All $25 million $100 million Core banking foreign banks activities plus additional services Tier II Commercial banks, Merchant $25 million $25 million Core banking banks, Building societies, activities only Finance & Discount houses
Tier III Deposit Taking Microfinance $5 million $7.5 million Deposit Taking banks Microfinance activities
Banking institutions in Tier II can migrate to the Tier 1 strategic group provided they meet the capital requirements and the risk management systems are commensurate with the nature and scope of their activities.
The Tier III segment comprises of deposit taking microfinance institutions. The minimum capital requirements of US$7.5 million for Tier III takes into account start-up costs such as acquisition of an IT system and establishment of branches. It is envisaged that the institutions in Tier III will further bolster the current financial inclusion initiatives.
The above strategic segmentation allows the existence of smaller, profitable banks with strong governance and risk management systems that play a meaningful role in the economy.
9.4 Guidelines governing current activities of banks
The Banking Act [Chapter 24:20] as read with the Banking Regulations, Statutory Instrument 205 of 2000 stipulates various requirements that banking institutions are required to comply with. Some of the requirements are stipulated below:
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Capital adequacy Capital is regulated in terms of the minimum capital requirements and capital adequacy ratios. Applicable capital adequacy thresholds are as follows: a) Tier 1 ratio = minimum of 8 percent b) Total Capital Adequacy Ratio = minimum of 12 percent c) Leverage Ratio = minimum of 6 percent
Provision for bad debts Provisions for bad debts are divided into specific and general provisions as indicated in the table below.
Loan Category Provisions General provisions For Loans or assets graded ‘Pass’ 1 percent For Loans or assets graded ‘Special Mention’ 3 percent
Specific provisions For Loans or assets graded ‘Substandard’ 20 percent For Loans or assets graded ‘Doubtful’ 50 percent For Loans or assets graded ‘Loss’ 100 percent The Reserve Bank has expanded the above scale to make it more granular as part of the Basel II implementation process. The expansion of the above scale is also accompanied by a more granular provisioning regime as shown below.
Revised Provision Levels Grade Previous 5-Tier Grade Provisioning Percentage (of Exposure) 1 to 2 Pass 1%
3 2%
4 Special Mention 3% 5 4% 6 5% 7 10% 8 Substandard 20% 9 Doubtful 50% 10 Loss 100%
Restricted lending There are no sectorial restrictions on lending but the Reserve Bank encourages diversification of portfolios to minimize concentration risk in banks’ credit portfolios.
Large credit exposure There are two main regulations:
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• Prudential Lending Limits a) Exposure to a single counterparty not to exceed 25 per cent of the bank’s capital base; b) Exposure to a single corporate group not to exceed 75 per cent of the bank’s capital base; and c) Aggregate value of large exposures (i.e. more than 10 per cent of capital base) of a bank should not exceed 800 per cent of the capital base.
• Limits on Loans to Insiders Currently the Banking Regulations impose the following restrictions to lendings to insider and related parties:
a) Exposure to a single insider or to any related interest of that person, not to exceed 25 per cent of capital;
b) Aggregate value of exposures to insiders and to their related interests not to exceed 100 per cent of the capital base (excluding loans made pursuant to benefits/compensation package) and 200 per cent (including loans made pursuant to a benefits/compensation package).
9.5 Open foreign exchange position
The overnight individual currency net open position is not to exceed 10 per cent of the capital base of a banking institution as at the end of the previous quarter. The overnight overall (all currencies) net open position is not to exceed 20 per cent of the capital base as at the end of the previous quarter.
Liquidity ratio Every registered financial institution is required to maintain a minimum holding of prescribed liquid assets which shall not be less than 30 percent of the liabilities to the public.
9.6 Guidelines Issued
In addition to the statutes governing the regulation and supervision of the banking sector, the Reserve Bank of Zimbabwe issued the following policy documents to the banking sector to provide specific regulatory guidance in various areas:
Guideline Description Corporate Governance Guideline No. 01-2004/BSD…
The guideline was issued with the objective of improving corporate governance arrangements within banking institutions. The guideline details the minimum expected corporate governance requirements for banking institutions including separation of owners and managers; duties and responsibilities of
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the board; appointment of directors and senior management; and role and function of board committees.
Minimum Internal Audit Standards in Financial Institutions Guideline No. 02-2004/BSD…
The guideline was issued with the objective of improving the quality and effectiveness of the internal audit function. The guideline outlines the role, duties and responsibilities of internal auditors and provides uniform practice on internal auditing which would serve as a benchmark to measure the effectiveness of the internal audit function.
Accreditation of Credit Rating: Guideline No. 04-2006/BSD The guideline outlines the criteria used by the Reserve Bank in the selection and accreditation of credit rating agencies.
Risk Management Guideline No. 01-2006/BSD
The guideline provides the minimum requirements for sound risk management practices. The guideline emphasizes the four key pillars of a sound risk management framework, namely adequate board and senior management oversight, sound risk management policies and operating procedures, adequate management information systems and sound risk measurement and monitoring tools.
Risk-Based Supervision Policy Framework Guideline No. 02-2006/BSD
The guideline sets out the Reserve Bank’s risk-based approach to the supervision of banking institutions and banking groups under its regulatory and supervisory jurisdiction. The framework provides guidance on the risk- based supervisory methodologies, policies, procedures and practices espoused by the Reserve Bank in fulfilment of its statutory responsibility of maintaining financial stability.
Special Purpose Vehicle, Securitisation &Structured Finance Guideline No.01-2007/BSD
The guideline outlines the regulatory framework for banking institutions involved in securitization and Special Purpose Vehicle (SPV) activities. The framework provides a common regulatory policy on the treatment of SPVs and securitization activities in which banking institutions engage.
Consolidated Supervision Policy Framework Guideline No. 02-2007/BSD
The framework provides guidance on the scope and manner of supervision of banking institutions on a consolidated basis. The guideline also details the
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prudential rules, terms and procedures for exercising consolidated supervision on a banking group as well as the methods used to calculate capital adequacy on a consolidated basis.
Guideline No. 01-2008/BSD: Minimum Disclosure Requirements for Financial Institutions
The guideline was issued with the objective of promoting adequate transparency in financial institutions by providing stakeholders with the information they require in relation to the bank’s condition and performance, and exposures to risk in order to facilitate meaningful assessments of a bank’s risk profile.
Guideline No: 1-2011/BSD: Technical Guidance on Basel II Implementation in Zimbabwe
The guideline seeks to give guidance to banking institutions on the implementation of Basel II. The Reserve Bank is in the process of revising some of the guidelines above in order to enhance them in line with international best practice.
Prudential Standards No. 7-2014/BSD: Fitness and Probity Assessment Criteria
The guideline outlines the Reserve Bank’s fitness and probity criteria.
Guideline No. 02-2015/BSD: External Audit Framework For Banking and Non-Banking Financial Institutions
The guideline replaces the Framework on the Relationship between Bank Supervisors and Banks’ External Auditors of 2004. The guideline provides information and guidance on how the relationship between the Reserve Bank of Zimbabwe and banking institutions’ external auditors can be strengthened to mutual advantage. The guideline seeks to facilitate mutually beneficial synergies that enable bank supervisors to leverage off external work in line with the principles of risk-based supervision.
9.7 Further enhancement to the supervisory framework Banking Act Amendments
Amendments to the Banking Act have been proposed to ensure that the regulatory framework is able to deal more effectively with developments in the financial sector and, in particular, to achieve some of the following objectives: • to improve the corporate governance framework of banking institutions;
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• to make banking institutions more responsive to their customers’ needs and to encourage the resolution of disputes between banks and their customers; • to introduce greater transparency in the shareholding and operations of banking institutions; • to allow banking regulators to monitor and regulate bank controlling companies; • to allow the regulator to take prompt corrective action with regards to problem • banks; and • to increase co-operation between the different financial regulatory authorities.
Troubled Banks Policy The Reserve Bank developed the Troubled and Insolvent Banks Policy in 2011 which outlines various supervisory assessment methodologies and corrective action programmes at the Reserve Bank’s disposal. The revised framework was rolled out to the market in February 2013, with a view to creating awareness as well as promoting transparency and accountability in the resolution of troubled banking institutions. This was also a benchmark under the IMF Staff Monitored program.
The Reserve Bank is also receiving technical assistance in the following areas: • Resolution of non-performing loans under IMF Technical Assistance (TA) • Programme; • Macro prudential stress-testing under IMF TA; • Consumer Protection – World Bank Technical Assistance The TA programmes are at various stages of implementation.
Basel II The Reserve Bank implemented started parallel running the Basel II framework and its old framework in 2013, following numerous consultations with stakeholders including training and issuance of technical guidance on Basel II implementation. The Reserve Bank had proposed to adopt the Modified Standardised Approach for credit risk, Alternative Standardised Approach for operational risk and Standardised Approach for market risk. Banking institutions are largely compliant with the minimum requirements under each of the approaches adopted.
The Reserve Bank is also monitoring developments on the international arena where the Basel Committee on Banking Supervision is in the process of reviewing the framework for standardised approaches. The Reserve Bank is monitoring these developments with a view of implementing the revised
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changes as they offer a simplified framework which can be consistently implemented by non-complex banking institutions.
9.8 Main supervisory practices
The Banking Act provides for explicit supervisory powers for the Reserve Bank. Two methods are employed namely: on-site examinations; and off-site surveillance. The Reserve Bank adopted the risk based supervision methodology for on-site & offsite supervision, on a solo supervision or consolidated supervision basis.
On-site examinations On-site examinations involve an on-site review of entire operations of banks and NBFIs with a view to determining asset quality; capital adequacy; adequacy of accounting and internal control systems; quality of management; compliance with applicable regulations and guidelines; and verification of information submitted through prudential returns.
Off-site surveillance Off-site surveillance entails the analysis of prudential returns submitted by banks and NBFIs on regular or other basis. Early warning mechanisms have been put in place to enable supervisors to undertake a comprehensive evaluation of an institution’s condition and potential vulnerabilities. This information provides the basis for regular contacts with bank management, to discuss the condition of their institutions and, to ensure that corrective action is taken timeously.
Risk-based Supervision The Reserve Bank formally adopted Risk Based Supervision in 2000 and fully implemented the methodology in 2006. This development has enhanced the supervisory process through a more incisive determination of banks’ risk profiles thereby making it possible to plan the supervisory activities accordingly. It enables the Reserve Bank to focus resources on areas of higher risk. The intensity and periodicity of supervision depends on the risk profile of the institutions.
Consolidated Supervision The Reserve Bank adopted the Consolidated Supervision approach in January 2002. Through this supervisory approach, the Reserve Bank determines the total risks affecting a banking group and the potential impact of such risks on the operations of the banking entities. In all cases, the Reserve Bank undertakes to ensure that the overall structure of the banking organization or group complies with good corporate governance and risk management standards. The Reserve bank has signed MoU with other regional supervisory authorities where some of the banks in Zimbabwe have their presence.
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9.9 Multi-disciplinary Financial Stability Committee
As part of the implementation of COMESA’s Framework for Assessing and Maintaining Financial Stability, the Reserve Bank set up a Financial Stability Unit housed within the Bank Licensing, Supervision and Surveillance Division. Further, a Multi-disciplinary Financial Stability Committee comprising of Reserve Bank, the Deposit Protection Corporation (DPC), Insurance and Pensions Commission (IPEC) and Securities and Exchange Commission of Zimbabwe (SECZ) was set up in 2011. The broad mandate of a Multidisciplinary Financial Stability Committee is to promote financial stability through macro-prudential oversight of the financial sector.
The committee has established two subcommittees namely the Technical Committee for Financial Stability Assessment and the Supervisory & Regulatory Cooperation, whose mandate is to formally assess the state of financial stability in accordance with the COMESA framework as well as prepare forward looking financial stability reports.
The performance and condition of the banking sector is assessed through evaluation of the key financial soundness indicators on a quarterly basis. Assessment of the financial indicators encompasses the analysis of the trend, level against prudential benchmarks where applicable and peer review. Evaluation of the global and domestic macro-financial conditions is also undertaken periodically by the Reserve Bank through its Economic Research Division.
The maiden Financial Stability Report as at 30 June 2014 was published towards the close of 2014.
9.10 Enterprise-wide Risk Management
In line with recent trends in risk management and the weaknesses unearthed by the global financial crisis, banking institutions are expected to manage risk in a more comprehensive, coordinated and integrated way across the entire business spectrum as opposed to focusing only on regulatory compliance. As such, the Reserve Bank has directed banking institutions to develop formal bank wide risk management frameworks incorporating the Enterprise-wide Risk Management (ERM) concept. In terms of this approach, banking institutions adopt an integrated process for identification, measurement, aggregating and managing of all risks within the institution. In this respect, the Reserve Bank is also in the process of revising the Risk Management Guideline to take into account the unfolding global dynamics of financial sector risk profiling and management. The Reserve Bank also coordinates supervisory activities with other domestic regulatory authorities such as IPEC and the SECZ which are responsible for other entities within the corporate
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structures of financial conglomerates, as well as regulatory authorities in countries where local banking groups have operations. In this regard, the Reserve Bank signed a Memorandum of Understanding with IPEC and SECZ governing the sharing of information on supervised entities.
9.11 Measures to remedy deficiencies as well as penalties utilised
The Banking Act stipulates the various corrective measures and penalties that can be applied in order to remedy any deficiencies noted through on-going supervision of banking institutions. The Reserve Bank also employs a ‘Troubled and Insolvent Bank Policy’ which provides for a framework for timely and effective responses to banking problems. The Policy provides for ‘Informal’ actions such as Commitment Letter and Memorandum of Understanding as well as ‘Formal’ actions such as Corrective Orders and Curatorship.
The Troubled and Insolvent Bank Policy has been enhanced to incorporate other indicators of troubled institutions utilizing CAMELS ratings and the recommended corrective actions to be taken thereof.
9.12 Deposit Insurance
The Deposit Protection Corporation (DPC) is governed by the Deposit Protection Corporation Act [Chapter 24:29]. The main function of the Deposit Protection Corporation is to administer the deposit insurance scheme for the protection of depositors against the risk of loss in the event of a bank failure. Deposit insurance schemes form part of the financial sector safety net that helps avoid interruptions in payment and settlement flows, maintain market confidence and permit a structured approach to bank resolutions.
10. National Payment Systems
Overview The National Payment Systems (NPS) Act authorises the Central Bank to operate settlement systems, recognize and oversee payment systems whose direct participants are regulated financial institutions. Following the introduction of multicurrency system in 2009, all other clearing and settlement systems were realigned to use the United States Dollar (USD) as the settlement currency. This culminated in the signing of a tripartite agreement between the Government, Central Bank and the ZETSS/CSD participants to realign the operations of the systems with the new dispensation.
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Types of Financial Market Infrastructures (30 May 2015) Category Number RTGS 1 CSD 2 Cards 4 Mobile 4 Cheque Clearing 1 Electronic Financial Transactions 1
10.1 Organisation of the Payment, Clearing and Settlement Systems
Large Value Payments Clearing and Settlement Systems
The Central Bank owns and operates the country’s large value settlement systems, namely: The Real Time Gross Settlement (RTGS) System known as Zimbabwe Electronic Transfer and Settlement System (ZETSS) which was set up in November 2002. It also operates the Central Securities Depository (CSD) for Government Securities which facilitates the achievement of Delivery Versus Payment (DvP) as it is interfaced with ZETSS. A central securities depository (CSD) for private equities operated by a private company was launched in 2014 and will be taking on-board fixed income securities outside Government securities.
10.2 Retail Payment Systems
The RBZ plays a supervisory and oversight role in the development of retail payments, in line with international best practice and also responsible for the regulation and oversight of payment systems. The retail payments streams include cheques, cards, mobile, internet payments and Electronic Funds Transfers (EFT).
Cheque The interbank cheque Clearing House is managed and operated by the Reserve Bank of Zimbabwe. A Clearing House Committee comprising of one representative from each member bank and chaired by the Central Bank manages the business of the Cheque Clearing House.
Card The card payment switches currently in operation include Zimswitch (Local Switch), Visa, MasterCard and China Union Pay.
Mobile The country has four mobile payment platforms, which have contributed significantly to Financial Inclusion.
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Electronic Funds Transfer (EFT) The interbank and intra-bank Electronic Funds Transfer (EFT) system is managed and operated by payment services providers. Instructions are cleared on a gross and multilateral basis and settlement is effected through the RTGS.
10.3 Major Legislation, Regulation and Policies
The general legal framework for payment systems includes the following: • The Reserve Bank of Zimbabwe (RBZ) Act • The National Payment Systems (NPS) Act [Chapter 24:23] • The Banking Act • The Bills of Exchange Act • The Bank Use Promotion Act [Chapter 24:24]: • Money Laundering and Proceeds of Crime Act [Chapter 9:24] • Bank Use Promotion and Suppression of Money Laundering Act • Exchange Control Act • Regional and International standards • Directives and Guidelines issued by the Central Bank • Payment systems rules, procedures and agreements.
To ensure that the National Payment System has a sound legal basis, the National Payments Systems Act [Chapter 24:23] was passed into law in November 2001 which authorizes the Reserve Bank to recognize, operate and oversee the payment, clearing and settlement systems.
The Reserve Bank has also put in place ZETSS/CSD Operating Rules and Memorandum of Agreements between the Reserve Bank and its participants. These Operating Rules govern ZETSS/CSD operations, and all system participants are expected to observe the rules.
Cheque Participants, in collaboration with the Central Bank put together the Cheque Clearing House rules that regulate the operation of the Cheque payment stream. These set of rules regulate the criteria relating to specific areas, which include membership, management, clearing items, clearing times and processes.
Participants in the Card, mobile, internet and Electronic Financial Transfer (EFT) networks are governed by system specific rules. The rules regulate the criteria relating to membership, management, clearing times and processes, risk management, as well as settlement arrangements. However, the Central Bank continues the process of reviewing the current laws in order to align them to the new developments.
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10.4 Participation in the Systems
In line with the NPS Act only the central bank and regulated financial institutions may be direct participants in payment systems. Non-financial institutions may participate as service and infrastructure providers to ensure that all banking transactions take place within a financial institution.
ZETSS As at 31 May2015, there were eighteen (18) participants on ZETSS.
Cheque There are direct participants on the Cheque Clearing House, including the Reserve Bank. To manage risk emanating from the Cheque Clearing House, the Banking institutions are required to lodge collateral (under the Cheque Clearing House Collateral Scheme) with the Central Bank as a precondition for participating in the Cheque Clearing House.
Cards As at 31 July 2015, there were fourteen (14) active participants on the Zimswitch system, thirteen (13) commercial banks, and one (1) non- commercial bank financial institutions. To manage risk emanating from the Zimswitch Clearing House, the Banking institutions are required to lodge collateral (under the Zimswitch Clearing House Collateral Scheme) with the Central Bank as a precondition for participating in the Zimswitch Clearing House.
Currently, there are seven (7) Visa and six (6) MasterCard member banks while China Union Pay has one (1).
Mobile Currently, sixteen (16) out of 18 financial institutions offer in-house mobile payment systems and in addition there are seven participants on Ecocash, two on Telecash and one on One-Wallet and one on Nettcash.
Internet Internet banking transactions are offered by sixteen (16) financial institutions.
EFT EFT member banks are seventeen (17) out of 18 financial institutions.
10.5 Types of Transactions Handled
ZETSS ZETSS settles inter-bank transactions, which comprise final settlement of obligations from financial market operations, customer payments, tax payments and government transactions, among others.
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Cheque Generally this mode of payment is increasingly being used less and less due to the clearing period. Most participants in the payment systems want real time payments.
Card Zimswitch, Visa and MasterCard provide switching platforms for card transactions at ATMs and Point of Sale (POS) terminals.
Mobile and Internet Transactions processed through mobile and internet channels include bill payments, airtime top up, purchase of goods and services and money transfers, amongst other payments.
EFT The EFT platform handle the following transactions corporate payments, salary transfers, debit orders and schedules to support numerous payments bulked into one credit. ·
10.6 Operation of the Transfer
ZETSS Once a transaction has been sent on ZETSS, and there are sufficient funds in the initiating financial institution’s settlement account held at the Central Bank, the funds will automatically be transferred to the receiving bank in real time.
Cheque Funds are made available to the depositor for withdrawal upon clearing and settlement.
Card For inter-bank card transactions, customers receive immediate value on ATM/POS transactions. These transactions can only be effected provided that there are sufficient funds in their accounts.
Mobile Immediate value received on customer’s mobile device. The mobile financial service providers or financial institutions validates, and authorises the instructions.
Internet Internet transactions, customers receive value for internet transactions based on the channel that has been accessed through the internet which can be a banks account, or card switching system.
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EFT EFT instructions are initiated from the customer’s interface to financial institution through the EFT network.
10.7 Clearing and Settlement Procedures
ZETSS Transactions processed through ZETSS are final and irrevocable.
Cheque The Payment Clearing House (PCH) Batch is posted for final settlement in ZETSS. Same day clearing and settlement has been introduced by the Central Bank.
Card The card switch comes up with multilateral net positions for each participant. These positions are electronically posted to the participants for settlement on a T+1 basis. The final settlement for Zimswitch or any local and international interbank card transactions occurs in ZETSS and through correspondent settlement banks respectively.
EFT With EFT transactions, clearing is done on a bilateral gross basis and funds are only applied after settlement through ZETSS.
Mobile Interbank mobile transactions are linked to the card systems and settle through the local switch.
Internet Internet transactions are cleared and settled based on the channel that has been accessed through the internet which can be intra-bank accounts, RTGS or card systems.
10.8 Transaction Processing Environment
ZETSS The Central Bank is linked to all participants through ZETSS/CSD using the SWIFT communication infrastructure. The electronic instruction moves from the paying bank to the receiving bank via the core system at the Central Bank in real time.
Cheque The ZETSS facilitates the electronic settlement of the manual and paper- based output from the Clearing Houses in Harare and Bulawayo. Settlement of obligations arising from country clearing is also done through ZETSS.
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Card The card participants are linked to the card switch through virtual private networks (VPNs). The electronic instruction moves from the paying bank to the receiving bank via the core switching system in real time.
Mobile Mobile financial transactions are linked to the core banking systems and mobile banking systems through the Short Message Service (SMS) and the Unstructured Supplementary Service Data (USSD) gateways for each Mobile Network Operator (MNOs).
Internet Internet transactions are sent to the ZETSS, core banking system or switch that will be accessed through the internet.
EFT The EFT customers are linked to the participating financial institutions that in turn, are linked to the EFT switch through a VPN.
10.9 Payment Systems Developments
Over the past few years, notable strides continued to be made in modernizing and diversifying payment systems through collaborative efforts with the banking industry and other stakeholders. Pursuant to that, the following projects were completed while some initiatives in progress at various stages:
Straight Through Processing (STP) – project has been resuscitated following the adoption of the multicurrency system which derailed its implementation.
Central Securities Depository for Equities – project undertaken by a private company and now fully operational with most equities now listed in the CSD.
Guidelines on Electronic Payments - work is under way to come up with a comprehensive electronic payments systems guideline.
Electronic Clearing House - The banking community is exploring ways of implementing a comprehensive Electronic Clearing House (ECH) solution aimed at promoting efficiency by enhancing processing speed, minimizing errors and addressing other challenges posed by the current paper-based clearing and settlement systems.
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Role of the Central Bank in the Payment System
10.10 Statutory Responsibility
World over, central banks are mandated with the responsibility to oversee and ensure the safety, soundness and efficiency of payment, clearing and settlement systems to enhance financial stability. In this regard, the RBZ fully subscribes to international best practices, in particular, the Bank for International Settlements (BIS) Committee on Payment and Settlement Systems (CPSS) 24 Principles for Financial Market Infrastructures (PFMIs) and five central bank responsibilities among others.
The Reserve Bank has the following statutory responsibilities: • Oversight of payment systems; • Establishment and operation of settlement systems; • Discharge of settlement obligations within settlement systems; • Provision of facilities for the collection and clearance of cheques and similar instruments; • Recognition of payment systems; and • Promotion of payment systems.
10.11 Provision of Settlement and Credit Facilities
The Reserve Bank owns and operates the ZETSS, CSD and Cheque Clearing House facilities. The Cheque Clearing House, which is situated at, and monitored by the Reserve Bank, caters for the clearing and settlement of inter- bank claims. Commercial banks, which are the clearing banks, know their net positions after mid-day when multilateral netting takes place. Building societies and other financial institutions clear through commercial banks.
Banks resort to the lender of last resort facility after exhausting liquidity in the inter-bank market. Zimswitch administers the clearing and settlement process of card transactions through the nominated settlement bank. Settlement positions are available to participating financial institutions via the network at the cut off time.
The VISA, China Union Pay and MasterCard Electronic Clearing Houses are monitored by the nominated correspondent settlement bank, which caters for the clearing and settlement of inter-bank card claims. Participating financial institutions, know their net positions when multilateral netting takes place. Participating financial institutions settle EFT transactions bilaterally on a gross or multi-lateral basis.
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10.12 Settlement
Final settlement of all local transactions from domestic payment platforms takes place in ZETSS at agreed intervals. VISA, China Union Pay and MasterCard settlements are done using correspondent bank arrangements.
11. Currency in use
11.1 List of legal tender notes and coins currently issued and in use in the economy
In February 2009, the country adopted a multicurrency system where foreign currencies are allowed to circulate freely.
12. The position of the central bank in SADC
The Reserve Bank has special relationships with other central banks in SADC through the constant exchange of information relating to monetary co- operation in the region. The Governor of the Reserve Bank of Zimbabwe participates in meetings of the Committee of Central Bank Governors in SADC. The Reserve Bank also participates in the constant update of the database for all SADC member countries. Several officials of the Reserve Bank participate in CCBG Subcommittees, in various capacities.
13. Publications
The Reserve Bank regularly publishes weekly and monthly bulletins. It also publishes annual reports, i.e. the Reserve Bank of Zimbabwe Annual Report and the Banking Supervision Annual Report, and special occasional papers. The Bank also produces a quarterly status report on the condition of banking institutions. Biannually, the Reserve Bank also publishes its Monetary Policy Statement after its announcement.
Zimbabwe
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