Thursday, October 1, 2020

Global financial crisis offered lessons on improved governance

“The immediate and longer term causes of the financial crisis are now better understood, and things have now reached the crucial stage where efforts are underway globally to put in place a new and more robust global financial governance architecture,” this was the view expressed by the Governor of the Bank of Botswana, Linah Mohohlo, at a recent Chief Executive Officers’ (CEOs) cocktail evening.

Against that background, Mohohlo said that the decision by Botswana Life Insurance of facilitating the sharing of views under the auspices of a theme, “Governance: The Cornerstone of a Resilient Financial Services Sector” could not have at a better time.

She commented, “Such a topic is appropriate and timely, and more so, that the World is cautiously emerging from a precipitous financial crisis which caused the deepest global economic recession in many decades.

On that score, key to the success of the initiative of setting up of robust financial governance architecture, according to the Central Bank chief, was the meeting of minds between financial regulators and those they regulate.

By way of background, the importance of the financial sector for economic development was highlighted, and in the same vein a number of principles which it was believed would help to ensure a robust and well functioning financial sector, were mentioned.

In this context for purpose of clarity it was indicated that the financial sector was very broad, adding it covered various types of banking, asset management, insurance, securities and foreign exchange trading as well as intermediary activities.

Defining the overlapping and interdependent nature of the relationship that existed between this broad-based sector, Mohohlo, posited, “The functions range from intermediation between savers and investors, facilitation of payments within and across borders, liquidity management and information pooling.”

On account of the functions ascribed to these services, Mohohlo pointed out that they have a huge contribution in the smooth functioning of the country’s economy, further that study after have confirmed this line of reasoning.

As evidence of the significance of the financial sector in the economy, an example was given of how a sizable majority of those institutions that survived the meltdown were in fact those that desisted from excessive risk and, “remained true to the time-honored principles of prudent financial management.”

The Bank chief argued that central to all known principles, trust takes precedence.

Speaking with a sense of authority, in what cleared showed to be her domain, addressing what would best be described as the Who is Who of the Finance and Economic think tank, of the country, Mohohlo intimated that the key principle of good governance was accountability to stakeholders, which critically depended on transparency in decision making at policy and operational levels.

“Thus it is only through accountability that the interests of stakeholders can be appropriately aligned,” she said.

Emphasis was also laid on the importance of trust as the stock-in-trade of the financial services industry. By way of illustration, mention was made of the fact it was on the basis of trust that savers place their funds in bank deposits in like manner as they willingly and confidently incline to persuasion to purchase and trade in bonds and equities.

Thus, without trust, payments for trade and commerce would not take place.

Mohohlo expressed the view that it was in order to ensure that they are trusted, that the financial services sector tend to be more regulated than other industries, yet it was worth appreciating that while well designed financial regulation can underpin trust, such trust needed to derive from regulated institutions through a clear and credible commitment to the highest governance standards.

The reason the credit crunch set in despite a plethora of laws, was explained as largely accruing from disregard of good governance with respect to internal risk control mechanisms.

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