Financial Times

Corporate Governance on Finance Companies

Through recommendations of the Central Bank and the Monetary Board, on July 8 the Supreme Court has approved the Direction on Corporate Governance for Banks. However a new set of regulations for Corporate Governance on registered finance companies is now being drafted by the Central Bank for the final Direction to be issued by the Monetary Board in due course for registered finance companies to follow.

Unlike the banking industry which is a long standing streamlined business carried on by recognized financial institutions the world over, the evolution of a finance company is different. Finance companies were set up by families of reputation and integrity together with professionals and other experts who invested in setting up of the business of finance companies. Mobilization of deposits was dependant on the reputation and social standing of these persons and they were able to mobilize public deposits inspiring public confidence.

The relationship between the depositors and Chairman and Directors of finance companies is more on a personal nature unlike the relationship between customers and Directors of a Bank which is of an impersonal nature. Essentially, a finance company is based on trust and confidence placed by the public on its Chairman and Directors.

The new regulations pertaining to Finance Companies, relate to

  • limits on the age of Chairman/Directors
  • Length of service and
  • Number of Directorships a Director of a Finance Company can hold in other companies.

Finance company operations were carried out quite successfully over the last five decades. Subsequently in the early 80’s a few finance companies collapsed. Supervision of these companies was under the Central Bank at that time. However the Finance Companies Act No. 78 of 1988 which introduced stringent regulations for finance companies to follow was introduced subsequently by the Central Bank. These rules are stringent even now. Since then and now we hardly hear of any fallen finance companies.
As there are provisions in the Companies Act for appointment and removal of Directors, I see no necessity for the introduction of new provisions for RFCs.

It must be noted that certain well managed registered finance companies like The Finance Company took over the fallen finance companies at the request of the Central Bank and they were resurrected. These companies are now functioning successfully.

Taking into account the proposed Transitional Provisions, it is noted that within three years of the date of this Direction, practically in some well established finance companies serving the masses for decades, a number of senior Working Directors of the present Board of Directors would have to resign because of the maximum number of Directors being limited to 13. Also the limitation on the maximum age factor will bear a negative impact. In such a situation the smooth and efficient running of an esteemed finance company such as The Finance Company Ltd. would be in jeopardy. Investor confidence would diminish. This could erode the confidence of the depositors and would end in a run on deposits and would thereby lead to severe financial crisis in these establishments.

In such an extreme case it appears that when such senior Directors would have to resign within a period of three years, they will automatically be absolved from all liabilities arising from such resignation. This would indeed be detrimental to depositors’ interest.

Therefore in my personal opinion I see no reason why the proposed Corporate Governance Code should be made mandatory. If the latest Corporate Governance is implemented I suggest that it should be on a voluntary basis.

Ray B. Ford

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