PLEASE SUMMARIZE THE FOLLOWING IN ONE PARAGRAPH (1/2 a word document)

What are the most serious problems/challenges, in your view, involving corporate governance of banks in your country?

A significant number of problems/challenges were cited, with some respondents mentioning half a dozen or more. The most common concerns were:

The lack of awareness/understanding by banks and boards of the need for strong corporate governance and its potential benefits. This was partly ascribed to the absence of firm direction by the authorities, whether through inadequate laws and regulations or inadequate publicity. However, the preponderance of family-owned banks or banks with concentrated ownership was also mentioned as a cause because these shareholders would likely be closely involved in the day to day running of the bank and thus not appreciate the need for stakeholder protection.

One Central Bank mentioned cultural reasons as an impediment to the implementation of strong corporate governance and another the frequency of the same person serving as a Chairman and a CEO. Others cited the concentration of ownership as a reason for concern as this created inadequate checks and balances. The result was often inadequate questioning of management decision-making, failure to hold officers accountable for their actions and the creation of conflicts of interest, especially over lending judgements.

Many cited the weakness of audit processes, the absence or lack of effectiveness of a board level audit committee or of an independent compliance function. There were related concerns about the refusal of the board of directors (BOD) to accept auditors recommendations and weaknesses in risk management processes generally.

Several responses mentioned the absence of skills, independence, and diversification among bank BODs. This was variously ascribed to the lack of experienced directors, lack of understanding of Directors roles and responsibilities, inadequate training facilities for directors and concentration among bank ownership.

Concern was raised by a few banks about the accuracy of financial statements, with some confusion being caused by IFRS and IAS39. Weak disclosure and transparency was another common concern, with reference both to financial statements and to the structure of the bank.

Remuneration was cited by some respondents, not only the fact that remuneration policy might not fit with the long-term strategy of the bank but also the legal basis and structure of Directors remuneration. One response mentioned that the key factor influencing good corporate governance is support and sponsorship by senior management.

a. Recent Failures Examples:

This question appears to have been misunderstood by most respondents. The few who cited causes of failures mentioned the absence of an audit committee, politically motivated lending policies and inadequate governance that allowed greed to flourish.

b. Regulatory initiatives Examples:

Initiatives cited included: a recent circular by the CB and the Investment Ministry (Egypt), issuance of a Directors Handbook (Jordan), corporate governance seminars in several countries under the aegis of Central Banks or banking institutes and implementation of Basel II were also cited. Respondents also cited central bank initiatives/guidelines regarding risk management, the compliance function, banks relationships with auditors, disclosure, international accounting practices, connected lending and limits on individual shareholdings and the creation board committees.

Measures taken by individual banks

Measured cited include: separation of the posts of the Chairman and the CEO, the recent establishment of corporate governance, audit and other board level committees; the appointment of a Corporate Governance Manager at senior level; improvements in disclosure and transparency; development of codes of conduct.

Do you think corporate governance of banks needs special attention in comparison with other listed companies? If yes, do you also think that corporate governance of banks is more important than of other large listed non-financial companies?

Nearly all the responses agreed that corporate governance is more critical for banks, although a couple of respondents argued that it is important for all listed companies and see no reason why banks should be expected to observe higher standards. The reasons mentioned by the majority include the key role banks play in the financial system; banks are different; the need for strong accounting and disclosure of activities that are often hard for stakeholders to understand; and the importance of additional checks and balances over complex financial operations via the four-eyes principle in order to reduce the risk of fraud.

Is there a corporate governance code in your country that exclusively (or mainly) focuses on the banking industry? Is there a corporate governance code that applies generally, including banks? Which entity, if any, monitors compliance with the code(s)?

Bahrain: No, but the Central Bank has issued guidelines in line with the Basel paper of February 2006 and a Steering Committee has been formed to develop corporate governance standards for all companies.

Egypt: Not for banks alone but the Institute of Directors issued a voluntary code. The Capital Markets Authority applies some aspects of it to listed companies and the Central Bank monitors banks risk management standards.

Jordan: The Central Bank has issued a manual for bank directors in 2004 and is currently drawing up more specific guidelines based on BCBS documents. It will monitor banks compliance after this has been issued. The Securities Commission is in the process of issuing a code for all listed companies. The Association of banks has issued a voluntary corporate governance code.

Kuwait: Yes (no more details)

Lebanon: There is a voluntary corporate governance code for all companies, but compliance is not monitored. The CB issues a circular in July 2006 based on BCBS guidance but there are no specific standards for banks alone.

Oman: No specific standards, but the CMA monitors the Code it issued for all listed companies.

Qatar: corporate governance is monitored as an element of prudential norms. The QCB is currently elaborating more specific corporate governance guidance.

UAE: None specifically.

Do you think it is desirable for your country to develop a corporate governance code that exclusively (or mainly) focuses on banks?

Virtually all the responses agree that it would be desirable to develop standards for banks alone, arguing on the same lines as for question 3. Other points made were the need to keep up with international standards for competitive reasons and the fact that banks have special characteristics so need standards tailored to their special circumstances. One response mentioned that although many laws and regulations covered aspects of corporate governance, they were scattered and could benefit from being brought together in a coherent manner.

What is the actual/potential role of the bank supervisor in issuing guidance to banks about corporate governance? Is there a danger that instructions or regulations regarding corporate governance will result in ticking the box or pro-forma compliance?

Nearly all the respondents (both Central Banks and banks) accepted the role of the regulator in advising on and enforcing corporate governance standards, although a few thoughts this would be better done by the national banking federation. Some thought there should be minimum requirements and tangible deliverables (such as changes in the composition of the board) but several saw the risk that regulation could become a box-ticking exercise. Others noted that the size and nature of banks differed widely and opposed a cookie-cutter approach. To avoid these downsides some stressed the need for a flexible case by case approach supported by a regular dialogue with the regulator and onsite inspection. Several mentioned that banks management should be held responsible for their corporate governance and stressed the need that it would only be really effective if industry buy-in were obtained. To that end they argued in favor of high-level seminars and conferences, where the importance of strong corporate governance could be explained by the CB and other experts.