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In recent years the GCC financial service regulators have given importance to corporate governance and have come up with rules and regulations to implement the same. Qatar Central Bank (QCB) has provided corporate governance guidelines for banks and financial institutions. QCB on-site supervision as part of risk assessment indicators for financial institutions covers corporate governance.
Recently, the Qatar Financial Centre ( QFC) has released new rules relating to governance and risk management by requiring the governing body of a QFC authorised firm to approve and establish a formal governance framework, risk management and internal controls framework and remuneration policy. The Saudi Monetary Agency has also provided principles of corporate governance. A recent move by Saudi Arabia on planning to open market for foreign investment will result in companies trying to improve corporate governance practices. Oman banking regulations cover the duties, acts of directors, officers and employees of the bank.
The key areas to be focused on governance in the GCC banking sector are strengthening of boards, improving shareholder rights, protecting minority shareholders, related party transactions and enterprise risk management. Immediately after the global economic crisis, QCB proactively assessed various exposures like securities and real estate markets of all the Qatari banks under different stress scenarios. Qatari banks had to create a risk reserve to cover contingencies on loans and advances with a minimum requirement of 1.5%-2% after excluding provisions and exposures against cash collaterals.
Qatar and other GCC regulators brought various regulatory reforms to strengthen risk management in banks after the crisis. In 2011 Qatar announced stricter regulations on personal loans capping margin and tenure and restrictions on transfer of loans. Again in 2011 Qatar brought regulations on credit card such as limits on withdrawals and maximum interest. QCB also brought credit bureau in 2011. It also increased the maximum limit of real estate finance risks to 150% of the capital and reserves.
Banks may invest in shares of Qatar exchange upto QR150mn within the total limit of shareholdings. In 2011 the UAE Central Bank issued new guidelines on retail loans and fees and capped personal loans. Restrictions came on the repayment tenor on personal loans.
The UAE Central Bank also prescribed maximum fees for banking transactions. Regulation in the GCC region has been strengthened to promote risk governance and financial stability in the financial services sector.
The Basel Committee has given focus on governance areas such as board practices, senior management, risk management and controls, compensation, complex or opaque corporate structure and disclosure and transparency.
The UAE Central Bank has come up with regulations to improve liquidity risk management and governance framework. Some of the areas which are covered in this regulation include board of directors responsibility on liquidity risk management, senior management role in liquidity strategy, process for monitoring and controlling liquidity risks, forward looking funding strategies, periodic stress tests, formal contingency funding plan and transfer pricing frameworks.
Overseas legal and regulatory changes which may have extraterritorial reach can impact GCC corporates. The FATCA (Foreign Account Tax Compliance Act of the USA) Act with truly global reach requires all banks to comply with Internal Revenue Service (IRS) regulations by way of reporting & withholding on US Persons.
The governance required on the part of each bank is demanding in ensuring effective policies & procedures, strong processes & controls and accurate reporting; all of which must be certified to the IRS by a senior bank official acting as the nominated Reporting Officer. The UK Bribery Act 2010 also has extraterritorial jurisdiction over overseas companies which maintain a business presence in the UK. This legislation is to combat bribery & corruption impacts on both individuals and companies and sets out principles under which all companies should have taken a proportional response to implement procedures, risk assessments, due diligence enhancements, training and monitoring & reviews.
Corporate governance benefits the GCC capital markets. Corporate governance will increase institutional participation and would bring a long-term perspective to the market and would also encourage the production of more high quality research. Global investors will pay premium to share prices on improved corporate governance standards. Hedge funds look for corporate governance.
Foreign direct investment is encouraged due to better corporate governance standards. It will also support development of bond market in the region.
Awareness of the advantages of corporate governance is definitely improving across the family businesses driven to some extent by what is evident in the strides that have been made in recent years in the regulated businesses by QFC, QCB and QFMA (Qatar Financial Markets authority).
Priorities for governance in family offices include succession planning, conflict management and professional management at board and senior management levels. Corporate governance promotes financial stability and can attract investment into the GCC region.
♦ R Seetharaman is Group CEO of Doha Bank
