Bank On It

With more than twenty years experience as a Bank Teller and Customer, I have grown accustomed to the ins and outs of retail or commercial banking. You rarely get advice how to shop for banking services. We see advertisements in the media about rates and features but seldom see the benefits. I will share a few important facts on how to choose the right bank for your personal or financial goals. Once you are enlightened, you will be able to make wiser banking decisions. Let’s go to the Bank!

One of the most important factors in choosing where to open your bank account is finding a convenient location that suits your needs. Rates are not the issue since most banks have competitive interest rates.

The main focus is convenience and this does not necessarily mean close in proximity to work or home since banking is now more automated and we can bank anywhere using the ATM (Automated Teller Machine), telephone and online services. Your bank must be accessible twenty-four hours per day whether offline or online.

Here is a caution: not all transactions can be conducted remotely. For routine services, we don’t have to go to the location where we opened our account but finding a convenient location is always good. Be prepared to visit the bank to carry out the following transactions;

• Security update
• Signature update
• Cashing large sums of money
• Adding individuals or opening a new account
• Closing account

Know Your Bank

It is important to know what products are offered by your bank. Don’t rely on cross-selling opportunities by the Teller or Customer Service Representative. You need to determine your most important banking needs when conducting commercial banking. While it is the bank’s responsibility to provide information about other products and services it offers, it is your responsibility to know which ones will provide you value, so you will not pay for products you do not need.

Here are few facilities that are offered by Banks nationwide:

ATM or ABM (Automated Teller/Banking Machine)

Depending on the machine used, there are fees charged to access funds. If you use your own bank’s ATM you might not be charged for using the machine. If you do otherwise, you may be charged a minimum fee per transaction.

Machines with the ‘Plus’, ‘Visa’ and ‘Master card’ signs are generally international brands that facilitate international transactions. This means that you can access funds outside the home country of your bank. One of the most discomforting things about some ATM’s primarily in the United States is that they only pay out a minimum $20 denomination. I would imagine that any bank that pays out lower denominations especially $10 and $5 notes, would grab a greater percentage of the teller machine market.

Money Transfer Facilities

Money transfer facilities are courier services that work in tandem with financial institutions to remit funds on their behalf between remote locations, whether international or intra-country. Customers are charged by their domicile remittance couriers (their own institution) whenever funds are sent. The most recent funds transfer service is sending money through email and Paypal. The banks have even tightened their grips on this SUPER convenient remittance service as unscrupulous individuals seek ways to rob unsuspected consumers.

Night Depository

Another convenient deposit service in commercial banking is Night Depository. This offers depositors the convenience of depositing their money outside of regular banking hours. A depository vault with lock is attached to the wall of the bank where customers have unlimited access 24 hours a day. There is usually a charge to utilize this facility, however, some banks may offer this service free to preferred customers. This product is normally geared to businesses who manage large sums of cash on a daily basis.

Similar to this is the Safety Deposit Box but the minor difference is that it allows you to store personal effect in a vault on the bank’s premises, for your own security. This may also attract a monthly or annual charge. This facility is accessed inside bank.

Assurance and Insurance

Bank assurance or insurance banking is also a profitable business niche for banks and Insurance companies. The banks saw it fit to compete with the Insurance companies when they embarked on this operation some years ago. Now it is one of the biggest markets in the financial sector, as wise investors and consumers save funds for retirement and unforeseen future events.

Foreign Exchange Trading

Foreign exchange trading is extremely volatile which means the stock market can appreciate (go up) or depreciate (go down) by the second as a result of irregular trends in the market. This fluctuation (change in value) is dependent on foreign market investors who depend on foreign exchange in their international business trading.

The Bloomberg Stock Money Market and the Jamaica Stock Exchange draw nationwide and worldwide attention on a daily basis as millions of dollars of foreign exchange passes through this medium. Private bankers most times act as brokers to find the right market for larger or riskier investors. On a smaller scale, commercial banking opportunities provide foreign exchange trading within their branches for their customers’ business and personal needs.

Saturday And Sunday Banking

One super convenience is weekend banking but there is a race between the banks. Some have scaled down operations to facilitate this as this is an expensive operation, while others have flexible opening hours to facilitate later or earlier transactions.

Credit Card And Commercial Paper

Commercial banking offers short-term lending through Credit Cards and Commercial papers. Credit cards allow users to spend now and pay later but be careful how you spend, as this unpaid balance attracts high rates of interest and is charged to your card.

Commercial paper is a promissory note issued to you by the bank in the form of credit. This could be a refinancing opportunity for any debt that you might currently have. However, the rule of thumb is; always remember that a debt is never complete until it is paid off in full and there will always be charges for the use of the facility.

Loan
A loan is also a well-known product on everybody’s lips. One of the ways that commercial banking earn funding is through interest charged on issuing loans. The interest that is calculated from the principal borrowed, is used to finance further lending and growth for the institution.

There are two ways in which interest is calculated; straight line and reducing balance method. Most banks now have amortized their loan facility. This means that payments are fixed each month. The monthly figure is shared by paying the interest on the loan, while the rest reduces the principal borrowed over the life of the loan.

Another form of a loan could be an overdraft facility. This type of credit facility is similar to the credit card as the bank offers an opportunity to exceed your balance in your checking or savings account. Most times this additional credit is secured, which means that the bank hypothecates (hold) funds or assets in similar value against the amount overdrawn.

Fixed and Ordinary Deposit
Fixed or ordinary deposits is another source of income for commercial banking. Fixed deposit means that a certain amount is deposited at an agreed rate, while an ordinary deposit is a regular saving account that you manage on a normal basis. These funds are reinvested by the bank at a higher rate and a portion of the proceeds from the return is paid over to the customer as interest.

Currently, these rates range from as low as 0.5 percent to 1 percent or higher (USA) and.085 to 3.75, percent (JAM) depending on how it is tiered (split). The amount of money you deposit and the length of time it is held by the bank will determine the rate of interest that you will receive from your bank. An ordinary savings account doesn’t receive much interest but it could certainly offset the charges from the tax that is levied (charged) against the account.

Bank On Your Bank

These are few products and services offered through commercial banking. The Bank should be your friend and not your enemy. Know your bank and allow your bank to know you. On the other side of the counter, monies that are deposited in our financial institutions help our country to operate effectively on a macro level or larger scale.

We are the ones who controls or determine the country’s inflation as monies are circulated daily through banking. The central bank also forms the center or nucleus of all the financial operations related commercial banking.

Once we develop a good rapport and relationship with our trusted financial adviser, we can always bank on our banks!

U.OL Defining “Commercial Banking”

“Commercial banking” was defined in the previous edition of this book as the activity of a banking institution whose “principal business is to accept deposits, make loans, collect commercial paper, and arrange the transfer of funds.” Under the banking law from the adoption of the Glass-Steagall Act in the 1930s until the beginning of the 1980s, there was a distinct demarcation between commercial banks and other financial institutions, such as investment banks, securities firms, and commercial financial services conglomerates.

AH this is changing. The types of institutions that can engage in traditional commercial banking functions have enlarged as a result of legislation giving additional powers to thrift institutions. The types of activities commercial banks engage in have expanded as a result of legislation at both the state and federal levels and as a result of judicial decisions dismantling parts of the wall erected by the Glass-Steagall Act to keep commercial banks insulated from the risks of dealing in securities. The “nonbank bank” explosion has started a restructuring of the banking market into holding companies capable of offering an array of financial services. In light of these developments, perhaps the most suitable definition is one offered by an English texi: “[B]anks come in all shapes and sizes, with different name tags applied indifferent countries, often quite loosely. Banks make most of their money from the difference between interest rates paid to depositors and charged to borrowers.” Commercial banks are “publicly quoted and profit oriented. They deal directly with the public, taking deposits, making loans and providing a range of financial services from foreign exchange to investment advice. Most countries have settled for between four and ten;” but in the United States there are nearly 15,000 because of “banking laws that have prevented banks operating in more than one state, and in different types of business,..

In addition to commercial banks, there are many specialized depository institutions that have been established to perform specialized roles. Thrift insti­tutions such as savings and loan associations and credit unions are important examples. At their inception, savings and loan associations primarily engaged in home mortgage lending and offering passbook-type savings to consumers. With the enactment of the Depository Institutions Deregulation and Monetary Con­trol Act of 1980, thrifts gained expanded authority to engage in commercial banking activities. Further incorporation into the general banking market has occurred as a result of the restructuring brought about by the financial failures and weakened condition of thrift institutions in the 1980s, which led to changes in the law to encourage the acquisition and merger of weak institutions with stronger financial institutions, including banks. To a great extent, thrift institutions are subject to a regulatory regime similar to that governing commercial banks, and engage in banking functions similar to those of commercial banks. Subsequent chapters discuss how thrifts fit into this regulatory scheme.

There are other specialized consumer-oriented financial companies. Credit unions may be organized under state and federal statutes with the power to maintain customer share accounts against which drafts may be drawn payable i n a manner similar to checks. There are also personal finance loan organizations authorized under the laws of the several states that loan small amounts of money to consumers, often at specially regulated rates that are higher than the usual interest rates allowed. These organizations normally are not deposit-taking institutions but operate with their own capital and credit. Banks often have their own small loan depart­ments to make the same type of loans, and holding companies may have special consumer loan subsidiaries or affiliate companies.

Although trust activities have become a part of the activity of many com­mercial banks,1 this book does not deal with the laws that govern these trustee relationships and activities. The competition for funds has led some banks to offer managed investment accounts through their trust departments similar to those offered by mutual funds and other securities firms. Again, there are trust companies organized under state law that operate by accepting money for the purpose of investment where the beneficial interest in the funds remains in the original owner.

There are other types of banking functions and specialized banks: for exam­ple, reserve banks, which are really bankers’ banks; investment banks, whose chief business is underwriting and dealing in securities, and providing financial advice and aid in corporate acquisitions and mergers; agricultural banks; foreign trade banks; and other specialized banks that have charters to engage in particu­lar types of business. Further, the peculiarities of federal laws regulating bank holding companies have encouraged the proliferation of various financial institutions that have been chartered as full-service banks but that limit their functions to activities such as consumer lending and credit card operations.

Because of the diversity of functions of commercial banks and the variety of depository institutions involved in them, this book does not attempt a compre­hensive survey of all banking activity. Rather, it emphasizes the basic regulatory structure that governs traditional commercial banking institutions and the com­mercial activities associated with accepting deposits, collecting commercial paper, making payments and transferring funds, and engaging in certain credit transactions.

As this introduction indicates, the laws and regulations that govern com­mercial banking are numerous and complex. The various types of financial institutions engaging in commercial banking activities are matched by an equal activities. The Depository Institutions Deregulation and Monetary Control Act of 1980 also gave thrift institutions chartered by the Federal Home Loan Bank Board the author­ity to engage in trust activities under certain conditions. 12 USC § 1464(n) (1982).

In addition, the law governing the transactions of commercial banks is complex. The Uniform Commercial Code has brought a desirable uniformity to the law in many areas, but there are many special purpose statutes, frequently intended to give special consumer protection, that must be taken into account in analyzing banking transactions. There is a growing body of federal law that must be considered along with the state commercial law of the UCC and common law. This book is intended to serve as a beginning guide for the bank officer engaged in these commercial banking transactions and the attorneys called upon to advise in banking matters. It is not a substitute for careful legal counsel, how­ever, and such assistance should be obtained because this book can neither cover all the details applicable in particular matters, especially at the regulatory level, nor report on all the local variations, changes, and new developments. More­over, the facts of a particular situation will vary in ways that may introduce new legal problems or otherwise affect the legal analysis. Obtaining the advice of competent legal counsel is essential.

How to Open an Offshore Bank Account As an American

With the world in chaos and bankrupt governments everywhere dreaming up new schemes to get their hands on your hard-earned money, more and more people are looking offshore for a place to move some of their assets.

I don’t encourage you to sit around and wait for some three-letter agency to swoop in a decide to dip into your retirement funds or bump up your tax rates or devalue your money by firing up the printing press. In a connected world, opportunities out of your home country are everywhere, and to make the most of your money and your freedom, you should explore those options.

There’s nothing illegal about having an offshore bank account. At least for now. While Hollywood has created a scene where those who bank out of the country are briefcase-carrying criminals or guys in Tommy Bahama shirts flying prop planes onto tiny island landing strips, nothing could be further from the truth. Your government doesn’t want you to move money to another country because it makes it more difficult for them to tax.

When I said it’s not illegal “for now”, I mean that you can never tell when things will get so bad that any loose change that can be grabbed to prop up a failing country will be grabbed without a second thought. The debacle in Cyprus has shown us just how desperate things could become. Sure, the EU can spin it as a tax on the Russian mob, but you know the government will always make up an excuse for their dirty deeds.

As an American, you’re at a disadvantage thanks to FATCA – the Foreign Account Tax Compliance Act. Washington wants you to believe that the only people keeping their money offshore are rogues and scoundrels. Never mind the six million Americans living and working in other countries. As such, they’ve imposed a draconian set of rules on foreign banks, basically making them as well as their sovereign governments a bunch of tattletales for the IRS. Some banks have given up on Americans altogether. But there is still hope.

First, put out of your mind the idea that “offshore” means somewhere where you can sit on a shore. Islands with crystal blue waters are not high on my list of offshore jurisdictions. If you’re an America, anywhere out of the United States is an offshore jurisdiction. Think Hong Kong, Singapore, Chile, and so on. While it is also associated with offshore banking, Switzerland is no longer available to Americans, thanks to IRS crackdowns there that have led most banks to shun US citizens.

Second, know that the days of numbered bank accounts and intense secrecy are over. Just ask the millionaires who got turned over to the US government. There are several short forms you will need to fill out each year, one with your tax return, another sent in separately. If you’re a US citizen or resident, you must declare any accounts – or combination of accounts – with a value of at least $10,000 at any time during a calendar year.

Third, focus on your goals. Once you’ve moved beyond the cliches and propaganda about offshore bank accounts, you can focus on what you really want. No, you’re not going to be able to hide a bunch of money from the tax authorities. Yes, you will have to pay tax at home on any interest you earn. But while your account won’t be a secret to your home government, you will have separation from them. Some bureaucrat with a fat finger won’t be able to freeze your account with one keystroke. It will be harder for an ambulance chaser to get at. And while you will have to pay tax in the US on interest earned, that interest rate could be double, triple, or even fifteen times higher than what you’re earning now.

Determine what you’re looking for in a bank account. Do you want a simple place to store savings away from the grubby hands of your local government? Do you want to hold part of your money in a different currency or currencies to diminish your sovereign risk? Do you want to earn a higher interest rate or benefit from appreciation of a foreign currency? Or do you want sophisticated wealth management tools and private bank service?

Fourth, once you know what you’re looking for, find the right environment for you. The good news is that most of the goals above can be had with just about any offshore account. Just having a portion of your assets out of your home country gives you more freedom. If the government here goes Argentina on you and imposes capital controls, you’ll have a nest egg you can access somewhere else. Any good offshore bank will give you a debit card to access your cash, as well.

Unlike in the United States, most foreign banks offer accounts in a multitude of currencies. Think the Australian dollar will go up thanks to a resources boom? No problem; you can hold it in your account. With most banks, you can swap out to another currency later if you change your mind. You can often times hold multiple currencies in the same account at once.

In Andorra, for instance, you can actually write checks in any currency the banks offers. If you need that kind of flexibility, Andorra is a great place to bank. It’s also one of the most stable jurisdictions in the world, with liquidity and capital ratios that blow away the US or most other “safe” banking jurisdictions. Banks are locally run by banking families that provide personalized service.

Because offshore banks offer multiple currencies to bank in, you can also choose your interest rate. While rates in the US are near zero, making savers suffer, rates in Australia and New Zealand are much higher. The governments there didn’t play the race-to-the-bottom game that their western counterparts did. Banks both in Australia, and those offering Australian dollar deposits, routinely offer near 5% interest rates on savings – even short-term savings – at a time when you’re lucky to get 0.75% in an online account in the US. If you want to branch out to an emerging destination like Mongolia, you can earn up to 15% on your money.

If you like the stability of the US dollar but want higher interest, places like Georgia, a small but economically robust emerging nation in the Caucasuses offers as high as 7-8% interest on medium-term deposits not in their local currency, but in US dollars. Georgia is one of the twenty most economically free countries in the world (the US is tenth) and not a bad place to earn some extra interest.

Fifth, consider the risks. Americans are used to $250,000 in deposit insurance from the FDIC. Some countries, like Mongolia, don’t offer such insurance at all. Others have lower limits, or don’t insure deposits in certain currencies. For the most part, countries around the world have enacted deposit insurance plans of some type to keep peoples’ money safe. But it’s up to you to do the research on each jurisdiction and each bank and determine where you’re most comfortable.

Keep in mind that the FDIC, for example, has less than the equivalent of 0.5% of all bank deposits in its fund. To me, that’s not very safe when you consider how thinly capitalized US banks are. While local banks in Hong Kong and Andorra have very conservative lending practices and high liquidity ratios, US banks get money from the Federal Reserve and go right out and loan it indiscriminately and then come running to the government when things go bust.

The FDIC may pay out if your bank goes bust, but consider the decline in the US dollar over the last few years and over the last decade. The dollar just isn’t what it once was. If the US banking sector had another run of bank failures like it did in the recent recession, you’d see more “Too Big to Fail” type nonsense, and as a result, more money printing to pay off depositors. So you might get your money, but it wouldn’t be worth as much.

Of course, deposit insurance wasn’t of much use in Cyprus, where the European Union basically forced the country to dip into bank accounts – first for 7 to 10%, then for much more – to keep from going bankrupt. Tens of thousands of dollars of your money could have been wiped away in an instant, with no way to get it out as the government kept banks closed until they could figure out just how much of your money to steal.

The good news is that having an offshore bank account isn’t shady, scary or difficult to open. In some cases, you can open one with a couple hundred dollars or even less. In some cases, you have to visit the country, which could be easy if you live near the Canadian border, for instance, or are taking a vacation sometime soon. There are, however, banks in Norway, Gibraltar, the Channel Islands (UK), and elsewhere where you don’t need to visit to open your account. You can do it all through the mail.

When you realize all of the things going on in the world today, you just might wonder why you didn’t look into getting a bank account out of the country earlier.

Charting the Waters at Cordell Bank

Until 1978, no diver had explored the Cordell Bank. This extraordinary place is now a National Marine Sanctuary. There’s an interesting history behind how this part of the ocean off the coast of California, northwest of San Francisco became a sanctuary.

The bank was discovered by George Davidson while conducting surveys along California’s north coast in 1853. Sixteen years later, in 1869, a more extensive survey was conducted by Edward Cordell, after whom the bank was named. What follows is some of the experiences shared by the first divers to view the bank.

At 150 feet, air bubbles slide out of my regulator sounding like gravel being poured from a metal bucket. We are 20 miles from the nearest shore on a ridgetop of a large Pacific seamount named the Cordell Bank and the scene below is incredibly bright. Anemone, hydrocoral, sponges, and algae cover everything in sight, in many places growing on top of each other.

While collecting some of these organisms, we are suddenly flushed with a euphoric giddiness. We try to smile, but numb lips and the regulator make the effort that much sillier. Struggling to control the narcosis, we keep collecting and exploring. All too soon, however, my buddy waves a thumbs-up in front of my mask. Now, where’s the ascent line? A flashing strobe catches my eye and I swim toward it. The line’s there, so we follow our bubbles – but not to the surface. At 10 feet, we both grab the regulators of full scuba tanks. The decompression wait seems eternal as we can hardly wait to tell the others about our dive to where no one has been before.

These experiences were shared with the author from Robert Schmeider, Ph.D., of Walnut Creek, California, who was obsessed with the exploration of Cordell Bank. In 1977, while studying a chart of northern California’s coastline, this atomic physicist became intrigued by Cordell Bank, which is 20 miles (32 km) due west of Point Reyes and to the northwest of San Francisco. The chart showed there was at least one shallow place with a depth of 20 fathoms or 120 feet (37 meters). It could be dived using regular scuba tanks, so Schmeider assumed it had been. But when he asked a few diving friends if they had ever been there, he discovered none had. So he talked to people with the Coast Guard, the Navy, the California Academy of Sciences, the University of California at Berkeley, the Department Fish and Game, the Geological Survey, the National Oceanic and Atmospheric Administration (NOAA) and others. After a couple of months, Bob realized to his amazement, no one knew much about the bank at all. The idea of exploring Cordell Bank soon became a serious goal.

But Bob expected many dangers. Deep-diving can always be dangerous, especially with compressed air scuba diving due to the possibility of nitrogen narcosis and decompression problems. Additionally, he knew the water was cold, and a fairly stiff current of one or two knots ran in the area. Two knots is nearly impossible to do any work in. To make matters even worse he expected to encounter lots of sharks, including great whites since Cordell Bank lies about midway between Tomales Bay and the Farallon Islands, both places where great whites are known to congregate.

The fisherman in Bodega Bay knew the Bank well as an excellent fishing area, so Bob lined up a boat and skipper from there. After extensive discussions with several of his regular diving partners, he announced his plan to divers in the Sierra Club’s Loma Prieta chapter from the San Francisco Bay area in October of 1977. He knew exploring the bank would require a large support group. At an organizational meeting held in the U.S. Geological Survey chambers in Menlo Park, the group elected a divemaster and all but one of the 40 people attending pitched in $40 a piece to kick off Cordell Bank Expeditions.

After a few practice dives at Monterey and at the Farallon Islands, Bob felt his group was ready to go to Cordell Bank. Unfortunately, he ran into numerous difficulties. Most importantly, a number of divers had dropped out of the group, so Bob had trouble gathering enough divers for a trip. Finally, on October 20, 1978, with just five divers, Bob made it to Cordell Bank.

As Bob recalls, “What we saw on that day absolutely astonished us. We were totally unprepared for the light level. Not only was it not dark, it was incredibly light. After I made the first dive with a buddy, I told the other drivers not to take their lights, as they simply would not need them. It was so light you could almost read. And we had been to a depth of close to 150 feet.”

“There were enormous aggregates of 12-inch (30 cm) fish swimming around above the pinnacle. To us, it seemed an incredible snowstorm of fish. When we finally broke through the fish on our way down, our entire field of vision was just filled with this miraculous sight. We could see colors – reds and oranges and yellows – and the rocks were covered, just inundated, with organisms. Sponges, especially Corynactics (Strawberry anemone), pink hydrocoral, hydroids, and a lot of large-bladed algae. It looked as if someone had landscaped it. We were just overwhelmed.”

On the first dive, they collected nearly 50 species, including at least one new genus of algae and one new species. By working closely with a number of professional biologists at the University of California at Berkeley, the California Academy of Sciences, the Los Angeles County Museum, the Geological Survey, the Smithsonian, and other institutions, they sorted and identified their new collections until the list included more than 400 species.

After that first dive, made possible by the Sierra Club divers and by grants from such organizations as the San Francisco Foundation and the National Geographic Society, the Cordell Bank Expeditions evolved into a member-supported, systematic, data-gathering organization that bought its own research vessel, the Cordell Explorer, which was retired in 2014. They bought a LORAN-C receiver and carried out depth surveys back and forth across certain areas, measuring depths and recording positions. From that data, they were able to generate their own set of charts. Those charts became a major help in carrying out more successful dives, as they could more reliably find the pinnacles and ridges they wanted to dive. In the summer of 1985, Bob and a colleague were able to obtain state-of-the-art hydrographic survey data on the Bank as a result of a project conducted by the National Oceanic and Atmospheric Administration (NOAA) and the U.S. Geological Survey (USGS). That survey covered the 200-mile Exclusive Economic Zone (EEZ) off the coast that the U.S. claims control over. Cordell Bank may well be the best-surveyed feature off the coast of North America.

Aside from collecting specimens and surveying, the expedition also used 35-millimeter photography, plus Super 8-millimeter, 16-millimeter, and videotape cinematography. Some of their photographs have been useful in identifying species that didn’t show up in their collections and in showing physical features the divers may not have noticed during their dives.

They have found this seamount is roughly elliptical and, at the 50-fathom depth, it is 9-1/2 miles long by 4-½ miles wide (15.3 x 7.25 km). It lies right on the edge of the continental shelf and is the northernmost such shallow place all the way to Canada. The bank is a distinct plateau with its flat top rising to the 30- to 35-fathom depth. Atop this plateau, at least four cliffy ridge systems, two in the north and two in the south, and several pinnacles reach to diveable depths. In fact, the shallowest point the expedition has found is about 19 fathoms (114 feet or 35 meters) and is part of a ridge system in the northeast. Geologically, it is considered a piece of the ancient Sierra Nevada that was sheared off by the Pacific Plate, thus explaining its granite composition.

Growing on this 19-fathom peak is a dense, whitish cap of barnacles and red algae. Below this, from 20 to 25 fathoms (36.6 to 45.7 meters), the sessile community grades to nearly foot-thick piles of sponges, anemones, including the common Strawberry Anemone Corynactis californica, California Hydrocoral Allopora californica, hydroids, and tunicates. Space is the limiting factor. The organisms are very brightly colored with reds, yellow, white, and pinks. At 30 fathoms (55 meters), the community thins to a few large, widely spaced creatures, mainly sponges, urchins, and anemone. By 35 fathoms (64 meters), bare rock dominates the scene. Around 200 feet in various places, brilliant white sediments of almost a hundred percent shell fragments accumulate.

The Cordell Bank community is very healthy showing little evidence of disease or death because the California Current brings clean, clear, cold (50 to 55 degrees F. or 10 to 13 degrees C.) water, with a high nutrient content, upwelling to the relatively shallow bank. When the disruptive El Niño current occurs off California’s coast, the water temperatures at the bank rise to over 60 degrees F. or 15.6 degrees C. The sun’s rays penetrate this water so deeply divers can take photographs using available light at 150 feet (46 meters). Visibility is sometimes as good as 100 feet (30.5 meters). Because of the water’s clarity and nutrient load, photosynthesizing organisms support a vast and complex food chain up to large fish, birds, and mammals.

Cordell Bank has long been known as a superb fishing area. Groups of rockfish congregate around the pinnacles, sometimes so thickly, divers report whiteout conditions. Besides rockfish, sport fishermen regularly catch lingcod, yellowtail, salmon, albacore, and shark. Oddly enough, the divers have yet to see great white sharks, in spite of the fact that the great white’s favorite prey, seals and sea lions, are at the bank. They have, however, seen blue and mako sharks.

Like rockfish, seabirds often congregate around the pinnacles, and it was just such gatherings that enabled the expedition to initially home in on shallow points to dive. On surveying and diving trips since 1978, volunteer observers from the California Marine Mammal Center and San Francisco State University have recorded many sightings of seabirds and mammals at or near Cordell Bank. They’ve seen 33 species of seabirds including black-footed albatross, northern fulmar, surf scoter, south polar skua, common murre, pigeon guillemot, tufted puffin, and brown pelican. The previously endangered brown pelican was particularly noteworthy because it was sighted on about two-thirds of the trips.

The observers also recorded fourteen kinds of marine mammals. Of special interest were two endangered cetaceans, the humpback and blue whales. Both species feed at the bank. The team’s most exciting encounter with blues occurred on October 10, 1982, when a pair approached from off the port bow, surfaced 30 yards away, visibly swam under the ship, and surfaced again several hundred yards astern. Marc Webber and Steven Cooper, reporting for the group, felt the number of blue whale sightings “represents a substantial number of records for this species over the continental shelf in the Cordell Bank area, and along with probable observation of feeding suggest this area is an important autumn habitat for this species.” Also of particular interest were sightings of northern elephant seals whose pelagic habits have only recently become better understood. Other observed mammal species were Minke whale, Dall’s porpoise, harbor porpoise, orca, Pacific white-sided dolphin, Risso’s dolphin, Northern right whale dolphin, California sea lion, Steller sea lion, northern fur seal, and harbor seal. These have all been autumnal observations. The expedition has restricted their trips to the autumn because the weather is most predictable at that time and because the California and Davidson currents more or less cancel each other out, which makes diving more practical.

The greatest mysteries Bob and his divers have encountered are a number of large, cylindrical holes that lie right on the sharpest, highest parts of the region. Some holes appear to be man-made, but others look natural. Hearsay has it the holes were made by the U.S. Navy during the 1960’s in a project related to submarine detection. Bob’s expedition was once followed for nearly an hour by an unidentified submarine. In spite of his security clearance, Bob has been totally unsuccessful in learning anything from the Navy about any of this.

Cordell Bank is now a national marine sanctuary. The Sanctuary Programs Division (SPD) of NOAA, which is in charge of the sanctuaries program held its first informational hearing on the bank in San Francisco on April 25, 1984, and published a draft Environmental Impact Statement and other documents.

Bob is optimistic about Cordell Bank’s future. He believes, “It’s incumbent upon those of us who wish to preserve certain areas of our environment like museums, to set up the legislation to protect those areas. We don’t give any thought whatsoever to commercially developing Yosemite because it’s become part of our national environment, our cultural heritage. And our marine sanctuaries will become the same way. I hope and believe that 50 or 100 years from now, areas like Cordell Bank, which had long since been designated marine sanctuaries, will be part of our national heritage and will be considered inviolate.”

Creating a Marine Sanctuary

The federal marine sanctuaries program was established by Title III of the Marine Protection, Research, and Sanctuaries Act of 1972. This law provides that areas in the ocean as far out as the edge of the continental shelf and in the Great Lakes may be protected.

During its first 5 years, the program crawled slowly along, because no funds were appropriated. By 1977, only two marine sanctuaries had been designated. The first was a six square mile site off Cape Hatteras, North Carolina, to protect the wreck of the U.S.S. Monitor, and the second was Key Largo Coral Reef Marine Sanctuary adjacent to John Pennekamp Coral Reef State Park in the Florida Keys, which covers 100 square miles. In that year, 1977, President Carter, in an environmental message to Congress, expressed support for the program and boosted funding. In contrast to the law’s original intent, Carter was trying to protect areas threatened, in this case, by offshore oil development. As it turned out, one of Carter’s last official acts was the designation of three new sanctuaries: Looe Key in Florida, Gray’s Reef in Georgia, and the Gulf of the Farallones off California. (Cordell Bank neighbors this sanctuary.) Once again, the program was slowed by restricted funding under the Reagan Administration.

The slowness of the marine sanctuaries program was especially disheartening because all the land is under state or federal control already and doesn’t require acquisition funds. Money was needed only for evaluating potential sites, managing a site after it becomes a sanctuary, and enforcing the protective laws.

The marine sanctuaries program works in the following way. Any organization or member of the public may send nominations to the Sanctuary Programs Division (SPD) in the Commerce Department’s National Oceanic and Atmospheric Administration (NOAA) for consideration. The idea of nominating a place need not be intimidating. As Bob Schmeider found out, “the nomination itself doesn’t need to be very specific at all. Of course, if the (SPD) already knows about a site, which they had already known about Cordell Bank from information I had given them well before the nomination, (then) the actual nominating step was simply a letter from me to them saying I would like to nominate Cordell Bank. If a site is totally unknown and you’re preparing a nomination, then you need to include some details and some information, so that they will have some knowledge of it. That’s all.”

Formerly, a nomination was automatically placed on a List of Recommended Areas, but this has been replaced by a Site Evaluation List (SEL) that includes nominated sites meeting certain preliminary criteria. After review by the SPD staff, the SPD can promote the area to active candidacy. At that point, they’ll produce draft documents, including a management plan, environmental impact statement (EIS), and a designation document. These will be circulated among interested individuals, organizations, and governmental agencies. They’ll also schedule public hearings in the communities nearest the candidate site to get additional input. From that, they’ll produce final documents and circulate those and hold more hearings. Congress has the opportunity to review a site’s candidacy and hold their own hearings. Cordell Bank was the first marine sanctuary candidate to receive such scrutiny. If the site is within state jurisdiction, then that state’s governor may veto the designation, but this won’t necessarily cancel a site’s candidacy altogether. (Cordell Bank wasn’t in state waters.) After all of these steps, the Secretary of Commerce can sign the designation document and the site will become a national marine sanctuary.

Offshore Banking Services

Banking is one of the most important sectors of the world economy as it influences investment, consumption and other business activities. Furthermore, banking has a substantial impact on the circulation of money and thus influences economic growth. Offshore banking provides a unique opportunity to individuals, business people and companies to access the international market and implement their business and investment plans since offshore banking encompasses stronger privacy and security features. That is to say, the activities you launch through your offshore private banking are more confidential and secure. It should be underlined that you will be able to offer the same privacy to your customers together with other related benefits.

The procedures you need to follow in order to open an offshore bank account are not complex. In other words, every individual may open an offshore bank account within few hours. Note that each offshore banking jurisdiction has its own requirements. Among the most popular offshore banking centres are the Cayman Islands, Seychelles, Saint Vincent and Grenadines, Bahamas, Gibraltar and Netherlands Antilles.

BASIC REQUIREMENTS:

As it has been mentioned before, opening an offshore bank account is rather simple. The procedures you need to follow in order to open an offshore bank account are similar to the procedures you follow in order to open a bank account in your home country. First of all, offshore banks will ask for your personal details: name, date of birth, address, citizenship, occupation and submit a copy of your passport, identity card or any other identification document issued by a governmental authority. Second of all, you will have to verify you residence address by presenting a utility bill or any other document. It should be mentioned that all the submitted documents must be certified.

Some considerable benefits of offshore banking are:

Minimised political risk. In many cases, the biggest threat is not the market risk but the governments, i.e. capital controls measures and bail-ins.
Asset protection.
Currency diversification. Holding foreign currencies leads to the minimisation of the risks you confront.
More options for your business and investment plans.

JURISDICTIONS:

Cayman Islands:

One of the major advantages of the Cayman Islands is the political stability. The annual license fee is 9.000 US dollars. The international banking infrastructure is well-developed with many facilities. Another considerable advantage of the Cayman Islands is the zero taxation on international banking income. Nevertheless, the state’s approach toward international private banks owned by non-banker is poor. Despite the fact the Cayman Islands have well-developed banking structures, the poor attitude towards international banks owned by non-bankers discourages many investors and business people to launch offshore banking activities in the Cayman Islands.

Seychelles:

The major advantage of Seychelles is confidentiality since state authorities have no direct access to bank information without a Court order. Note that Seychelles has double tax treaties with Barbados, Botswana, China, Cyprus, Indonesia, Malaysia, Mauritius, Oman, Qatar, South Africa, Thailand, United Arab Emirates and Vietnam. Furthermore, it should be pointed out that Seychelles has signed Tax Information Exchange Agreements only with the Netherlands.

Saint Vincent and Grenadines:

The country maintains a degree of flexibility and confidentiality that many bank owners prefer. In particular, confidentiality regarding the incorporation and the launch of business of an International Banking License has been ensured by the Confidential Relationships Preservation (International Finance) Act 1996 and by the International Banks Act 1996. Among the major advantages of Saint Vincent and Grenadines is the absence of exchange control restrictions to offshore transactions and stamp duties. Furthermore, there are no corporate taxes, no income tax, no withholding tax, no capital gain tax and no estate/inheritance/succession duties.

The country has political stability, well-developed international banking infrastructures and skillful labour force.

The International Banks Act 1996 issues the following licenses:

Class I Offshore Banking License: The Licensee is involved in offshore banking activities outside the country. The minimum class requirement for Class I license is 500.000 US dollars.
Class II Offshore Banking License: The Licensee is engaged in offshore banking with individuals or groups detailed described in a written undertaking. The minimum class requirement for Class I license is 100.000 US dollars.

Bahamas:

Bahamas is considered one of the most attractive international banking centres in the world because of its excellent communications systems and the frequent air and sea connections with the USA. In addition, the country has a well-developed banking secrecy legislation. It should be taken into account that there are no taxes on international banking income.

There are two types of licenses, the unrestricted and restricted license. The unrestricted license can be obtained by private individual given that they can prove that they have a considerably high net worth. On the other point of view, restricted licenses are granted to financial institutions. Note that a restricted license enables the holder to offer banking and trust services exclusively to a particular class of associated individuals or businesses.

Gibraltar:

Gibraltar is a full member of the European Union. Therefore, banks incorporated in Gibraltar operate under the same legal framework as the banks in the UK. Nevertheless, Gibraltar has some additional advantages such as the efficient and effective bureaucratic procedures. Moreover, banks may operate completely free of tax.

Biometric Payment Authentication (BPA) – Corporate Banking Transactions: Pakistan Perspective

1. Introduction

The term ‘authentication’, describes the process of verifying the identity of a person or entity. Within the domain of corporate e-banking systems, the authentication process is one method used to control access to corporate customer accounts and transaction processing. Authentication is typically dependent upon corporate customer users providing valid identification data followed by one or more authentication credentials (factors) to prove their identity.

Customer identifiers may be user ID / password, or some form of user ID / token device. An authentication factor (e.g. PIN, password and token response algorithm) is secret or unique information linked to a specific customer identifier that is used to verify that identity.

Generally, the way to authenticate customers is to have them present some sort of factor to prove their identity. Authentication factors include one or more of the following:

Something a person knows – commonly a password or PIN. If the user types in the correct password or PIN, access is granted

Something a person has – most commonly a physical device referred to as a token. Tokens include self-contained devices that must be physically connected to a computer or devices that have a small screen where a one-time password (OTP) is displayed or can be generated after inputting PIN, which the user must enter to be authenticated

Something a person is – most commonly a physical characteristic, such as a fingerprint. This type of authentication is referred to as “biometrics” and often requires the installation of specific hardware on the system to be accessed

Authentication methodologies are numerous and range from simple to complex. The level of security provided varies based upon both the technique used and the manner in which it is deployed. Multifactor authentication utilizes two or more factors to verify customer identity and allows corporate e-banking user to authorize payments. Authentication methodologies based upon multiple factors can be more difficult to compromise and should be considered for high-risk situations. The effectiveness of a particular authentication technique is dependent upon the integrity of the selected product or process and the manner in which it is implemented and managed.

‘Something a person is’

Biometric technologies identify or authenticate the identity of a living person on the basis of a physiological characteristic (something a person is). Physiological characteristics include fingerprints, iris configuration, and facial structure. The process of introducing people into a biometrics-based system is called ‘enrollment’. In enrollment, samples of data are taken from one or more physiological characteristics; the samples are converted into a mathematical model, or template; and the template is registered into a database on which a software application can perform analysis.

Once enrolled, customers interact with the live-scan process of the biometrics technology. The live scan is used to identify and authenticate the customer. The results of a live scan, such as a fingerprint, are compared with the registered templates stored in the system. If there is a match, the customer is authenticated and granted access.

Biometric identifier, such as a fingerprint, can be used as part of a multifactor authentication system, combined with a password (something a person knows) or a token (something a person has). Currently in Pakistan, mostly banks are using two-factor authentications i.e. PIN and token in combination with user ID.

Fingerprint recognition technologies analyze global pattern schemata on the fingerprint, along with small unique marks known as minutiae, which are the ridge endings and bifurcations or branches in the fingerprint ridges. The data extracted from fingerprints are extremely dense and the density explains why fingerprints are a very reliable means of identification. Fingerprint recognition systems store only data describing the exact fingerprint minutiae; images of actual fingerprints are not retained.

Banks in Pakistan offering Internet-based products and services to their customers should use effective methods for high-risk transactions involving access to customer information or the movement of funds to other parties or any other financial transactions. The authentication techniques employed by the banks should be appropriate to the risks associated with those products and services. Account fraud and identity theft are frequently the result of single-factor (e.g. ID/password) authentication exploitation. Where risk assessments indicate that the use of single-factor authentication is inadequate, banks should implement multifactor authentication, layered security, or other controls reasonably calculated to mitigate those risks.

Although some of the Banks especially the major multinational banks has started to use two-factor authentication but keeping in view the information security, additional measure needs to be taken to avoid any unforeseen circumstances which may result in financial loss and reputation damage to the bank.

There are a variety of technologies and methodologies banks use to authenticate customers. These methods include the use of customer passwords, personal identification numbers (PINs), digital certificates using a public key infrastructure (PKI), physical devices such as smart cards, one-time passwords (OTPs), USB plug-ins or other types of tokens.

However addition to these technologies, biometric identification can be an added advantage for the two-factor authentication:

a) as an additional layer of security

b) cost effective

Existing authentication methodologies used in Pakistani Banks involve two basic factors:

i. Something the user knows (e.g. password, PIN)

ii. Something the user has (e.g. smart card, token)

This paper research proposes the use of another layer which is biometric characteristic such as a fingerprint in combination to the above.

So adding this we will get the below authentication methodologies:

i. Something the user knows (e.g. password, PIN)

ii. Something the user has (e.g. smart card, token)

iii. Something the user is (e.g. biometric characteristic, such as a fingerprint)

The success of a particular authentication method depends on more than the technology. It also depends on appropriate policies, procedures, and controls. An effective authentication method should have customer acceptance, reliable performance, scalability to accommodate growth, and interoperability with existing systems and future plans.

2. Methodology

The methodologies applied in this paper build on a two-step approach. First, through my past experience working in Cash Management department of a leading multinational bank, implementing electronic banking solutions for corporate clients throughout Pakistan and across geographies.

Secondly, consulting and interviewing friends working in Cash Management departments of other banks in Pakistan and Middle East for better understanding of the technology used in the market; its benefits and consequences for successful implementations.

3. Implementation in Pakistan

Biometric Payment Authentication (BPA) i.e. biometric characteristic, such as a fingerprint for authorizing financial transactions on corporate e-Banking platform implementation in Pakistan will be discussed in this section. First the descriptive, then the economic benefit analysis for adopting the presented methodology.

As technology is very much advanced today, fingerprint scanners are now readily available on almost every laptop or a stand-alone scanning device may be attached to a computer. Also with the advent of smart phones, now the fingerprint scanner is available on phones as well (e.g. Apple iPhone, Samsung mobile sets etc)

In Pakistan, end users shouldn’t have trouble using a fingerprint-scanning device on a laptop or on a smart phone as all work which needs to be done has to be done by banks introducing this methodology.

Besides this Pakistan is a perfect location to implement biometrics based authentication, mainly because:

a. CNICs are issued after taking the citizen’s biometric information – especially fingerprints

b. Telco companies needs to maintain and validate an individual’s fingerprints before issuing a SIM card

These examples show that a large population Pakistan is already familiar and comfortable with biometrics (fingerprints) methodology. However, banks have to develop their e-banking portal or application in accordance with and by accepting fingerprints for corporate users. The e-banking portal would invoke the fingerprint device of the end user for either login or authenticating financial transactions. Enrollment can be performed either remotely through first time login into e-banking platform after user has received setup instructions and passwords or at the bank’s customer service center.

This article suggests banks in Pakistan to move multifactor authentication through PIN and; fingerprints. Fingerprints are unique and complex enough to provide a robust template for authentication. Using multiple fingerprints from the same individual affords a greater degree of accuracy. Fingerprint identification technologies are among the most mature and accurate of the various biometric methods of identification.

Now let’s discuss the economic benefits of using PIN and; fingerprints instead of token devices for authentications. And before we deep dive into the statistics, first just look into the current process of token inventory ordering to its delivery to the end user and then its maintenance if any token is lost or faulty.

Mostly banks in Pakistan order and import tokens from a US based company called ‘VASCO Data Security International Inc.’. Once order is placed, the VASCO ships the token to the respective ordering bank and the bank receives the tokens after clearing the custom duties. Banks settles the invoices of VASCO by sending back the amount through outward remittance along with the courier charges. Banks then initialize the token and upon customer written request issues the token to an end user. The token is couriered to the end user and training is conducted via phone or physical visit of the bank’s representative to the customer office. Any lost or faulty token are replaced with new ones and again couriered to end users. Tokens are returned back to banks if any end user resigns their organization or is being moved into some other role that doesn’t involve banking related operations or use of e-banking platform.

Theoretically it seems pretty simple, but practically these are very time consuming activities and cost is associated to each and every step mentioned above.

Now, let’s do some cost calculation which are associated to the above activities and build some statistics so that cost benefit analysis can be done.

Currently, some of the banks in Pakistan, locally, have introduced fingerprint recognition technologies to authenticate ATM users and are in the phase of eliminating the need for an ATM card which will eventually help banks in cost saving of replacing lost or stolen cards.

Cost calculations are approximations and not to be taken as true cost for any budgeting.

3.1. Descriptive Statistics

The descriptive statistics for token inventory ordering to its delivery to the end user and then its maintenance if any token is lost or faulty (statistics built on roughly 1000 tokens consumption per year per bank) are shown in the below statistics.

Eastern European Banking Model

A traditional banking model in a CEEC (Central and Eastern European Country) consisted of a central bank and several purpose banks, one dealing with individuals’ savings and other banking needs, and another focusing on foreign financial activities, etc. The central bank provided most of the commercial banking needs of enterprises in addition to other functions. During the late 1980s, the CEECs modified this earlier structure by taking all the commercial banking activities of the central bank and transferring them to new commercial banks. In most countries the new banks were set up along industry lines, although in Poland a regional approach has been adopted.

On the whole, these new stale-owned commercial banks controlled the bulk of financial transactions, although a few ‘de novo banks’ were allowed in Hungary and Poland. Simply transferring existing loans from the central bank to the new state-owned commercial banks had its problems, since it involved transferring both ‘good’ and ‘bad’ assets. Moreover, each bank’s portfolio was restricted to the enterprise and industry assigned to them and they were not allowed to deal with other enterprises outside their remit.

As the central banks would always ‘bale out’ troubled state enterprises, these commercial banks cannot play the same role as commercial banks in the West. CEEC commercial banks cannot foreclose on a debt. If a firm did not wish to pay, the state-owned enterprise would, historically, receive further finance to cover its difficulties, it was a very rare occurrence for a bank to bring about the bankruptcy of a firm. In other words, state-owned enterprises were not allowed to go bankrupt, primarily because it would have affected the commercial banks, balance sheets, but more importantly, the rise in unemployment that would follow might have had high political costs.

What was needed was for commercial banks to have their balance sheets ‘cleaned up’, perhaps by the government purchasing their bad loans with long-term bonds. Adopting Western accounting procedures might also benefit the new commercial banks.

This picture of state-controlled commercial banks has begun to change during the mid to late 1990s as the CEECs began to appreciate that the move towards market-based economies required a vibrant commercial banking sector. There are still a number of issues lo be addressed in this sector, however. For example, in the Czech Republic the government has promised to privatize the banking sector beginning in 1998. Currently the banking sector suffers from a number of weaknesses. A number of the smaller hanks appear to be facing difficulties as money market competition picks up, highlighting their tinder-capitalization and the greater amount of higher-risk business in which they are involved. There have also been issues concerning banking sector regulation and the control mechanisms that are available. This has resulted in the government’s proposal for an independent securities commission to regulate capital markets.

The privatization package for the Czech Republic’s four largest banks, which currently control about 60 percent of the sector’s assets, will also allow foreign banks into a highly developed market where their influence has been marginal until now. It is anticipated that each of the four banks will be sold to a single bidder in an attempt to create a regional hub of a foreign bank’s network. One problem with all four banks is that inspection of their balance sheets may throw up problems which could reduce the size of any bid. All four banks have at least 20 percent of their loans as classified, where no interest has been paid for 30 days or more. Banks could make provisions to reduce these loans by collateral held against them, but in some cases the loans exceed the collateral. Moreover, getting an accurate picture of the value of the collateral is difficult since bankruptcy legislation is ineffective. The ability to write off these bad debts was not permitted until 1996, but even if this route is taken then this will eat into the banks’ assets, leaving them very close to the lower limit of 8 percent capital adequacy ratio. In addition, the ‘commercial’ banks have been influenced by the action of the national bank, which in early 1997 caused bond prices to fall, leading to a fall in the commercial banks’ bond portfolios. Thus the banking sector in the Czech Republic still has a long way to go.

In Hungary the privatization of the banking sector is almost complete. However, a state rescue package had to be agreed at the beginning of 1997 for the second-largest state bank, Postabank, owned indirectly by the main social security bodies and the post office, and this indicates the fragility of this sector. Outside of the difficulties experienced with Postabank, the Hungarian banking system has been transformed. The rapid move towards privatization resulted from the problems experienced by the state-owned banks, which the government bad to bail out, costing it around 7 percent of GDP. At that stage it was possible that the banking system could collapse and government funding, although saving the banks, did not solve the problems of corporate governance or moral hazard. Thus the privatization process was started in earnest. Magyar Kulkereskedelmi Bank (MKB) was sold to Bayerische Landesbank and the EBDR in 1994, Budapest Bank was bought by GE Capital and Magyar Hitel Bank was bought by ABN-AMRO. In November 1997 the state completed the last stage of the sale of the state savings bank (OTP), Hungary’s largest bank. The state, which dominated the banking system three years ago, now only retains a majority stake in two specialist banks, the Hungarian Development Bank and Eximbank.

The move towards, and success of privatization can be seen in the balance sheets of the banks, which showed an increase in post-tax profits of 45 percent in 1996. These banks are also seeing higher savings and deposits and a strong rise in demand for corporate and retail lending. In addition, the growth in competition in the banking sector has led to a narrowing of the spreads between lending and deposit rates, and the further knock-on effect of mergers and small-hank closures. Over 50 percent of Hungarian bank assets are controlled by foreign-owned banks, and this has led to Hungarian banks offering services similar to those expected in many Western European countries. Most of the foreign-owned but mainly Hungarian-managed banks were recapitalized after their acquisition and they have spent heavily on staff training and new information technology systems. From 1998, foreign banks will be free to open branches in Hungary, thus opening up the domestic banking market to full competition.

As a whole, the CEECs have come a long way since the early 1990s in dealing with their banking problems. For some countries the process of privatization still has a long way to go but others such as Hungary have moved quickly along the process of transforming their banking systems in readiness for their entry into the EU.

Royal Entrepreneurship – The Case of Royal Bank Zimbabwe Ltd Formation

The deregulation of the financial services in the late 1990s resulted in an explosion of entrepreneurial activity leading to the formation of banking institutions. This chapter presents a case study of Royal Bank Zimbabwe, tracing its origins, establishment, and the challenges that the founders faced on the journey. The Bank was established in 2002 but compulsorily amalgamated into another financial institution at the behest of the Reserve Bank of Zimbabwe in January 2005.

Entrepreneurial Origins
Any entrepreneurial venture originates in the mind of the entrepreneur. As Stephen Covey states in The 7 Habits of Highly Effective People, all things are created twice. Royal Bank was created first in the mind of Jeffrey Mzwimbi, the founder, and was thus shaped by his experiences and philosophy.

Jeff Mzwimbi grew up in the high density suburb of Highfield, Harare. On completion of his Advanced Level he secured a place at the University of Botswana. However he decided against the academic route at that time since his family faced financial challenges in terms of his tuition. He therefore opted to join the work force. In 1977 he was offered a job in Barclays Bank as one of the first blacks to penetrate that industry. At that time the banking industry, which had been the preserve of whites, was opening up to blacks. Barclays had a new General Manager, John Mudd, who had been involved in the Africanisation of Barclays Bank Nigeria. On his secondment to Zimbabwe he embarked on the inclusion of blacks into the bank. Mzwimbi’s first placement with Barclays was in the small farming town of Chegutu.

In 1981, a year after Independence, Jeff moved to Syfrets Merchant Bank. Mzwimbi, together with Simba Durajadi and Rindai Jaravaza, were the first black bankers to break into merchant banking department. He rose through the ranks until he was transferred to the head office of Zimbank – the principal shareholder of Syfrets – where he headed the international division until 1989.

The United Nations co-opted him as an advisor to the Reserve Bank in Burundi and thereafter, having been pleased by his performance, appointed him a consultant in 1990. In this capacity he advised on the launch of the PTA Bank travellers’ cheques. After the consultancy project the bank appointed him to head the implementation of the programme. He once again excelled and rose to become the Director of Trade Finance with a mandate of advising the bank on ways to improve trade among member states. The member states were considering issues of a common currency and common market in line with the European model. Because the IFC and World Bank had unsuccessfully sunk gigantic sums of funds into development in the region, they were advocating a move from development finance to trade finance. Consequently PTA Bank, though predominantly a development bank, created a trade finance department. To craft a strategy for trade finance at a regional level, Mzwimbi and his team visited Panama where the Central Americans had created a trade finance institution. They studied its models and used it as a basis to craft the PTA’s own strategy.

Mzwimbi returned to Zimbabwe at the conclusion of his contract. He weighed his options. He could rejoin Barclays Bank, but recent developments presented another option. At that time Nick Vingirai had just returned home after successfully launching a discount house in Ghana. Vingirai, inspired by his Ghanaian experience, established Intermarket Discount House as the first indigenous financial institution. A few years later NMB was set up with William Nyemba, Francis Zimuto and James Mushore being on the ground while one of the major forces behind the bank, Julias Makoni, was still outside the country. Makoni had just moved from IFC to Bankers’ Trust, to facilitate his ownership of a financial institution. Inspired by fellow bankers, a dream took shape in Mzwimbi’s mind. Why become an employee when he could become a bank owner? After all by this time he had valuable international experience.

The above experience shows how the entrepreneurial dream can originate from viewing the successes of others like you. The valuable experiences acquired by Mzwimbi would be critical on the entrepreneurial journey. An entrepreneurial idea builds on the experiences of the entrepreneur.
First Attempts

In 1990 Jeff Mzwimbi was approached by Nick Vingirai, who was then Chairman of the newly resuscitated CBZ, for the CEO position. Mzwimbi turned down the offer since he still had some contractual obligations. The post was later offered to Gideon Gono, the current RBZ governor.

Around 1994, Julias Makoni (then with IFC), who was a close friend of Roger Boka, encouraged Boka to start a merchant bank. At this time Makoni was working at setting up his own NMB. It is possible that, by encouraging Boka to start, he was trying to test the waters. Then Mzwimbi was seeing out the last of his contract at PTA. Boka approached him at the recommendation of Julias Makoni and asked him to help set up United Merchant Bank (UMB). On careful consideration, the banker in Mzwimbi accepted the offer. He reasoned that it would be an interesting option and at the same time he did not want to turn down another opportunity. He worked on the project with a view to its licensing but quit three months down the line. Some of the methods used by the promoter of UMB were deemed less than ethical for the banking executive, which led to disagreement. He left and accepted an offer from Econet to help restructure its debt portfolio.

While still at Econet, he teamed up with the late minister Dr Swithun Mombeshora and others with the intent of setting up a commercial bank. The only commercial banks in the country at that point were Standard Chartered, Barclays Bank, Zimbank, Stanbic and an ailing CBZ. The project was audited by KPMG and had gained the interest of institutional investors like Zimnat and Mining Industry Pension Fund. However, the Registrar of Banks in the Ministry of Finance, made impossible demands. The timing of their application for a licence was unfortunate because it coincided with a saga at Prime Bank in which some politicians had been involved, leading to accusations of influence peddling. Mombeshora, after unsuccessfully trying to influence the Registrar, asked that they slow down on the project as he felt that he might be construed as putting unnecessary political pressure on her. Mzwimbi argues that the impossible stance of the Registrar was the reason for backing off that project.

However other sources indicate that when the project was about to be licensed, the late minister
demanded that his shareholding be increased to a point where he would be the majority shareholder. It is alleged that he contended this was due to his ability to leverage his political muscle for the issuance of the licence.

Entrepreneurs do not give up at the first sign of resistance but they view obstacles in starting up as learning experiences. Entrepreneurs develop a “don’t quit” mind-set. These experiences increase their self -efficacy. Perseverance is critical, as failure can occur at any time.

Econet Wireless
The aspiring banker was approached, in 1994 by a budding telecommunication entrepreneur, Strive Masiyiwa of Econet Wireless, to advise on financial matters and help restructure the company’s debt. At that time Mzwimbi thought that he would be with Econet probably for only four months and then return to his banking passion. While at Econet it became apparent that, once licensed, the major drawback for the telecommunication company’s growth would be the cost of cell phone handsets. This presented an opportunity for the banker, as he saw a strategic option of setting up a leasing finance division within Econet that would lease out handsets to subscribers. The anticipated four months to licensing of Econet dragged into four years, which encompassed a bruising legal struggle that finally enabled the licensing against the State’s will. Mzwimbi’s experience with merchant banking proved useful for his role in Econet’s formation. With the explosive growth of Econet after an IPO, Mzwimbi assisted in the launch of the Botswana operations in 1999. After that, Econet pursued the Morocco licence. At this stage, the dream of owning a bank proved stronger than the appeal of telecoms. The banker faced some tough decisions, as financially he was well covered in Econet with an assured executive position that would expand with the expansion of the network. However the dream prevailed and he resigned from Econet and headed back home from RSA, where he was then domiciled.

His Econet days bestowed on him a substantial shareholding in the company, expanded his worldview and taught him vital lessons in creating an entrepreneurial venture. The persistence of Masiyiwa against severe government resistance taught Mzwimbi critical lessons in pursuing his dream in spite of obstacles. No doubt he learnt a lot from the enterprising founder of Econet.

Debut Royal Bank
On his return in March 2000, Mzwimbi regrouped with some of his friends, Chakanyuka Karase and Simba Durajadi, with whom he had worked on the last attempt at launching a bank. In 1998 the Banking Act was updated and a new statutory instrument called the Banking Regulations had been enacted in the light of the UMB and Prime Bank failures.

These required that one should have the shareholders, the premises and equipment all in place before licensing. Previously one needed only to set up an office and hire a secretary to acquire a banking license. The licence would be the basis for approaching potential investors. In other words it was now required that one should incur the risk of setting up and purchasing the IT infrastructure, hire personnel and lease premises without any assurance that one would acquire the licence. Consequently it was virtually impossible to invite outside investors into the project at this stage.

Without recourse to outside shareholders injecting funds, and with minimal financial capacity on the part of his partners, Mzwimbi fortuitously benefited from his substantial Econet shares. He used them as collateral to access funds from Intermarket Discount House to finance the start up – acquired equipment like ATMs, hired staff, and leased premises. Mzwimbi recalls pleading with the Central Bank and the Registrar of Banks about the oddity of having to apply for a licence only when he had spent significant amounts on capital expenditure – but the Registrar was adamant.

Finally, Royal Bank was licensed in March 2002 and, after the prerequisite pre-opening inspections by the Central Bank, opened its doors to the public four months later.

Entrepreneurial Challenges
The challenges of financing the new venture and the earlier disappointments did not deter Mzwimbi. The risk of using his own resources, whereas in other places one would fund a significant venture using institutional shareholders’ capital, has already been discussed. This section discusses other challenges that the entrepreneurial banker had to overcome.

Regulatory Challenges and Capital Structure
The new banking regulations placed shareholding restrictions on banks as follows:

*Individuals could hold a maximum of 25% of a financial institution’s equity
*Non-financial institutions could hold a maximum of 10% only
*A financial institution however could hold up to a maximum of 100%.

This posed a problem for the Royal Bank sponsors because they had envisaged Royal Financial Holdings (a non-financial corporate) as the major shareholder for the bank. Under the new regulations this could hold only 10% maximum. The sponsors argued with the Registrar of Banks about these regulations to no avail. If they needed to hold the shares as corporate bodies it meant that they needed at least ten companies, each holding 10% each. The argument for having financial institutions holding up to 100% was shocking as it meant that an asset manager with a required capitalisation of $1 million would be allowed by the new law to hold 100% shareholding in a bank which had a $100 million capitalisation yet a non-banking institution, which may have had a higher capitalisation, could not control more than 10%. Mzwimbi and team were advised by the Registrar of Banks to invest in their personal capacities. At this point the Reserve Bank (RBZ) was simply involved in the registration process on an advisory basis with the main responsibility resting with the Registrar of Banks. Although the RBZ agreed with Mzwimbi’s team on the need to have corporations as major shareholders due to the long term existence of a corporation as compared to individuals, the Registrar insisted on her terms. Finally, Royal Bank promoters chose the path of satisficing- and hence opted to invest as individuals, resulting in the following shareholding structure:

*Jeff Mzwimbi – 25%
*Victor Chando – 25%
*Simba Durajadi- 20%
*Hardwork Pemhiwa- 20%
*Intermarket Unit Trust – 2% (the only institutional investor)
*Other individuals – less than 2% each.
The challenge to acquire institutional investors was due to the restrictions cited above and the requirement to pump money into the project before the licence was issued. They negotiated with TA Holdings, which was prepared to take equity holding in Royal Bank.

So tentatively the sponsors had allocated 25% equity for Zimnat, a subsidiary to TA Holdings. Close to the registration date, the Zimnat negotiators were changed. The incoming negotiators changed the terms and conditions for their investment as follows:

*They wanted at least a 35% stake
*The Board chairmanship and chairmanship of key committees – in perpetuity.

The promoters read this to mean their project was being usurped and so turned TA Holdings down. However, in retrospect Mzwimbi feels that the decision to release the TA investment was emotional and believes that they should have compromised and found a way to accommodate them as institutional investors. This could have strengthened the capital base of Royal Bank.

Credibility Challenges
The main sponsors and senior managers of the bank were well known players in the industry. This reduced the credibility gap. However some corporate customers were concerned about the shareholding of the bank being entirely in the hands of individuals. They preferred the bank risk to be reduced by having institutional investors. The new licensing process adversely affected access to institutional investors. Consequently the bank had institutional shareholders in mind for the long term. They claim that even the then head of supervision and licensing at RBZ, agreed with the promoters’ concern about the need for institutional investors but the Registrar of Banks overruled her.

Challenges of Explosive Growth
The strategic plan of Royal Bank was to open ten branch offices within five years. They planned to open three branches in Harare in the first year, followed by branches in Bulawayo, Masvingo, Mutare and Gweru within the next year. This would have been followed by an increase in the number of Harare branches.

From their analysis they believed that there was room for at least four more commercial banks in Zimbabwe. A competitor analysis of the industry indicated that the government controlled Zimbank was the major competitor, CBZ was struggling and Stanbic was not likely to grow rapidly. The bigger banks, Barclays and Standard Chartered, were likely to scale down operations. The promoters of the bank project had observed in their extensive international experie nce that whenever the economy was indigenised in Africa, these multinational banks would dispose of their rural branches. They were therefore positioning themselves to exploit this scenario once it presented itself.

The anticipated opportunity presented itself earlier than expected. On an international flight with the Standard Chartered Bank CEO, Mzwimbi, confirmed his interest in a stake of the bank’s disinvestments which was making rounds on the rumour mill. Although surprised, the multinational banker agreed to give the two month old entrepreneurial bank the right of first refusal on the fifteen branches that were being disposed of.

The deal was negotiated on a lock, stock and barrel basis. When the announcement of the deal was made internally, some employees resisted and politicised the issue. The Standard Chartered CEO then offered to proceed on a phased basis with the first seven banks going through, followed by the others later. Due to Mzwimbi’s savvy negotiating skills and the determination by Standard Chartered to dispose of the branches, the deal was successfully concluded, resulting in Royal Bank growing from one branch to seven outlets within the first year of operation. It had exceeded their projected growth plan.

Due to what Mzwimbi calls divine favour, the deal included the real estate belonging to the bank. Interestingly, Standard Chartered had failed to get bank buildings on lease and so in all small towns they had built their own buildings. These were thus transferred within the deal to Royal Bank. Inherent in the deal was an inbuilt equity from the properties since the purchase price of $400 million was heavily discounted.

Shortly after that, Alex Jongwe, the CEO of Barclays Bank, approached Royal Bank to offer a similar deal to the Standard Chartered acquisition of rural branches. Barclays offered eight branches, of which Royal initially accepted six. Chegutu and Chipinge were excluded, since Royal already had a presence there.

Royal Entrepreneurship – The Case of Royal Bank Zimbabwe Ltd Formation

The deregulation of the financial services in the late 1990s resulted in an explosion of entrepreneurial activity leading to the formation of banking institutions. This chapter presents a case study of Royal Bank Zimbabwe, tracing its origins, establishment, and the challenges that the founders faced on the journey. The Bank was established in 2002 but compulsorily amalgamated into another financial institution at the behest of the Reserve Bank of Zimbabwe in January 2005.

Entrepreneurial Origins
Any entrepreneurial venture originates in the mind of the entrepreneur. As Stephen Covey states in The 7 Habits of Highly Effective People, all things are created twice. Royal Bank was created first in the mind of Jeffrey Mzwimbi, the founder, and was thus shaped by his experiences and philosophy.

Jeff Mzwimbi grew up in the high density suburb of Highfield, Harare. On completion of his Advanced Level he secured a place at the University of Botswana. However he decided against the academic route at that time since his family faced financial challenges in terms of his tuition. He therefore opted to join the work force. In 1977 he was offered a job in Barclays Bank as one of the first blacks to penetrate that industry. At that time the banking industry, which had been the preserve of whites, was opening up to blacks. Barclays had a new General Manager, John Mudd, who had been involved in the Africanisation of Barclays Bank Nigeria. On his secondment to Zimbabwe he embarked on the inclusion of blacks into the bank. Mzwimbi’s first placement with Barclays was in the small farming town of Chegutu.

In 1981, a year after Independence, Jeff moved to Syfrets Merchant Bank. Mzwimbi, together with Simba Durajadi and Rindai Jaravaza, were the first black bankers to break into merchant banking department. He rose through the ranks until he was transferred to the head office of Zimbank – the principal shareholder of Syfrets – where he headed the international division until 1989.

The United Nations co-opted him as an advisor to the Reserve Bank in Burundi and thereafter, having been pleased by his performance, appointed him a consultant in 1990. In this capacity he advised on the launch of the PTA Bank travellers’ cheques. After the consultancy project the bank appointed him to head the implementation of the programme. He once again excelled and rose to become the Director of Trade Finance with a mandate of advising the bank on ways to improve trade among member states. The member states were considering issues of a common currency and common market in line with the European model. Because the IFC and World Bank had unsuccessfully sunk gigantic sums of funds into development in the region, they were advocating a move from development finance to trade finance. Consequently PTA Bank, though predominantly a development bank, created a trade finance department. To craft a strategy for trade finance at a regional level, Mzwimbi and his team visited Panama where the Central Americans had created a trade finance institution. They studied its models and used it as a basis to craft the PTA’s own strategy.

Mzwimbi returned to Zimbabwe at the conclusion of his contract. He weighed his options. He could rejoin Barclays Bank, but recent developments presented another option. At that time Nick Vingirai had just returned home after successfully launching a discount house in Ghana. Vingirai, inspired by his Ghanaian experience, established Intermarket Discount House as the first indigenous financial institution. A few years later NMB was set up with William Nyemba, Francis Zimuto and James Mushore being on the ground while one of the major forces behind the bank, Julias Makoni, was still outside the country. Makoni had just moved from IFC to Bankers’ Trust, to facilitate his ownership of a financial institution. Inspired by fellow bankers, a dream took shape in Mzwimbi’s mind. Why become an employee when he could become a bank owner? After all by this time he had valuable international experience.

The above experience shows how the entrepreneurial dream can originate from viewing the successes of others like you. The valuable experiences acquired by Mzwimbi would be critical on the entrepreneurial journey. An entrepreneurial idea builds on the experiences of the entrepreneur.
First Attempts

In 1990 Jeff Mzwimbi was approached by Nick Vingirai, who was then Chairman of the newly resuscitated CBZ, for the CEO position. Mzwimbi turned down the offer since he still had some contractual obligations. The post was later offered to Gideon Gono, the current RBZ governor.

Around 1994, Julias Makoni (then with IFC), who was a close friend of Roger Boka, encouraged Boka to start a merchant bank. At this time Makoni was working at setting up his own NMB. It is possible that, by encouraging Boka to start, he was trying to test the waters. Then Mzwimbi was seeing out the last of his contract at PTA. Boka approached him at the recommendation of Julias Makoni and asked him to help set up United Merchant Bank (UMB). On careful consideration, the banker in Mzwimbi accepted the offer. He reasoned that it would be an interesting option and at the same time he did not want to turn down another opportunity. He worked on the project with a view to its licensing but quit three months down the line. Some of the methods used by the promoter of UMB were deemed less than ethical for the banking executive, which led to disagreement. He left and accepted an offer from Econet to help restructure its debt portfolio.

While still at Econet, he teamed up with the late minister Dr Swithun Mombeshora and others with the intent of setting up a commercial bank. The only commercial banks in the country at that point were Standard Chartered, Barclays Bank, Zimbank, Stanbic and an ailing CBZ. The project was audited by KPMG and had gained the interest of institutional investors like Zimnat and Mining Industry Pension Fund. However, the Registrar of Banks in the Ministry of Finance, made impossible demands. The timing of their application for a licence was unfortunate because it coincided with a saga at Prime Bank in which some politicians had been involved, leading to accusations of influence peddling. Mombeshora, after unsuccessfully trying to influence the Registrar, asked that they slow down on the project as he felt that he might be construed as putting unnecessary political pressure on her. Mzwimbi argues that the impossible stance of the Registrar was the reason for backing off that project.

However other sources indicate that when the project was about to be licensed, the late minister
demanded that his shareholding be increased to a point where he would be the majority shareholder. It is alleged that he contended this was due to his ability to leverage his political muscle for the issuance of the licence.

Entrepreneurs do not give up at the first sign of resistance but they view obstacles in starting up as learning experiences. Entrepreneurs develop a “don’t quit” mind-set. These experiences increase their self -efficacy. Perseverance is critical, as failure can occur at any time.

Econet Wireless
The aspiring banker was approached, in 1994 by a budding telecommunication entrepreneur, Strive Masiyiwa of Econet Wireless, to advise on financial matters and help restructure the company’s debt. At that time Mzwimbi thought that he would be with Econet probably for only four months and then return to his banking passion. While at Econet it became apparent that, once licensed, the major drawback for the telecommunication company’s growth would be the cost of cell phone handsets. This presented an opportunity for the banker, as he saw a strategic option of setting up a leasing finance division within Econet that would lease out handsets to subscribers. The anticipated four months to licensing of Econet dragged into four years, which encompassed a bruising legal struggle that finally enabled the licensing against the State’s will. Mzwimbi’s experience with merchant banking proved useful for his role in Econet’s formation. With the explosive growth of Econet after an IPO, Mzwimbi assisted in the launch of the Botswana operations in 1999. After that, Econet pursued the Morocco licence. At this stage, the dream of owning a bank proved stronger than the appeal of telecoms. The banker faced some tough decisions, as financially he was well covered in Econet with an assured executive position that would expand with the expansion of the network. However the dream prevailed and he resigned from Econet and headed back home from RSA, where he was then domiciled.

His Econet days bestowed on him a substantial shareholding in the company, expanded his worldview and taught him vital lessons in creating an entrepreneurial venture. The persistence of Masiyiwa against severe government resistance taught Mzwimbi critical lessons in pursuing his dream in spite of obstacles. No doubt he learnt a lot from the enterprising founder of Econet.

Debut Royal Bank
On his return in March 2000, Mzwimbi regrouped with some of his friends, Chakanyuka Karase and Simba Durajadi, with whom he had worked on the last attempt at launching a bank. In 1998 the Banking Act was updated and a new statutory instrument called the Banking Regulations had been enacted in the light of the UMB and Prime Bank failures.

These required that one should have the shareholders, the premises and equipment all in place before licensing. Previously one needed only to set up an office and hire a secretary to acquire a banking license. The licence would be the basis for approaching potential investors. In other words it was now required that one should incur the risk of setting up and purchasing the IT infrastructure, hire personnel and lease premises without any assurance that one would acquire the licence. Consequently it was virtually impossible to invite outside investors into the project at this stage.

Without recourse to outside shareholders injecting funds, and with minimal financial capacity on the part of his partners, Mzwimbi fortuitously benefited from his substantial Econet shares. He used them as collateral to access funds from Intermarket Discount House to finance the start up – acquired equipment like ATMs, hired staff, and leased premises. Mzwimbi recalls pleading with the Central Bank and the Registrar of Banks about the oddity of having to apply for a licence only when he had spent significant amounts on capital expenditure – but the Registrar was adamant.

Finally, Royal Bank was licensed in March 2002 and, after the prerequisite pre-opening inspections by the Central Bank, opened its doors to the public four months later.

Entrepreneurial Challenges
The challenges of financing the new venture and the earlier disappointments did not deter Mzwimbi. The risk of using his own resources, whereas in other places one would fund a significant venture using institutional shareholders’ capital, has already been discussed. This section discusses other challenges that the entrepreneurial banker had to overcome.

Regulatory Challenges and Capital Structure
The new banking regulations placed shareholding restrictions on banks as follows:

*Individuals could hold a maximum of 25% of a financial institution’s equity
*Non-financial institutions could hold a maximum of 10% only
*A financial institution however could hold up to a maximum of 100%.

The 10 Commandments of Good Governance in Banks

Due to the banking crisis of 2008, the question of how banks can protect themselves against future failures has attracted the attention of regulators, banking experts and business media. An important area is the need for better transparency, mainly regarding remuneration in the banking sector, and how boards of banks should improve their corporate governance practices to reduce the chances of a repeat of the credit crunch.

The recent publication of Central Bank of Egypt draft Code of Corporate Governance for banks marks a significant step in this process. Banks together with their respective boards should pay close attention to the corporate governance guidelines.

There are several tips and recommendations for good governance available for the board of banks. Yet, I consider the following `10 commandments` are central in establishing a sound governance regime:

1-Set the right tone at the top.

The main concerns for the board should include guiding, approving and overseeing the bank’s strategic objectives, corporate values and policies. This could be achieved by developing a code of conduct for the bank employees, management, and board members. Likewise, the board should clearly define areas of responsibility, authority levels and reporting lines within the bank.

2-Adequate qualifications of board members

The board should have adequate knowledge and experience relevant to each of the material financial activities the bank intends to pursue to enable effective governance and oversight of the bank.

To ensure that non-executive directors have the knowledge and understanding of the business, the board should provide thematic business awareness sessions on a regular basis and each director should be provided with a tailored induction, training and development to be reviewed annually with the chairman. Similarly, suitable arrangements should be made for executive board members in business areas other than those for which they have direct responsibility.

Non-executive directors are encouraged to spend more time in the business to ensure that they can participate effectively to strategy and other board decisions.

3-Appoint independent non-executive directors

To foster an independent element within the board, banks must consider that independent directors should constitute a significant membership of the board, and that the board should have at least three independent, non-executives directors. Larger banks may have a higher proportion of non-executive directors.

Non-executives directors should be able to devote sufficient time to the role in order to assess risk and ask tough questions about strategy.

In UK, there are recommendations for banks to appoint a senior independent director (SID) whose role is to provide a sounding board for the chairman and serve as a trusted intermediary for the non-executive directors, when necessary.

4-Establish board-risk governance

Banks should establish a board risk committee to work in tandem with existing audit committee. The risk committee would concentrate on risk strategy and management, free from any conflict with demands placed on audit committees. The risk committee would report regularly (as part of the annual report) on risk strategy and risk management. The risk committee has authority to seek external advice to test its risk management assumptions, particularly in the context of risk related to significant banking transactions.

Given the importance of an independent risk management function, banks should appoint a chief risk officer (CRO) with sufficient authority, stature, independence, resources and access to the board. This executive should be reporting to both the risk committee and internally to the CEO. Removal of the CRO should be subject to board discussion and public disclosure.

5-Expand scope of the remuneration committee

The scope of the remuneration committee should be expanded to cover all aspects of remuneration policy on a bank-wide basis with particular focus on the risk dimension. The remuneration committee is responsible to review the compensation philosophy and major compensation programs.

In order to reduce the perceived excessive risk-taking within banks, this committee will also be expected to approve the links between performance targets and pay or bonus schemes. At least half of bonuses should be paid in the form of a long-term incentive scheme.

6-Develop Information Technology (IT) governance

IT governance provides the structure that links IT processes, resources and information to the bank’s strategies and objectives, enhances effective board decision-making and creates greater transparency and accountability. IT governance ensures that related risks are properly identified and managed. The board needs to approve IT expenditures and provide adequate oversight over all aspects of IT governance, including procurement, outsourcing, the efficiency of systems and procedures, IT security, customer data protection and adequacy of anti-fraud and anti-money laundering systems.

7-Improve efficiency through board evaluation

The board and board committees should be subject to a formal and rigorous performance evaluation with external facilitation of the process every three years. The evaluation statement should either be included as a dedicated section of the chairman’s statement or as a separate section of the annual report, signed by the chairman. Where an external facilitator is used, this should be indicated in the statement, together with their name and other meaningful details for the shareholders.

8-Manage conflicts of interest effectively

Banks should establish information barriers (“Chinese walls”) between the different departments so that decisions by staff in one department are made in ignorance of confidential information available to staff in other departments which might affect their decision. Conflicts by board members or senior executives should be disclosed to the banks’ compliance officer. A good corporate governance practice is to put in place and disclose a conflicts of interest policy.

9-Monitor the governance of banks’ clients

It is important for banks that their clients apply the principles of good governance. Banks may consider that it is in their own best interest to check the governance framework and practices of their corporate borrowers. Even in circumstances where a bank cannot directly influence the governance practices of their borrowers, it can have an important influence by “leading by example”.

10-Track potential governance failures

Banks should have in place a policy setting out adequate procedures for employees with concerns about the integrity of the bank’s operations or its staff (so called whistle blowing policy). Employees should be able to communicate their concerns with corporate protection from retaliation from the management. The procedure should facilitate the flow of confidential and direct or indirect communication to the board (or Audit Committee) outside the internal “chain of command”. The establishment of proper communication channels would allow bank staff to discuss their concerns in confidence without fear of retaliatory action.

Conclusion

Good corporate governance is crucial for today’s complex and dynamic banking environment to ensure long-term sustainability and trust of stakeholders including regulators, investors, clients and employees. Therefore, it should be cultivated and practiced regularly within banks at board and executive management levels. Remember; Corporate governance is like a muscle, should be exercised or it will atrophy!

Hany Abou-El-Fotouh is Chief of Staff & Group Board Secretary, CI Capital Holding – the investment banking arm of Commercial International Bank which is the largest private bank in Egypt. He provides advice and direction to the Board and management with respect to corporate governance practices and formulates corporate policies.

Hany is a leading expert on money laundering and terrorist financing controls in the MENA region. Founder of the Middle East Compliance Officers’ Forum (MECOF), he has been honored for his work in promoting compliance culture and awareness in the MENA region

Hany writes articles to different newspapers and journals on a variety of subjects. He is a public speaker and professional trainer. Previously, he worked in various senior positions in leading banks in Egypt and GCC countries like HSBC, Oman International Bank, Banque Saudi Fransi among others