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 BSD Circular No.15
June 13, 2002 


 

The Presidents/Chief Executives/Country Managers,

All Banks/DFIs
Dear Sirs/Madam,



PRUDENTIAL REGULATION NO. XXIX –
RESPONSIBILITIES OF BOARD OF DIRECTORS

The State Bank attaches a great importance to effective corporate governance, clear lines of responsibility, elaborate mechanism of accountability, and existence of proper checks and balances in each bank/financial institution. The corporate governance means the way in which business and affairs of each institution is directed and managed by their ‘Board of Directors’ and the ‘Management’. To promote safe and sound banking practices, it is imperative that the ‘Board of Directors’ assumes its role independent of the influence of the Management. Members of the Board should know their responsibilities and powers in clear terms. Further, it should be ensured that the Board of Directors focus on policy making and general direction, oversight and supervision of the affairs and business of the bank/DFI and does not play any role in the day-to-day operations, as that is the role of the ‘Management’.

2) In order to improve the prevailing corporate governance and to make the Board of Directors of banks/DFIs more effective, the following guidelines are being issued:

i) The Board shall approve and monitor the objectives, strategies and overall business plans of the institution and shall oversee that the affairs of the institution are carried out prudently within the framework of existing laws and regulations and high business ethics.

ii) All the members of the Board should undertake and fulfill their duties and responsibilities keeping in view their legal obligations under all the applicable laws and regulations.

iii) The Board shall clearly define the authorities and key responsibilities of both the Directors and the Senior Management without delegating its policymaking powers to the Management and shall ensure that the Management is in the hands of qualified personnel.

iv) The Board shall approve and ensure implementation of policies, including but not limited to, in areas of Internal Audit & Control, Compliance, Risk Management, Human Resources, Credit, Write-offs, Recovery, Rescheduling/Restructuring of debt, Treasury Management, Investments, Acquisition/Disposal of fixed assets, Donations/Charities, Prevention of Frauds & Forgeries and any other operational area which the ‘Board’ and/or the ‘Management’ may deem appropriate from time to time. The Board shall also be responsible to review and update existing policies periodically and whenever circumstances justify.

v) The markets are ever-changing and so are their requirements. The Board, therefore, is required to ensure existence of an effective ‘Management Information System’ to remain fully informed of the activities, operating performance and financial condition of the institution, the environment in which it operates, the various risks it is exposed to and to evaluate performance of the Management at regular intervals.

vi) The Board should meet frequently (preferably on monthly basis, but in any event, not less than once every quarter) and the individual directors of an institution should attend at least half of the meetings held in a financial year. The Board should ensure that it receives sufficient information from management on the agenda items well in advance of each meeting to enable it to effectively participate in and contribute to each meeting. The Board should carry out its responsibilities in such a way that the external auditors and supervisors can see and form judgment on the quality of Board’s work and its contributions through proper and detailed minutes of the deliberations held and decisions taken during the Board meetings.

vii) To share the load of activities, the Board may form specialized committees with well-defined objectives, authorities and tenure. These committees, preferably comprising of ‘Non-Executive’ board members, shall oversee areas like audit, risk management, recruitment, compensation, credit, etc without indulging in day-to-day operations in these areas. These committees should apprise the full board of their activities and achievements on regular basis.

viii) The Board should ensure that it receives management letter from the external auditors without delay. It should also be ensured that appropriate action is taken in consultation with the Audit Committee of the Board to deal with control or other weaknesses identified in the management letter. A copy of that letter should be submitted to the SBP so that it can monitor follow-up actions.

3) The above guidelines are being issued under the powers vested in the State Bank of Pakistan under the Banking Companies Ordinance, 1962 and are required to be followed by banks incorporated in Pakistan and DFIs. They will also follow the ‘Code of Corporate Governance’ issued by the SECP so long as any provision thereof does not conflict with any provision of the Banking Companies Ordinance, 1962, Prudential Regulations and the instructions/guidelines issued by the State Bank.

4) The branches of foreign banks operating in Pakistan shall intimate to the State Bank, within 30 days from the date of receipt of this Circular, regarding any similar measures taken or policies introduced by their Head Offices with regard to above guidelines. They are required to adhere to these guidelines wherever feasible and applicable. However, they need not necessarily seek approval of their Board of Directors, as stipulated above in the case of local banks/DFIs.

5) All banks/DFIs incorporated in Pakistan are required to place this Circular before their Board of Directors for meticulous compliance and send a written confirmation, within 30 days of receipt of this circular, signed by each board member signifying their understanding of these guidelines.

Please acknowledge receipt.

Yours faithfully,
(Jameel Ahmad)
Director

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