I am therefore delighted that the Institute of Directors has chosen this topic for discussion today. Perhaps it would be useful to begin by defining what corporate governance means. There is no single, accepted definition of what “corporate governance” means. The majority of the definitions employed by corporate practitioners relate corporate governance to “control” of the company. In this regard, corporate governance is defined as a set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance influences how the objectives of the company are set and achieved, how risk is monitored and assessed and how performance is optimised. Ladies and Gentlemen, corporate governance is of key importance to any financial system. In Zambia the financial sector is dominated by banks and these remain the main source of finance in the economy. The failure of corporate governance in banks may therefore pose serious consequences for the banking sector and the economy as a whole. It is also important to note that the health of the financial system largely depends on their capacity to identify measure, monitor and control their risks. Banks face a wide range of complex risks in their day to day operations, including risks relating to credit, liquidity, exposure concentration, market risks, settlement, and internal operations. The nature of banks’ business particularly the maturity mismatch between their assets and liabilities, their relatively high gearing and their reliance on creditor confidence creates particular vulnerabilities.

The consequences of mismanaging their risks can therefore be very severe not only for the individual bank, but also for the system as a whole. Chairperson, it must further be noted that Banks are highly leveraged institutions, funding their assets largely from customer deposits. Banks must therefore be accountable to their  BIS central bankers’ speeches  1  depositors. The failure of a bank can therefore result in monetary loss for depositors. The interests of depositors must therefore be protected. It is for this reason that corporate governance for banks and other financial institutions is crucial and therefore the boards of directors and management of banks have to pay particular attention to the interests of depositors and other creditors. The Basel Committee on Banking Supervision states that “effective corporate governance practices are essential to achieving and maintaining public trust and confidence in the banking system, which is critical to the proper functioning of the banking sector and the economy as a whole. Poor corporate governance may contribute to bank failures, which in turn can pose significant costs on the treasury and can have other macro-economic effects like contagion risks. Additionally poor corporate governance can lead to financial markets to lose confidence in the ability of banks to properly manage their assets and liabilities, including customer deposits, and this could in turn trigger a run on a bank or precipitate a liquidity crisis. Furthermore, effective corporate governance is also crucial for banks since it enhances transparency.