authorities. since sight money created is payable by banks at any time through legal tender and technically, the banking system does not have funds adequate for meeting all such created money at any particular point of time. banking business thus casts a huge responsibility on the monetary authorities to facilitate, regulate, and protect the banking and payments system. weak corporate governance ( cg ) can contribute to financial instability and that would increase the risk profile of companies in the corporate sector and expose the banks and financial institutions to a greater risk. in a more direct sense, weaknesses in cg arrangements in banks and financial institutions reduce their capacity to identify, monitor and manage their business risk and that can result in poor quality lending and excessive risk - taking by the financial institutions. depending on the resilience of the financial institutions and markets, these risks have the potential to spread across the wider financial system. needless to say that inadequate cg can also lead to a poor credit culture, excessive exposure concentration, poor management of interest risk / exchange risk and inadequacies in the management of connected exposures. some of these risks, singularly or collectively, can lead to potential insolvency and financial instability. in more recent times, the regulators world over have introduced prudential norms on single borrower exposures, group exposures and concentration of credit risks. the underlying principles of such norms indicate some degree of compulsion on the observance of cg principles. to further augment such prudential norms, regulators may even consider introducing mandatory disclosures by banks and financial institutions. where does good governance fit in this scenario? obviously, corporate governance is now identified and acknowledged as a powerful tool to generate trust and confidence in an institution. in that context, good corporate governance is essentially important for banks, because such institutions ( a ) deal with funds raised from the public ; ( b ) are likely to encounter greater risks including frauds and failure ; and ( c ) if such frauds or failures occur in such institutions, it may pose issues relating to public confidence in the financial system stability itself. all these reasons have led to banks tending to depend upon risk management practices based on principles of prudence rather than complying with only minimum requirements. it is also as a result of such realization that many stakeholders and regulators are now consciously looking towards good corporate governance, as one of the prime instruments in its overall effort to maintain financial system stability. in sri lanka, the cbsl has already issued a voluntary code of best

##makers in south africa should be to soften the blows for the economy. at the one extreme there is the international monetary fund that believes that much more restrictive monetary and fiscal policies should have been applied in south africa in recent months to fend off the attacks of international speculators and short - term profiteers. at the other extreme we find economists in south africa with major private sector interests who believe that the reserve bank should have kept interest rates artificially low with a complete disregard of the consequences this would have had for the exchange rate of the rand and subsequent inflation. there are those who believe that the reserve bank should have done more to keep the exchange rate stable, even if it should have required the reintroduction or tightening of exchange controls. there are many naive critics in south africa who believe that the reserve bank is fully responsible for the high interest rates and that the reserve bank indeed used its mythical powers to force interest rates to these destructively high levels. in their ignorance they believe that the reserve bank can even at this stage pull the rabbit from the hat and instantaneously bring interest rates down again. unfortunately, in the real world such miracles are just not possible. 2. what caused interest rates to go up to avoid confusion in this debate, the real causes for the recent sharp rise in interest rates should be revisited. it will be recalled that in the first quarter of this year there was wide - spread optimism that interest rates in south africa could decline further during the course of 1998. the reserve bank had already reduced its bank rate from 17 to 16 per cent in october 1997, and to 15 per cent on 9 march 1998. inflation was declining, foreign portfolio investments flowed into the country, the foreign reserves were rising and the exchange rate of the rand was under pressure to appreciate. however, the situation changed dramatically in may 1998 when non - residents reviewed their investment strategy and started to withdraw some of the funds they had previously invested in south african bonds. during the four months january to april 1998, non - resident investors increased their holdings of south african bonds by approximately r16 billion. over the next four months, that is from may to august 1998, they reduced their holdings of south african bonds by about r19 billion. this dramatic change of strategy had an almost immediate negative effect on the overall demand and supply conditions in the south african financial markets. the yield on long - term government bonds rose from just below 13 per cent at the beginning of may to a peak of over 21 per cent