As per the Bank Corporate Governance Directives No. SBB/71/2019 of the National Bank of Ethiopia, “Corporate governance” means the process and structure used to direct and manage the business and affairs of a bank towards enhancing business prosperity and corporate accountability with ultimate objectives of realizing long term shareholders’ value as well as customers and other stakeholders’ interest.
Successful corporate governance is significant to the proper performance of the banking sector and the economy at large. Banks execute a crucial role in the country’s macro-economy by intermediating finances from depositors to actions that support the economy and support by catalyzing macro economic growth.
In this aspect, Banks’ safety and effectiveness are important to financial stability, and the mode in which they perform their business, consequently, is vital to macro economic wellbeing. Corporate governance limitations at banks that take part a significant role in the financial system. It further results in the conduction of problems across the banking sector in particular and in the macro economy of the country in general.
The main objective of corporate governance is to safeguard stakeholders’ basic interest in compliance with the public interest of the country on a regular basis. Among stakeholders, chiefly in retail banking services, shareholders’ concern would usually follow depositors’ interest.
As a result, corporate governance basically resolves the allocation of responsibilities and authority through which the business of a bank are accomplished by its board of directors as well as senior executives whose main responsibility in general is:
- set the bank’s strategy and objectives;
- hire and manage employees;
- to manage the periodic activities of the bank;
- safeguard the interests of depositors, shareholder, and other stakeholders;
- support corporate culture, and behavior in compliance with applicable laws and regulations;
- establish audit and control.
Corporate leaders have to operate towards sound corporate governance, as it is a basic element in the safe functioning of a bank. It may unfavorably affect the bank’s risk factor and profile if not operating efficiently. Well oriented and effectively governed banks contribute to the maintenance of cost-effective as well as efficient supervisory process.
In addition, effective corporate governance may allow the supervision to put more dependence on the bank’s internal and external processes. Incidentally, corporate supervisory experience underlines the importance of having the relevant levels of responsibility, authority, and accountability.
Different countries have corporate governance policy issued by the central bank of the respective country. In similar fashion, the National Bank of Ethiopia already has Banks’ Corporate Governance Directives No. SBB/71/2019 that incorporates different provisions. The directive involves relevant governance provisions that put different conditions compatible to the generally accepted corporate standards and procedures.