LAHORE, March 13: State Bank of Pakistan Governor Dr Shamshad Akhtar has said that corporate governance is necessary for ensuring transparency, fairness and accountability in the banking system.

Speaking at the convocation of the Institute of Bankers, Pakistan, on Thursday she said that the concept of well governed companies had always been there, but standards were evolved for improving economic efficiency after corporate scandals, like collapse of Enron, resulted in significant loss to investors’ confidence in the 90s.

The compliance cost was, however, so high in the West that US President George Bush had to call for bringing it down.

Corporate governance increased the investor confidence for being a deterrent against malpractices.

The shares of companies adopting corporate governance were 30 per cent higher than those of the poorly governed companies.

The need for introduction of corporate governance in the banking system was necessary for stability of the financial system because the ratio of its assets to GDP was 59 per cent and private money of every segment of society was involved in it, she maintained.

She said that protection of interests of depositors was a difficult task because banks were operating in a highly vulnerable atmosphere.

The foreign banks, she said, owned nearly half of the assets of the banking sector, but were controlled by overseas companies.

Three or four banks were owned by brokers while some were operating as part of industrial groups. Transparency was a critical factor, particularly in the banks owned by the companies.

Such banks were apparently clean, but transactions were behind the scene and corporate governance was compromised in the process.

She said that the reforms in banking sector after privatisation and liberalisation had helped improve functioning of the boards of directors.

The offices of presidents and chief executive officers had been separated and at least 25 per cent directors were to be independent.

The SBP had also issued guidelines for risk management and detailed instructions for policy framework to restrict exposure to single borrowers.

Shareholding in other companies would be restricted to 20 per cent. Deviations would require consultation with the State Bank, she informed.

She said that the SBP was not only engaged in market assessment of every bank, but was also endeavouring to strengthen its own governance after restructuring in 2006.

It had not only set up consumer protection and risk management departments, but also given a market driven salary package to employees.

The SBP was also working on a consolidated supervision of the banks which would require legal amendments.