We're a little more than halfway through 2013, and already we've seen some instrumental changes in the banking industry in the Solomon Islands, with more to come:
- The Central Bank of Solomon Islands Act 2012 (New Act), which was passed by Parliament in late 2012, became law earlier this year, repealing the old Central Bank of Solomon Islands Act [Cap 49] (Old Act).
- The Financial Institutions (Amendment) Bill 2013 (Amendment Act) was passed by Parliament following furious debate last month.
- New agent banking Guidelines were issued by the Central Bank of Solomon Islands (CBSI), to facilitate banking in rural areas (please click here for an overview).
- Proposed new CBSI Prudential Guideline No. 8 “Disclosure on Interest Rates, Fees and Charges”, which is currently in draft form (Draft Guidelines).
The New Act
The general purpose of the New Act (as emphasised in the Explanatory Memorandum), is to bring CBSI practices in line with international best practices. We set out below a summary of the main changes instituted by the New Act.
- The New Act emphasises the growing autonomy of CBSI from the Solomon Islands Government (SIG) in both lending and policy control. Given the new emphasis on statistical publishing, there should be less political interference and control of fiscal policy, and more accountability to the market. The New Act also introduces stricter board member selection criteria. We note, however, that there isn't a complete separation; CBSI remains SIG’s “fiscal agent” subject to the Minister for Finance’s directions (with Cabinet approval) to coordinate monetary and fiscal policy or for the public interest.
- CBSI has power to impose broader administrative sanctions and penalties, including monetary sanctions, warnings and licence revocation. The maximum penalty which can now be imposed by CBSI is the equivalent to 10,000 penalty units (SBD$10,000) or one year's imprisonment per contravention. Monetary penalties can be imposed on a daily basis for each day of the violation, until compliance is achieved (section 63(4) of the New Act). Under the Old Act, fines were not managed by CBSI and only applied to Board Members' breach of secrecy or conflict of interest obligations, contravention by licensed financial institutions of established maximum rates/fees chargeable in the extension of credit and failing to supply information, or supplying false information to CBSI.
- CBSI can act as lender of last resort to licensed financial institutions; such loans may be given for a period of 90 days (subject to renewal, but for a maximum of 180 days) (section 15 of the New Act). Previously some secured loans could be given for a maximum of one year. Such loans are only available to solvent banks (to improve their liquidity), and in exceptional circumstances (a response to the liquidity crisis during the Global Financial Crisis (GFC)).
Some other changes include:
- the removal of cap on the required reserves as a percentage of deposits (previously had discretion up to 40%) – this facilitates greater policy responsiveness to changing macroeconomic conditions on CBSI’s behalf (we do note, however, that separate Capital Adequacy Policies still exist);
- an increased emphasis on ensuring financial institutions establish consumer complaints units (section 9(m) of the New Act) – this may have an impact on organisational structures within licensed financial institutions;
- after CBSI board members resign from CBSI, they must wait a minimum of one year before serving in a professional capacity in a bank or other financial institution (section 46 of the New Act). Persons are not eligible to sit on the CBSI board if they are a beneficial owner of more than 5% of the equity interest in a financial institution (section 43(3)(d) of the Act);
- new limitations on CBSI granting credits to SIG/public bodies both directly or indirectly with the exception of intra-day credits. Publicly-owned banks and financial institutions are specifically exempt from this requirement (section 36 of the New Act); and
- the inclusion of the explicit goal of financial inclusion, with implications for micro-financing and community engagement.
Overall, the changes which the New Act introduces should make operating in the Solomon Islands more consistent with inter-jurisdictional operating procedures and promote greater transparency and predictability for the market of CBSI’s policy goals – provided that institutional cultural change occurs concurrently with legislative change.
The Amendment Act
The Amendment Act seeks to amend the Financial Institutions Act (FIA) in one important way: by permitting the issuance of interim licences for applicants to carry on banking business pending approval or rejection of their application for a licence under the FIA. By the Amendment Act, CBSI would be authorised, within 60 days of receiving a complete application, to issue an interim licence that would be valid for a period of 6 to 12 months (new section 5(7A) of the FIA).
CBSI may not issue an interim licence under section 5(7A) unless it is satisfied in respect of the matters set out in section 5(5) of the FIA and, where the applicant is a foreign financial institution, the matters set out in section 5(6) of the FIA (new section 5(7C) of the FIA).
Where an interim licence is issued, the time limit imposed by section 5(7) of the FIA for the CBSI to either issue a licence, or inform the applicant that the licence application is refused (four months), no longer applies, but the CBSI must take such action before the expiry of the interim licence (new section 5(7B) of the FIA).
The Draft Guidelines as currently drafted are similar to the Reserve Bank of Fiji Prudential Guideline 12A, and aim to improve transparency, with benefits for the consumer. We will provide a full update on the implications for licensed financial institutions when the Draft Guidelines become final.