Solomon Islands has a relatively stable banking system closely integrated with the financial systems of Australia and New Zealand, regulated by the Central Bank of Solomon Islands (CBSI), in accordance with the Financial Institutions Act 1998 (FI Act), Central Bank of Solomon Islands Act 2012 (CBSI Act), and prudential standards issued under the FI Act.
There are also strict controls in place in Solomon Islands regarding the control of all financial transactions, and dealings in foreign currency and securities, between residents of Solomon Islands and other countries, set out in the Exchange Control Act 1976 (EC Act), Exchange Control (Foreign Exchange) Regulations (EC Regulations), and Exchange Control Policy (EC Policy).
Persons carrying on ‘banking business’ in the Solomon Islands must be licensed under the FI Act. ‘Banking business’ is defined as:
- the business of accepting deposits from the public or members thereof, withdrawable or payable upon demand or after a fixed period or after notice, or any similar operation through the frequent sales or placement of bonds, certificates, notes or other securities, and the use of such funds, either in whole or in part, for loans or investment for the account and at the risk of the person doing such business; and
any other activity recognised by the Central Bank as customary banking practice which a licensed financial institution engaging in the activities described in the first paragraph, may additionally be authorised to do so by the Central Bank or any related activity which the Central Bank may consider appropriate.
The FI Act provides a supervisory umbrella, and addresses such issues as:
- defining financial institutions and banking business;
- rules regarding ownership;
- licensing requirements;
- minimum capital requirements;
- restrictions of business activities;
- definition of the roles and duties of external auditors;
- measures to protect the interests of depositors;
- a supervisory and examination system;
- situations where CBSI may intervene in the operations of a financial institution;
- transfer of ownership or control of a financial institution; and
- sanctions for non-compliance by financial institutions or their officers.
CBSI has power under section 8 of the FI Act to issue prudential standards for the regulation of the banking industry. There are currently six prudential standards, dealing with capital adequacy, asset classification and provisioning, foreign currency open positions, external audit, large credit exposures, and liquidity management.
CBSI was established in February 1983 under the Central Bank of Solomon Islands Act [Cap 49] (Old CBSI Act), which was amended in 1985 to extend CBSI’s supervisory capabilities and banking functions. Today, besides being charged with the responsibility of acting as banker to Government and commercial banks, CBSI, as agent for Government, is responsible for conducting monetary policy.
The Central Bank of Solomon Islands Act 2012 (CBSI Bill) has recently been passed by the Solomon Islands Parliament. Its purpose is to bring CBSI legislation in line with international best practice for central banking legislation and governance. The CBSI Act strengthens CBSI’s autonomy and accountability to ensure that central banking policy and practice continues to be effective and efficient in facilitating price and financial sector stability, which is essential for sustainable economic growth in Solomon Islands. The CBSI Act:
- removes or limits political interference into CBSI institutional autonomy;
- clearly identifies and prioritises the objectives of CBSI and aligns its functions with its objectives;
- facilitates the use of direct instrument of monetary policy in addition to indirect instrument as used in modern central banking;
- strengthens CBSI members’ personal autonomy, giving tighter criteria, rules and policies on extending and fixing mandates for the members of the board;
- ensures greater attention be given to the checks and balances of limiting the powers of the board; and
- ensures that CBSI is transparent and accountable to the public by reporting through published materials.
There is no legislation specific to securities in Solomon Islands. The Companies Act 2009 (Companies Act) contains a general restriction on persons engaging in conduct in relation to any advertisement or generally for any debt and equity securities or any dealings in debt and equity securities (including trading) that is misleading or deceptive or likely to mislead or deceive. Contravention of this section constitutes an offence, carrying a fine of SBD$1,000 or a term of imprisonment not exceeding 5 years.
Dealings in foreign currency
We set out below a summary of some key restrictions in respect of dealings in foreign currency. CBSI has appointed the commercial banks operating in Solomon Islands (namely Australia and New Zealand Banking Group Limited, Bank of South Pacific, and Westpac Banking Corporation) as “Authorised Dealers” in foreign exchange for the purposes of the EC Regulations, with delegated powers from CBSI to deal the majority of exchange control applications).
- No person can take or send out of the Solomon Islands any currency, except with the authority of CBSI or an Authorised Dealer.
- Except with the authority of CBSI:
- no person, acting on his own behalf or on behalf of another person, can deal with foreign currency in Solomon Islands; and
- no resident, or person acting on behalf of a resident, shall deal outside Solomon Islands, with foreign currency.
Some more specific restrictions include:
- Exchange control approval is required for the crediting of accounts of non-residents, whether with a bank or in the books of an organisation or individual.
- Exchange control approval is required for a permanent resident of Solomon Islands (including a company incorporated in Solomon Islands and the Solomon Islands branch of an overseas incorporated company or firm) to:
- borrow funds (or a transaction having that effect) from a non-resident, including the branch’s overseas head office;
- pay interest to the non-resident lender; or
- repay the loan to the non-resident lender.
- All requests for approval of transactions involving capital payments are dealt with by CBSI (major categories of transactions are transfer overseas of sale proceeds of Solomon Islands assets, loan repayments, and direct investment overseas).
- The establishment of a foreign currency account by a permanent resident of Solomon Islands with a bank in or outside Solomon Islands, or a non-resident with a bank in Solomon Islands, is generally not permitted.
Dealings in foreign securities
Exchange control approval is required for permanent residents of Solomon Islands to acquire, dispose of, or otherwise deal in “foreign securities”. This applies only to the acquisition of shares for valuable consideration (that is, it does not apply to gifts). Exemptions may be granted, or authorisations issued, pursuant to EC Regulations. Foreign securities include deposits in overseas bank accounts and debts payable outside Solomon Islands.
Inbound: Investment by non-residents in Solomon Islands in a new business or in an existing enterprise requires prior approval of the Foreign Investment Board (FIB). The approval granted by FIB is further subject to exchange control approval in respect of transactions which have exchange control implications, such as:
- the issue or allotment of shares/securities to a non-resident
- the transfer of shares/securities from/to a non-resident
- the registration of shares/securities in the name of a non-resident in a register in Solomon Islands
- the despatch overseas of share scrips
- borrowing from a non-resident
- payments arising from various agreements.
Outbound: Portfolio investment by permanent residents of Solomon Islands is not permitted.