The National Bank of Ethiopia has raised the cap on remuneration for board directors at banks, insurance companies and microfinance institutions.
The new directive signed by the new governor, Yinager Dessie (PhD), increased the annual compensation for board members to 150,000 Br from 100,000 Br. The directive has also raised the monthly allowance of the board of directors to 10,000 Br from 4,000 Br.
The last time the directive saw an amendment was two years ago, when the initial remuneration rate of 50,000 Br for annual compensation, and the 2,000 Br monthly allowance were revised. The directive was initially issued seven years ago by the central bank with the intention of “safeguarding depositors” and “avoiding unnecessary competition” among shareholders of the financial institutions to be included in the board of directors’ list.
The regulatory bank’s remuneration limit came into force notwithstanding the commercial code of the nation, which allows members of the board of directors at share companies to be rewarded with as high as 10pc of the companies’ net profit.
During the 2016/17 fiscal year, the aggregate profit before tax of the 16 private commercial banks was eight billion Birr. In the stated period, the private insurers have recorded the highest aggregate profit of 1.3 billion Br.
The financial institutions’ board of directors should comprise of a minimum of nine directors. The directors should have a variety of profiles including gender diversity and varied experience in finance, banking, accounting, legal matters, administration, audit and technology. The central bank also mandates the inclusion of minority shareholders in the directors’ list.
The directors are mandated to establish clear policies; review and approve strategies, policies, procedures, annual business plans and budgets; monitor management’s performance; reviewing and approving the organisational structure and selecting and appointing qualified and competent executive officers and senior executive officers. Board members of financial institutions will perform their duties for a maximum of six consecutive years, and only one-third of them can be elected for an additional term of three years.
Directors have to meet at least once a month and form three committees, namely an audit committee, risk and compliance committee and a human resources committee, according to the directive of the National Bank. These subcommittees are expected to meet at least once a month and have the duty to report on their findings to the board of directors. Each director will be a member of two of the committees.
The directors take higher responsibilities and risks, according to a financial expert with two decades of experience. He also believes that the remuneration that is set by the regulator does not match the responsibilities that they shoulder.
“This, after all, discourages and pushes away competent professionals not to be included in the board of directors,” he said. “Why would they take responsibility for less compensation?”
A veteran businessman and founder of one of the private commercial banks shares his view.
“The remuneration directive is intended just to protect the depositors,” Eyesuswork Zafu the board chairperson United Bank said. “It doesn’t safeguard the interest of shareholders.”
Eyesuswork also argues that the directive is amended without being tabled to stakeholders in the industry for deliberation.
“The owners of the companies are those who are entitled to set the remuneration, not the central bank,” Eyesuswork told Fortune.
The flat compensation rate across all of the financial institutions also discourages directors, according to Eyesuswork.
A director will get a monthly remuneration of 22,500 Br, according to the new amendment which came into effect on August 29, 2018.
“Remuneration rates should be made based on the commercial code, depending on the profitability of the institutions, yet has to be restricted not to be exaggerated,” Eyesuswork said. “It should also be revised regularly considering the cost of living.”
Along with the board remuneration limit, the central bank has amended the branch opening directive for the third time. The new directive has eliminated the requirement of situating branch locations at suitable locations for cash loading and unloading to obtain authorisation to relocate or open branches or sub-branches.
Officials of the National Bank of Ethiopia were not immediately available for comment.
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