No. 10 Banking (Published 11th January, 2010) Act No. 10 of 2010 T assent Dr. BINGU WA MUTHARIKA PRESIDENT 8th January, 2010 ARRANGEMENT OF SECTIONS PART IPRELIMINARY SECTION 1 2. 3 Owe IAMS 10. MW. ee 14, lee 16. 17. 18. 19. Short title Interpretation Application of the Financial Services Act, 2009 Part II_LIcENSING OF BANKS Licensing of banks Conditions for licensing of banks Limitation on shareholding Licensing criteria Suspension or revocation of licence Register Part [II—PRUDENTIAL SUPERVISION Division I_Obligations of Banks Capital funds and minimum capital ratios Directives related to accounting policies of banks and financial institutions Restriction of cash dividends Submission of periodic returns to the Registrar Supervision of banks and financial institutions Exchange of information Forced appointment of external auditor Duties of external auditors to a bank Requirements on bad debt provisions Records, books of account and information to be keptBanking No. 10 Division [Structural Matters and Limitations SECTION 20. Prohibited transactions 21. Equity investments privately held by liquidated or divested investor 22. Restricted transactions 23. Matters that may be covered by the Registrar’s directives 24. Restrictions on loans to shareholders, directors, officers, employees and to their relations, etc. 25. Actions requiring prior approval Division I1_-Enforcement and Other Remedial Measures 26. Enforcement actions by the Registrar 27. Provisions relating to statutory management or closure of banks 28. Registrar to determine action on bank under statutory management Part [V—WInDING-UP 29. Liquidation or winding-up of a bank 30. Powers of a liquidator 31. Liquidator to report on custodial assets and liabilities 32. Preference of certain claims 33. Financial records, audit and release of liquidator 34, Companies Act applicable in case of winding-up 35. Entries in bank books and evidence of depositor claim 36. Unclaimed funds after winding-up 37. Expenses relating to liquidation Part V—MONETARY SUPERVISION 38. Monetary directives 39, Administrative penalty Part VI—ABANDONED PROPERTY 40. Abandoned property to be delivered PART VII—FIDUCIARY OPERATIONS 41. Fiduciary operations to be specially permitted Part VIII—MISCELLANEOUS PROVISIONS 42. Identification of depositor by thumb impression 43. Use of the word “bank”No. 10 Banking 3 SECTION 44. Advertisement of financial services 45. Board of directors for a bank 46. Conflict of interest 47. Additional responsibilities of the board 48. Additional duties of directors 49. Liability of executive officers, etc. 50. Prohibited remuneration of directors, officers and others 51. Customer due diligence 52. Violations of this Act to be published 53. Inconsistency with the Companies Act 54. General offence and penalty 55. Regulations 56. Continuity of banking licence 57. Transition period 58. Repeal and savings of Cap 44.01 An Act to provide for the regulation of the business of banking in Malawi, and to provide for matters incidental thereto and connected therewith ENACTED by the Parliament of Malawi as follows— PART [PRELIMINARY 1. This Act may be cited as the Banking Act, 2009. Short tite and commence- ‘ment : 2.—(1) In this Act, unless the context otherwise requires — Interpretation “bank” means a person who conducts banking business in Malawi, including by accepting funds withdrawable by cheque or transferable by other means; “banking business” means the business of receiving deposits or deposit substitutes from the public that are— (a) payable, with or without interest, on demand, or after the expiration of a stated period; and (6) transferrable by cheque or by other means. “banking licence” means a licence granted by the Reserve ActNo.... of Bank of Malawi and issued under the Financial Services Act to 200 carry on banking business;ActNo. .. of 2009 Cap. 46:03 ACtNo. . of 2009 Banking No. 10 “capital” includes paid-up capital and unimpaired reserves; “close relation” means spouse, brother, sister, parent, child, child of the spouse and the spouse of any of these and also includes a business partner and the close relations of the business partner; “controlling party” has the meaning ascribed to that term in the Financial Services Act; “company” means any company incorporated or registered as such under the Companies Act; “core capital” means paid-up share capital and disclosed reserves, with the latter being defined as the total of statutory reserves, retained profits from prior years, share premium, and sixty per cent (60%) of after tax profits in the current year to date (or in the case of loss, one hundred per cent (100%) of that loss), less unconsolidated investments in financial companies; “credit facility” includes financing by means of loans, leases, advances, establishing a line of credit, factoring, hire purchase, accepting of trade and other bills, discounting of such bills and notes, the opening or confirming of documentary credit, the issue of other letters of standby, guarantee or surety, the undertaking to pay on account of another person, and such other similar undertakings as may be prescribed by the Registrar in the Registrar's directives from time to time; “deposit” means money entrusted to a bank and accepted by it for credit to a depositor’s account, which is payable, with or without interest, on demand or after the expiration of a stated period of time; “deposit substitutes” means funds received from the public through the issue, endorsement or acceptance of debt instruments of any kind other than deposits, or through the issue of participations, certificate of assignment, repurchase agreements or similar instruments; “executive officer” means an officer at the most senior levels of the management of a bank, whether or not the officer is a director, who effectively manages the affairs of the bank; “group of related debtors” means a group of debtor companies or enterprises operating under common control of an individual or of a group of related individuals, or of a corporate body acting as a controlling party as defined in the Financial Services Act, 2009;No. 10 Banking 5 “insider” includes any of the following — (a) principal shareholders; (6) members of the board of directors or audit committee; (©) executive officer; and (d) senior management officials; “liabilities to the public”, in relation to a bank means all claims against such bank payable on demand or at a determinable future date, whether or not the precise date of payment is fixed; “non-performing loan” means a credit facility that is not paying principal or interest according to the terms of the borrower’s financing agreement; “Registrar's directive” means a directive issued under the Financial Services Act, 2009; ActNo. ... of 2009 “related party” includes any of the following — (a) a person who is related to an insider of a licensed institution by marriage or consanguinity to the second degree; (6) a legal person in which an insider has a business interest, including as a partner, director, manager or guarantor; (c) an individual person for whom an insider is a guarantor; (@) a subsidiary of the licensed institution or of an insider; (e) a company or undertaking in which at least a ten per cent (10%) interest is held by the licensed institution or by an insider; () @ parent company of the licensed institution or of an insider; (g) a company that is under common control with the licensed institution or of an insider; (h) a company that holds at least a ten per cent (10%) interest of another company in which the licensed institution or an insider holds at least a ten per cent (10%) interest; () company that has common management or common directors with the licensed institution, an insider, or another related party of the licensed institution; and (/) a political party that is controlled by an insider or related party or whose funds or services shall benefit an insider or related party;6 Banking No. 10 “eserves”, in relation to a bank, means all funds which have been built up out of earnings, premiums on shares, profits from the realization of assets, and increase of the value of assets upon revaluation of such assets, and which have been set aside as a general or special reserve and are available for meeting the liabilities of the bank; “significantly undercapitalized bank” means a bank which has the following characteristics — (a) has capital ratios that are less than fifty per cent (50%) of the requirement prescribed in the Registrar’s directive on capital; (4) holds core capital of less than fifty per cent (50%) of the requirement prescribed in the Registrar’s directive on capital; or (c) holds total capital of less than fifty per cent (50%) of the requirement prescribed in the Registrar’s directive on capital. “unsecured”, in relation to credit facilities, means credit facilities made without collateral, guarantee or other personal security, or if made against a collateral, guarantee or other personal security, such part of the credit facility which at any time exceeds the market value of the collateral or the amount recoverable from the guarantor or surety, as the case may be; (2) For the purposes of this Act, a person shall be deemed to be accepting deposits of money if such person accepts from the general public deposits of money as a feature of his business, or if such person solicits such deposits, irrespective of the terms and conditions under which such deposits are accepted or solicited and whether or not certificates or other instruments are issued in respect of any such deposit: Provided that the acceptance of insurance premiums by an insurer, shall not be deemed to constitute acceptance of deposits of money for the purposes of this Act. (3) Words and expressions used in this Act have the meanings ActNo. ...of ascribed to them in the Financial Services Act, 2009. 2009 Application of 3. This Act shall apply in addition to the Financial Services Act, theFinancial 2999, Services Act, 2009 Act No. of Part II—LICENSING OF BANKS 2009 Licensing 4.—(1) A person shall not— of bank: : . a (a) conduct banking business in Malawi; orNo. 10 Banking 7 (b) indicate to the public that he is conducting or is about to conduct banking business. unless licensed as a bank under the Financial Services Act, 2009. actNo ot (2) The Registrar shall not license a person as a bank unless the person is a body corporate (©) The Rewistrar may, by Registrar's directive, determine that other entities accepting funds from the public, mciuding those that horrow from the public or other banks. and that empioy such tunds in whole or in part, by granting loans, advances and other credit facilities and by investing or by any other means at the risk of the person conducting such business. 1s engaged in bankin and shall require that entity to be licensed business (4) A person who contravenes this section commits an offence and on conviction shall be liable to a fine of ten million Kwacha (K 10,000,000) and to four (4) years imprisonment. 5.—(1) In considering an application for a banking licence, the matters that the Registrar shall take into account include— (a) the validity and accuracy of the documents and information submitted therewith, (5) the financial condition, resources. integrity and previous banking or non-banking business ventures of direct and indirect shareholders associates and affiliates of the proposed bank: (c) the integrity, working experience and qualifications of the proposed directors and executive officers of the proposed bank and their competence to conduct the proposed business: (q) the capacity of the applicant— (i) to maintain an adequate capital at all times; (ii) to comply with the provisions of this Act and of any other Act relevant to its business: (@) the adequacy of the capital, and earning prospects resulting from the intended operation: (f) the nature and scope of the proposed operation: (g) the needs and convenience of the community or sector to be served: (iy the structure of its organization: (i) the imterests of depositors and creditors of the applicant; (/) the interest of the national economy and the public interest: 2009 Conditions for hioensing of banksBanking No. 10 (& the structure and shareholding of the proposed group of companies of which the proposed bank forms part or intends to form part; (D the sources and nature of capital to be used to finance the proposed bank; (m) whether the applicant is or will be able to apply and maintain effective and proper internal control systems and sound principles of corporate governance; and () other matters that may be deemed essential by the Registrar. (2) The Registrar may interview the promoter, directors and proposed senior management personnel in the course of an appraisal and also inspect their books and records to satisfy himself about the representations made or information furnished by the applicant. Limitaionon 6(1) A person or group of persons who do not satisfy the shareholding Licensing criteria criteria for the fit and proper test relating to controlling shareholders, as determined by the Registrar in the Registrar's directives shall not acquire more than ten per cent (10%) of the shares of a bank. (2) A bank not transfer any shares referred to in subsection (1) without obtaining written approval from the Registrar. (3) The Registrar of Companies shall not register any transfer of shares of a bank referred to in subsection (1) without receiving a notice of no objection from the Registrar. (4) A person who is a controlling party of a bank shall not be 2 controlling party of another bank. 741) The Registrar shall not grant a licence unless he is satisfied that— (@) the banking business to be conducted under the licence shall be effectively managed by at least two (2) persons as executive officers of the bank; and (6) the bank has minimum start-up capital as stipulated in the Registrar’s directive on capital (2) A bank shall not engage in any business other than the business designated in its licence. Suspension or 8, Where a banking licence is suspended or revoked, the power revocation of licence ActNo, 2009 of the Registrar to give written direction to the bank under the of Financial Services Act, 2009, shall extend to— (a) the disposal of its assets; andNo. 10 Banking (5) its entering into any transaction or a transaction of any kind specified in the directions. 9.(1) The Registrar shall keep a register of banks, consisting of a separate part for cach class of banking business. (2) The Registrar shall publish in the Gazette— (a) the entry of a bank, or the cancellation of any entry, in the register; (b) a copy of the register as at 31st December of the preceding year. Parr III—PRUDENTIAL SUPERVISION Division I—Obligations of Banks 10.—(1) Every bank shall at all times maintain adequate capital for the conduct of its business. (2) The Registrar may prescribe higher on-going capital requirements for a specific bank where the supervisory review process reveals existing risks in the bank warranting the increase. 11. Without limiting the power of the Registrar under the Financial Services Act, 2009, to issue Registrar's directives, the Registrar’s directives may make provision with respect to any of the following— (a) valuation of assets and liabilities; (6) depreciation of assets; (c) impairment of assets; (d) provision for contingent losses and litigation; (e) provision for tax payable; (f) amortization of goodwill; (g) net positions on foreign currencies; (A) foreign currency loans; (i recognition of income and expenses; (j) amortization of pre-incorporation expenses; or (4) such other items as may be prescribed by the Registrar. 12.(1) A bank shall not declare, credit or pay any cash dividends or make any transfer from the surplus if to do so would result in a breach of its capital adequacy requirements under this Act or the Financial Services Act, 2009. Register Capital funds and minimum capital ratios Directives related to accounting policies of bank AAct No... of 2009 Restriction of cash dividends ACtNo, ... of 200910 Banking No. 10 Cap. 46:03 (2) Notwithstanding the provisions of the Companies Act, a bank shall not increase its paid-up share capital out of revaluation reserves. (3) A bank shall not pay any cash dividend on its shares if the ActNo. ...of bank’s capital requirements under section 10 or the Financial oe Services Act, 2009, are not met. Submission --:13—(1) Every bank shall submit to the Registrar all information of periodic and data on its operations in Malawi including periodic returns and Reseuas "those of any company which is a subsidiary, affiliate, associate or holding company to the bank which the Registrar may require for ActNo. ...of proper discharge of its functions under this Act or the Financial 2009 Services Act, 2009. (2) The format of the periodic returns required under subsection (J) and the periods within which they shall be submitted shall be determined by the Registrar in a Registrar’s directive. @) Any bank which, without reasonable cause, fails to comply with subsections (1) and (2) of this section, or submits inaccurate returns, shall pay to the Registrar an administrative penalty per day of default as determined in the Registrar’s directives. (4) The Registrar shall, if he deems necessary for the safety and soundness of the bank, or for the safety of the depositors of to determine whether the provisions of this Act or the Financial Services Act are being duly complied with, require in writing any affiliates, associates, holding or subsidiary companies or any person who controls a bank to provide the Registrar or its appointed agent such information or documents as may be necessary including the financial statements and other financial records within the period specified in the notice. (1) The Registrar may periodically, or at his discretion, examine or cause to be examined the business of any bank in order to determine whether the bank is in a sound financial condition and ActNo. ...of complies with the requirements of this Act or the Financial Services 2009 Act, 2009, or any other Act relevant to its banking business. ‘Supervision 14, of banks (2) In addition to subsection (1), the Registrar may, on a consolidated basis, carry out an examination of any affiliates, associates, holding or subsidiary companies or any person who controls a bank, whether they ‘are domiciled within or outside Malawi. 3) A bank shall, periodically, as prescribed in the Registrar’s directive or on request by the Registrar, provide any information or data requested by the Registrar for purposes of carrying out an examination in pursuance of subsection (2).No. 10 Banking 15._(1) The Registrar may upon request made to him by any monetary, supervisory or other regulatory authority in the ordinary course of business, disclose any of the information provided under section 13 to that monetary, supervisory or regulatory authority within or outside Malawi; except that the Registrar shall, before disclosing any information under section 13, satisfy itself that the information is required for the proper discharge of the requesting monetary, supervisory or regulatory authority’s duties. (2) The Registrar shall rely on foreign monetary, supervisory, or regulatory authorities on matters of cross-border supervision of banks. 16.—{1) Where a bank fails to nominate or obtain approval of an extemal auditor, as required under the Financial Services Act, 2009, within two months after the lapse of the term of its previous auditor, or fails to fill a vacancy for an external auditor, the Registrar may appoint a qualified firm of external auditors whose remuneration shall be paid by the bank. (2)A person appointed as an external auditor under subsection (1) shall— (a) for the purposes of the Companies Act be deemed to have been appointed as an external auditor at the immediately preceding annual general meeting of the bank; (6) be deemed to be an external auditor appointed by the bank and approved by the Registrar as required by the Financial Services Act, 2009. (3) The Registrar may for sufficient cause withdraw its approval of the appointment of an external auditor previously granted, and upon the withdrawal, the external auditor concerned shall vacate office. (4) For the purposes of subsection (3), sufficient cause shall relate to any of the following— (a) failure to comply with the requirements of this Act; (6) breach of duty as imposed by this Act; (c) inability to perform in accordance with international accounting standards as prescribed by the Society of Accountants in Malawi; or (@) any other reason that the Registrar may, in his discretion consider applicable. 17.—(1) In addition to the requirements under the Financial Services Act, 2009, the duties of an external auditor in relation to a bank shall include the following — il Exchange of ‘information Appointment of external auditor by the Registrar ActNo. ... of 2009 Cap. 46:03, ACtNo. ... of 2009 Additional duties of external auditors to a bank12 Banking No. 10 (a) to warn the board of directors of a bank of — (i) the bank’s ability or inability to meet the capital requirements; (ii) the bank’s ability or inability to meet the reserve and liquidity requirements; (iii) the bank’s risk exposures; (iv) any other matter which the external auditor becomes aware of in the performance of his or her functions as an auditor which may— (aa) prejudice the ability of the bank to continue conducting business as a going concern; (bb) be detrimental to the interest of the depositors; or (cc) violate the principles of sound financial management or the maintenance of adequate intemal controls and systems by the bank; (6) to obtain sufficient, relevant and reliable evidence to satisfy themselves of the various matters necessary to form their opinion; (c) to ascertain, evaluate and test internal controls before placing audit reliance on them; (d) to exercise reasonable care and skill in accordance with the current professional standards and practices and to perform the audit in accordance with international auditing standards and such other regulations, directives, policies, guidelines as the Registrar may issue; (e) to assess, and in writing comment on, the report of the board of directors before the report is tabled at the annual general meeting; and (/) to report to the Registrar any of the following— (i) facts or decisions that constitute a material breach of laws or regulations; (ii) information that indicates failure to fulfil any of the requirements for a banking licence; (iii) any indications that may affect the bank’s ability as a going concern; (iv) matters of serious conflict within decision making bodies; (¥) the intention of the auditor to resign or the removal of the auditor from office;No. 10 Banking (vi) where after discussing the audit findings with a bank, the extemal auditors conclude that they will give a negative or adverse opinion as opposed to one qualified by exceptions; or (vii) material adverse changes in current or potential risks of the bank’s business; (2) External auditors shall not be exonerated by disclaimer clauses in the statements they endorse if the statements contain material errors and gross misrepresentation (3) External auditors of banks shall be subject to an audit quality monitoring review as implemented by the Malawi Accountancy Board or its delegated authority. (4) The Registrar may in his discretion require that audited financial statements of each bank be reviewed by the Malawi Accountants Board or his delegated authority and all the costs arising from such a review shall be met by the bank. 18.—(1) Every bank shall, before annual accounts are finalized, dividends paid, and the capital requirements in section 10 are met, satisfy the Registrar in respect of — (a) sufficiency of provisions for bad debts; (8) existence and enforcement of a proper policy on non-accrual of interest on non-performing loans; and (c) amortization of preliminary expenses, goodwill and similar expenses. (2) The Registrar may, in a Registrar’s directive, set out the requirements to be fulfilled by a bank in order to comply with subsection (1). 19._(1) Every bank shall keep in Malawi such records, books of account and information as necessary to exhibit clearly and correctly the state of its business and to explain its transactions and financial position, and to enable the Registrar to determine whether it has complied with the provisions of this Act. (2) The records, books of account and information referred to in subsection (1) shall be preserved for a period of at least seven (7) years from the date of the last entry therein. Division [Structural Matters and Limitations 20. A company licensed under this Act to conduct banking business shall not— (a) purchase shares in its own business or make loans or advances against such shares as collateral; Requirements on bad debt provisions Records, books of account and information to be kept Prohibited transactionsit Banking No. 10 Equity investments privately held by liquidated or divested investor Restricted transactions (b) hold shares in a company that is a controlling party of the bank, irrespective of whether the shares are to be held for trading or equity investment. 21—(1) Where any shareholder of a privately held equity investment in a bank is liquidated or divests his interest, such investment shall with immediate effect— (a) be offered to existing shareholders on a right-of-first-refusal basis, and at a consideration to be agreed among the parties; (b) be offered to other external parties where for any reason the existing shareholders are not willing to take up the shares, (2) Such equity shall be offered to existing shareholders in proportion to their shareholding (3) Such equity shall not, for any reason whatsoever, be warehoused. (4) Approval shali be sought from the Registrar regarding persons wishing to take up such equity investment in a bank. (5) If the Registrar is satisfied that existing shareholders have failed or may fail to take up their allocated shares, nominate or obtain approval for an external investor to take up such equity investment, the Registrar shall advertise for potential investors to take up such equity. 22. Except with the prior approval of the Registrar, a bank shall a (a) engage on its own account in wholesale or retail trade, including import and export trade, except in so far as may be necessary in the course of the satisfaction of debts due to it; (®) purchase, acquire or hold immoveable property other than for the purpose of conducting its business or providing housing or amenities for its staff; (c) have investments in land, buildings and other immoveable property which in aggregate exceeds the sum of its capital and reserves: Provided that paragraph (6) and paragraph (c) shall not prevent a bank from enforcing a security by acquiring immoveable Property and reselling it within two (2) years; and (d) own shares in the capital of any company, firm or enterprise the aggregate value of which is more than the percentage of the bank’s core capital specified in Registrar’s directives,