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FINANCIAL REGULATION

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FINANCIAL

REGULATION

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It looks at how the activities of Financial Institutions are controlled in a Financial System so as to ensure stability.

The Bank of Ghana Act, 2002 (Act 612) defines a Financial System as “ a network of deposit taking and non-deposit taking financial institutions such as a brokerage firm, insurance company, pension fund, investment company, which carries on the business of or whose business is any of the following activities;

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Taking of deposits of money from the

public repayable on demand and withdrawable by Cheques, drafts, orders or other means;

Financing of any activity by way of

creative financial assets such as loans and advances, securities, bank deposits or otherwise, than its own;

Companies dealing in shares, stocks,

bonds or other securities;

Leasing, letting or delivering goods to a

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Carrying on by insurance companies of

any business other than insurance;

Collecting of money or accepting

employer contributions and paying it out for legitimate claims or for retirement benefits”

Categories of the Financial System

From the above definition the Financial

System can be categorized as follows;

Banking

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Capital / Securities Market

Insurance

Pensions

Alternatively, the Financial System may be put in two main categories; Bank and Non-Bank institutions.

Function of the Financial System

The broad function of the Financial System is to mobilise funds and resources in the form of savings and deposits and to allocate them mainly in the form of capital, loans among others – intermediation.

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Essentials of an efficient Financial System

These are factors that contribute to the

Financial System performing in the manner that would ensure it attain its objective.

They include;

Effective Regulation: there should be

independent regulatory bodies to regulate the activities of participants based on clearly defined regulatory processes and practices.

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Supportive Legal Framework: There must be clearly defined laws which determine the rights and obligations of participants within a framework that ensures enforcement.

Supportive Financial

Infrastructure: This includes

institutions such as secondary markets (stock exchanges, bond markets) as well as systems and practices that facilitate financial transactions;

Trading and settlements systems

to ensure payment

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Healthy Competition: Competitive level

playing fields as well as wide dissemination of market information to enable customers make informed choices.

Judicious mix of local and foreign

participants

Competent, honest and solvent

professionals

Variety of financial assets and instruments.

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ELEMENTS OF FINANCIAL REGULATION

Effective regulation is an important element of regulation and therefore it is paramount to ascertain the elements of financial regulation.

The International Monetary Fund (IMF) has identified four (4) main elements of ensuring financial stability;

Regulatory Governance: it refers

to the capacity of the regulatory bodies to make decisions without interference, and to formulate, implement and enforce sound regulatory policies and practices.

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The institutional Framework which provides the legal basis for regulatory governance involves four main components;

First there must be legislation which provides the legal basis for the establishment of an independent regulatory body.

In Ghana the Financial System is regulated by three institutions;

Bank of Ghana

Securities and Exchange Commission and

National Insurance Commission. 

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Secondly, the Statute must define the

objectives and functions of the regulatory body.

Thirdly, the Statute must define the

enforcement powers and capabilities of the regulatory body.

Fourthly, the regulatory body must

have power to make rules, regulations

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The main principles under this element are;

Objectives of regulations

Independence and adequate resources

Enforcement powers and capabilities

Clarity and transparency of regulatory processes

External participation, such as Auditors.

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Prudential Framework: it comprises

the rules, directives and regulatory requirements that set forth the structure to govern the operations of the financial firms.

They enforce the capability of financial

institutions to cover risks associated with their operations.

Minimum Capital Requirement

Credit Limits

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 The main principles here include;

Risk Management

Risk Concentration

Capital Requirements

Corporate Governance

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Regulatory Practices: the techniques

and mechanisms for supervision and monitoring

Group-wide supervision

Monitoring and on-site inspection

Reporting to supervisors

Co-operation and information sharing

Confidentiality

Licensing, ownership transfer, and

corporate control

Qualifications

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Financial Integrity and Safety

Nets

Markets (integrity and financial crime)

Customer protection

Information, disclosure and

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BANKING REGULATION

Banking system is at the heart of the financial system because of the functions it performs, which includes; It allocates or channels resources

through credit decision process and market pricing to the most efficient users.

Provides a medium for receiving and payment for goods and services

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Objectives of banking regulation

To ensure financial stability and stability of

individual banks and reduction of financial crime

To induce and retain market confidence by

ensuring that only honest, competent and solvent institutions and practitioners are in the system

To protect customers, investors and depositors

through regulating the range of risk assumed by entities, ensuring that adequate information is given and disclosures made to investors.

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To set and maintain starts reflecting international standards.

To ensure healthy competition

The objective of banking regulation is to ensure that appropriates steps are in place to deal with basic problems of banking which includes;

Unwise investments and bad loans

Lending to individuals, industries and business without proper due diligence and without ensuring that they are capable of repayment.

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Speculation and risky dealings in foreign

currencies and futures instruments

Inadequate security

How the Bank of Ghana regulates

the Banking System

Licensing

Prudential regulation

On-site and off-site examination

Powers of investigation

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Power to give directives and make

regulations

Power to produce guidelines

Powers of enforcement

Sanctions for financial crime

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THANK YOU

AND

GOOD LUCK

References

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