Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Friday, March 18, 2016

Governance of Central Banks: Imperatives Dictated by (Digital) Financial Inclusion!

Ramesh S Arunachalam 

Serving the larger public and societal interest is the key mission of governments and its public institutions and every nation’s CENTRAL BANK is no exception to this dictum. Citizens indeed expect (individual) CENTRAL BANK board members and officials to perform their duties with integrity, objectivity, honesty and in a fair and unbiased manner, without fear or favor! And it is also strongly expected that CENTRAL BANK board members and officials will not allow their private interests[i] and affiliations to compromise their official work which includes not just policy setting but also decision-making, rule framing, compliance facilitation and so on and so forth.

While the above is the general expectation especially given that CENTRAL BANKS are the guardians of the economy in a larger sense, these aspects become all the more important when we consider newer and increased roles for CENTRAL BANKS, including those in an eclectic area like (DIGITAL) FINANCIAL INCLUSION. Without question, this avant-garde discipline places huge and special demands on CENTRAL BANKS, in terms of the functions, roles and duties to be performed as well as stakeholders to be regulated and supervised! Let us be clear on that!

Given the above context, two issues assume great importance regarding Governance of CENTRAL BANKS and management of conflicts of interest at CENTRAL BANKS and these are discussed in sequential fashion hereafter.

First, from a governance perspective, let us look at CENTRAL BANK board[ii] appointments. If there is one important lesson from the global finance crisis of 2008, it is the fact that CENTRAL BANKS should ensure that the industry that is being regulated and supervised by them[iii] - the broader financial sector - does not have representation on the CENTRAL BANK board. In other words, there should be no one - from the larger financial sector - appointed to the board of a CENTRAL BANK as an independent director, so as to prevent conflicts of interest[iv]. This precaution, which is usually considered as a modern day necessity, if taken, will ensure that individuals with past and/or current (close) ties to the (regulated) financial sector are NOT appointed as independent directors to the CENTRAL BANK board. That is absolutely fine and indeed should be the case, where it is not already followed by a CENTRAL BANK[v]! But the above strategy is simply not enough when one talks of (digital) financial inclusion which is fast dominating the financial landscape of many CENTRAL BANKS globally.

As we all know, (digital) financial inclusion brings in a much, much wider set of stakeholders into play. Apart from banks, NBFIs, cooperatives, credit unions, NGOs, and other financial intermediaries, a whole new set of stakeholders – ranging from TELCOS to a wide range of Agents, Intermediaries, Merchants and Others - are involved in (digital) financial inclusion and they participate in the design and delivery of these financial (inclusion) services in real time.

OK, in line with the earlier arguments, we may therefore say that representatives of (and/or people closely connected with) all of these new set of stakeholders[vi] must be kept out of a CENTRAL BANK board as they are “interested persons” and as their presence on the board of a CENTRAL BANK could result in “Conflicts of Interest”.

That is fine but who exactly are these stakeholders? This is where the difficulty lies and it requires every CENTRAL BANK to have a clear and comprehensive (interoperable) framework on (DIGITAL) FINANCIAL INCLUSION in terms of definition of these services (including their breadth, depth and scope), the stakeholders involved in design and delivery, the intermediary and end user clients[vii] and so on and so forth! Until and unless you have all of the above from a CENTRAL BANK perspective, it would be impossible to define, identify and manage associated conflicts of interest. And as noted above, that is just one part of the problem.

A second related issue is also important here and this concerns the conflicts of interest that may be associated with a CENTRAL BANK official (staff but not board members). This would typically include the Governor, Deputy Governors/Equivalent and others in the CENTRAL BANK hierarchy.

Thus, to reiterate, as noted earlier, while a conflict of interest is not corruption per se, conflicts between the public duties of CENTRAL BANK board members/officials and their private interests (if these exist), if inadequately managed, can INDEED RESULT in corruption. And, as noted above, this needs to be dealt with through an appropriate definitional and scoping framework with regard to (digital) financial inclusion and an associated conflicts of interest policy, especially given the huge set of stakeholders who are (and who could get) involved (digital) financial inclusion.

Thus, two tangible outputs need to be URGENTLY created at every CENTRAL BANK:

a)     A definitional and scoping framework on (DIGITAL) FINANCIAL INCLUSION SERVICES that outlines the nature of such services (including their breadth, depth and scope), the stakeholders involved in design and delivery of these services, the intermediary and end user clients and so on; and

b)    A conflict of interest policy with regard to board members and officials in the CENTRAL BANK that clearly articulates how conflicts of interest are (to be) defined (with examples) as well as identified/managed[viii], especially, given a CENTRAL BANK’s increased focus on (DIGITAL) FINANCIAL INCLUSION SERVICES.

While a larger objective of an effective Conflicts of Interest policy is the simple prohibition of all private-capacity interests on the part of CENTRAL BANK board members and/or officials, the more relevant and immediate objective should be to maintain the integrity of the official CENTRAL BANK policy, its administrative decisions, public management functions and so on. That indeed is the need of the hour, if public confidence and trust in CENTRAL BANKS is to remain high, as is the case in many countries today!

[i] Where a private interest has in fact compromised the proper performance of a board member and/or public official’s duties and responsibilities, it would indeed be appropriate for that specific situation to be regarded as an instance of misconduct or ‘abuse of office’, or even instance of corruption, rather than as a ‘conflict of interest’.
[ii] I am talking of the Governing board here and not any committee/equivalent that deals with monetary policy but the same arguments/principles apply to any such CENTRAL BANK committee(s)
[iii] Either individually by them and/or in tandem with other regulators/supervisors
[iv] A conflict of interest is not corruption per se. A ‘conflict of interest’ involves a conflict between the public duty and private interests of a CENTRAL BANK board member and/or public official, in which the board member/public official has private-capacity interests which could improperly influence the performance of their official duties and responsibilities.
[v] Readers may be interested in the following articles that I wrote with regard to India’s CENTRAL BANK - How the RBI can be made more accountable— Part 3, How the RBI can be made more accountable – Part 2 and Should the RBI be made more accountable? —Part1
[vi] This matter gets even more complicated when we consider the fact that despite being involved in the design and delivery of (digital) financial (inclusion) services, these newer set of stakeholders - i.e., TELCOS and a wide range of agents, intermediaries, merchants and others - are neither regulated not supervised in any serious fashion by the CENTRAL BANK and/or any other regulator/supervisor for that matter.
[vii] It is often argued that the end users of (digital) financial inclusion services tend to be those who have been traditionally excluded from the formal financial sector and/or bottom of pyramid (bop) clients but that may not necessarily be the case, as real life experiences have indicated!
[viii] Here, it must be recognized that unresolved conflicts of interest MAY result in abuse of a public office/official position, by a CENTRAL BANK board and/or staff member!

This article draws on a number of resources in the Governance area from the web and elsewhere including OECD resources and other governance material. They are far too numerous to acknowledge individually and so, I collectively (gratefully) acknowledge them. The application to the CENTRAL BANK and (DIGITAL) FINANCIAL INCLUSION SPACE has however been done by the author!

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