On 31 March 2021, the new Mozambican Credit Institutions and Financial Companies Law no. 20/2020, of 31 December 2020, will come into effect. This new law is in response to the demand for a banking regulation that forces national banking entities to act in the best interest of their clients, by complying with contractual obligations in a rigorous manner.
What prompted the new law?
In the post-pandemic environment in Africa, and especially in Mozambique, financial institutions will have not only to endure an economy in recession, but also one where there will be many financial problems with the business sector and a rapid acceleration of existing trends, such as the digitalisation of the economy, cybercrime and social and governance factors of the financial entities themselves.
The expected recession resulting from the pandemic will have great consequences for banks and finance companies in Mozambique, as well as for all the other sectors of the economy. In the upcoming months, banking and financial institutions are expected to face increasing levels of non-performing loans, with companies withdrawing their pre-existing credit lines and defaulting on previously obtained financing.
Thus, foreseeing future problems in the financial system, the Mozambican Parliament, instituted preventive measures by increasing regulation and supervision of financial institutions. The aim is to establish a legal regulatory framework for financial services in Mozambique to assist the Central Bank of Mozambique in its response and support to the COVID-19 crisis.
What changes does the law introduce?
Two essential aspects can be drawn from this new law, namely:
- the strengthening of licensing, governance and supervision requirements for credit institutions and financial companies and,
- the definition of resolution mechanisms and instruments for institutions considered unviable, or at risk of insolvency, that allow timely intervention and recovery, or their orderly winding-up, minimising negative repercussions on the economy.
We shall now briefly and in concrete manner examine the novelties introduced to the Mozambican banking system by the new law:
#1 Clear definition of credit vs financial institutions
A new classification of banking institutions will be introduced, i.e. only banks, micro-banks and credit cooperatives will become credit institutions. In addition, financial companies will include types which previously were classified as credit institutions as a category of payment service providers, such as leasing companies, factoring companies, investment companies and electronic money institutions.
#2 Standards for the management and supervision of banks
The new Law requires the adjustment of the members of the management and supervisory bodies and of the persons with essential functions in the management of banks. The exercise of the functions of the management and supervisory bodies of credit institutions and financial companies will now be subject to evaluation during the special registration process and during the term of office, to ensure their suitability.
The members of these bodies are now required to meet the suitability, professional qualifications, independence and availability requirements, and any lack of suitability may justify a new assessment by the Central Bank of Mozambique.
On the other hand, in situations of justified urgency to prevent the risk of serious damage to the sound and prudent management of a credit institution or financial company, or to systemic stability, the Central Bank of Mozambique may determine the temporary suspension from office of any member of the bodies in question.
#3 Customer information and financial education
The duty to provide information and assistance to customers has been strengthened in order to allow customers to make a free, conscious and informed decision regarding the purchase of financial products and services. In this regard, banks are now obliged, in collaboration with the Central Bank of Mozambique, to develop and promote programmes and initiatives of consumer information and financial education.
#4 Corporate governance rules
Within the scope of prudential supervision, specific rules on corporate governance have been established. The board of directors of the banking entities will now be obliged to create specialised committees which are necessary for the carrying out of their mandate, namely: audit, risk management, asset and liability management, appointments, and remuneration. The effectiveness of these governance systems must be ensured through the existence within the banking organisation of:
- internal audit
- compliance and
- risk management functions
In the context of corrective intervention and provisional administration, measures have been created to (i) safeguard the financial strength of financial institutions, the interests of account holders or the stability of the financial system; (ii) the recovery of the institution in difficult situation to ensure the continuation of its activity; (iii) adequacy; and (iv) proportionality.
#5 Notifying the Central Bank of Mozambique of financial imbalance or insolvency risk
An institution that is in a situation of financial imbalance or at risk of insolvency, irrespective of the reason, must notify the Central Bank of Mozambique, even if the competent bodies consider that this may not have an impact on the institution’s financial balance. For instance, this is the case of the risk of violation of prudential norms and limits, in particular the minimum levels of capital adequacy, or financing difficulties in meeting the respective liquidity requirements.
As for institutions that do not comply or are at risk of not complying with the rules that regulate their activity, the Central Bank of Mozambique may require them to immediately adopt the measures or actions necessary to address the situation.
The list of measures that may be adopted is now much broader than the previous list of extraordinary reorganisation measures.
#6 Suspension or dismissal of banking officials
Additionally, the Central Bank of Mozambique may suspend or dismiss one or more members of the management body of the institution concerned, when:
- the corrective intervention measures prove insufficient, or there is a legitimate concern that they are insufficient to resolve the situation or
- any of the situations listed above is verified and is likely to jeopardise the financial balance or solvency of the institution, such as, for example, the detection of a serious violation of legal or regulatory norms that govern its activity, as well as the respective statutory rules; or the verification of reasonable grounds to suspect of the existence of serious irregularities in the management.
The Bank of Mozambique may appoint provisional directors for the institution and may also accompany that appointment with the appointment of a supervisory committee, when the measure of suspension or dismissal of members of the management body is not considered sufficient to address some of the situations.
#7 Liquidation or sale of the financial institution
If the measures of corrective intervention and provisional administration applied do not allow the recovery of the institution, or if it considers that they would be insufficient, the Bank of Mozambique may, alternatively
- apply a resolution measure, if the requirements for the purpose are met;
- revoke the authorisation to exercise the respective activity, followed by the liquidation regime provided for in the applicable law
The measures of the resolution may take several forms, such as:
- partial or total sale of the business;
- partial or total transfer of the business to transitional institutions;
- separation and partial or total transfer of the business to asset management vehicles;
- reduction or conversion of own capital and financial instruments.
These measures may be applied separately or cumulatively.
In conclusion, we are convinced that this New Law will be a factor of unquestionable credibility, allowing the Mozambican banking system to consolidate the confidence of the international markets in the post-pandemic period and thus contributing to the development of the entire national business sector.
Pedro Gonçalves Paes, Partner, RSA LP
Pedro is a Lusophone lawyer with an extensive experience as commercial/corporate lawyer in Mozambique, Portugal and Brazil, namely legal advice in international/ national operations with expertise in projects, infrastructure, property and construction transactions and negotiating/structuring loan financing with international financing institutions. He is also Member of the Portuguese Bar Association and the Brazilian Bar Association.
Email: [email protected]
RSA LP / CF&A Law firm
Rua José Craveirinha 198, Bairro Sommerschield, Maputo, Mozambique