NATIONAL INSTITUTE OF PUBLIC ADMINISTRATION

STUDENTNUMBER: 29000699

COURSE: BANKING AND PRACTICE

PRORAMME BACHELOR OF LAWS

ASSIGNMENT: TWO

YEAR: FOUR, SEMESTER ONE

QUESTION

Evaluate the importance of central bank independence in maintaining effective monetary policy,
and discuss how this independence influences corporate governance practices. Illustrate your
arguments with practical examples of companies responding to central bank actions.

INTRODUCTION
In an environment where the economy is liberalised, the central bank has a far greater role to
play as it is charged with introducing various policy instruments and effectively manage the
instrument so as to keep the economy in stable condition. This assignment seeks to elaborate on
whether the central bank like Bank of Zambia fully applies

the principles and practices that are regarded as appropriate conduct by directors and managers
of a company.Good corporate governance is thus concerned with such important values as
responsibility, accountability, fairness as well as transparency.

CORPORATE GOVERNANCE

Corporate governance refers to the system of rules, practices, and processes by which a company
is directed and controlled. It involves balancing the interests of a company's many stakeholders,
such as shareholders, management, customers, suppliers, financiers, government, and the
community. The central bank of Zambia, as a public institution, has a responsibility to conduct
its operations in a manner that is transparent, accountable, and consistent with its mandate.

INDEPENDENCE IN REGARD TO CORPORATE GOVERNANCE

Independence in corporate governance refers to the ability of a central bank to operate without
political interference, to make decisions based on economic considerations and to be accountable
for its actions. Independence is crucial to ensure that monetary policy decisions are made based
on the best available economic analysis and to maintain public trust in the central bank's ability
to achieve its objectives. This also implies the widest possible room for manoeuvre in the
conduct of policies delegated to it1. Central bank is seen as the means of achieving the goal of
price stability. The phrase price stability cannots the absence of inflation. Inflation is seen as the
grave disease for the economic well being of a country. It increases uncertainty, discourages
investment and brings conflict into industrial relations2.

It also brings about adverse social effect such as the arbitrary distribution of income and wealth
and discourages serving of money. Using various indicia of independence, a certain scholar
concluded that for eighteen industrialised countries, the average rate of inflation was lower in
countries with an independent central bank.
1
R.M.Lastra, central banking and banking regulations, (financial markets group. London 1996) p.10
2
Ibid.p14
BANK OF ZAMBIA AND THE PILLAR OF INDEPENDENCE

The independence of a central bank is an important pillar of corporate governance, and it is

essential to ensure that a central bank operates free from political interference to carry out its
mandate effectively. In the case of the Bank of Zambia (BoZ), it is worth analyzing whether the
institution fully applies this pillar of independence in corporate governance. With this
understanding, it is now imperative to evaluate whether Bank of Zambia fully applies a pillar of
independence in corporate governance. In doing so, we can consider the following factors:

(a) Legal framework:

The legal framework that establishes the central bank's independence is a critical pillar of
corporate governance. The central bank's governance structure should be enshrined in law, which
should clearly define its mandate, objectives, and powers. The law should also establish the
procedures for appointing the central bank's leadership and its board of directors. If the legal
framework provides for political interference, then the central bank may not fully apply the pillar
of independence in corporate governance.

Despite the importance of De fact independence, central government independence requires the
protection of a binding legal institutional framework as a source of legitimacy. Organic
safeguards are legal provisions regulating the organization of the central bank and its
institutional relationships with the government. The provisions should legislate both the
functions of the central banks and the scope of its powers. That legislation form the central banks
functional or operational guarantees.legal provisions should also refer to the different ways in
which central banks can be held accountable for their actions. The formal declaration of central
bank independence can be contained in a constitution, in a law or even in a contract. Most
countries choose to grant independence to their central banks through a law. For example Chile
and Philippines are among the few countries to have constitutionalised the independence of their
central banks3.

Legal independence is preferred for it grants parliament the right to amend or repeal a law at any
time. While a constitution can also be amended, it is generally lengthy and a complex procedure.

3
V.Grilli et al, political and monetary Institutions and public financial policies In the industrialised countries. (1991)
A law granting independence to a central bank should take into account the different categories
comprising organic and functional guarantees.

(b) Operational autonomy: The central bank's ability to conduct its operations without political
interference is essential to maintain independence. This autonomy should include the ability to
set monetary policy, manage the country's foreign exchange reserves, regulate the banking
sector, and supervise financial institutions. The central bank should also have the authority to
communicate its decisions to the public and the government without fear of reprisal

(C)Accountability: While independence is crucial, the central bank must also be accountable for
its actions. This requires transparency in decision-making, clear communication of its policies,
and the ability to justify its actions. The central bank should be subject to regular audits, and its
operations should be transparent to the public and the government.
(D) Leadership and governance structure: The leadership and governance structure of the central
bank are also essential pillars of independence in corporate governance. The central bank's board
of directors should be independent, competent, and experienced. The appointment of the central
bank's governor and senior management should be based on merit and qualifications, rather than
political considerations.

FUNCTIONS OF A CENTRAL BANK

The purpose of central banking has been defined in so many ways. To maintain stability of the
price level, to keep the economy on an even keel and so on. These aims can be valid for more
than they are in literature. Under some circumstances the purpose of central banking might be
defined as the maintenance of gold standard, the maintenance of sterling standard and the
maintenance of dollar standard4.

Hanson's dictionary of economic and commerce explains the principal functions of central bank
as been able to carry out the monetary policy of a country and this requires that it should work
closely with the government and should have some means controlling the commercial bank5.
Furthering this explanation a prominent economist once said that money is an money does. By
this he meant that anything is money if it performs the functions of money. Anything is money

4
R.S Sayes, central banking after Bagehot 1967
5
J.L Hanson, A dictionary of economics and commerce 1969
that serves as a medium of exchange, a storehouse of value, a standard of value and a standard
of deffered payment. If in like manner it can be said that a central bank is like a central bank
does, what then does a central bank do.

The then controller of the bank of England sir Ernest Harvey noted in a lecture in Australia that
the central banks should have the sole right of the note issue, should serve the needs of
commercial banks and other and other financial institutions, should be the principal fiscal agent
of its government, should have the main responsibilities for the maintenance of gold and
foreign exchange. Reserves of the nation.

It should have principal responsibility for the control of the volume and use of money in the
interests of economic stability and growth6. It has a distinctively public purpose. It is not Only
since world wide war 1 has the term central bank, a term descriptive of the functions of such
institutions, come into common usage. Previously, institutions now known as central banks had
been referred to either Individually. The bank of England, bangue de France, the Reichsbank or
collectively as note issuing banks, the common expression on the European continent. Bray
Hammond pointed out. In his classic study, that the term had actually been used as early as 1834
by a French traveller to the United, Michael Chavelia, who had referred to the bank of United
States as a banque centrale7.

However, if the central bank is dependent on the government, note issue is clearly under political
control. Another function is formulation and implementation of monetary policy, the task of
monetary policy is to ensure that the explanation in domestic liquidity is consistent with the
authorities objective for growth, inflation and the balance of payments. This objective focuses on
the fact that countries, especially those implementing adjustment programmes. Usually suffer
from high inflation, sluggish growth and external disequilibrium. To extreme extent these
problems are likely to reflect inappropriate development in a monetary aggregates.

From the view of stabilisation policy, the primary role of monetary policy is to prevent excessive
spending. However, in a broader sense financial policy plays a role in affecting the efficiency of
resource use in the economy by influencing the mobilisation of financial resources.8 In the strict

6
E. Harvey, central banks 1928
7
B. Hammond, Banks and politics in America 1957
8
Davies J. M microeconomics adjustment policy instruments and issues 1992
sense of the term, monetary policy is carried by monetary means, the traditional instruments of
policy namely bank rate and open market operations9. Another function is serving as bankers
bank, historically, the central banks role as banker of other banks originates from the traditional
tendency in which commercial banks used to centralise thier reserves in one or more well
established commercial bank or banks10 or in a clearing association. The bank or banks at the
centre would pool the reserves and provided services and facilitate to other commercial banks.
The bank/s at the centre maintained interested bank deposits.

However, other writers hold the view that ordinary commercial banks could not effectively
perform functions of central banking because of thier inclination to competence and profit
making.Goodhart notes that the function rests upon the metamorphosis from a competitive, profit
maximising institutions to a non profit making maximising central bank, because in so far as the
central commercial bank is a competitor, other banks will be unhappy about placing deposits
with it that increase the size of its book11

a crucial point to note on the advent of central banking is the dual role for example being the
banker for the commercial banks and at the same time for the government which central banks
play. This makes transactions between the latter and the former easier. The crediting and debiting
of thier respective account is easily facilitated that way unlike where accounts are held at a
separate bank. The only and perhaps, major drawbacks over interest of the government above
those of the banking sector. Therefore as Goodhart notes,12 an independent nun competitive
central bank is likely to be welcomed by other banks.

Another function is bank supervision, although different definitions to the terms supervision and
regulation may be provided, the two terms can be used interchangeably with reference to central
bank functions. Bank supervision in a broad sense is a process with four stages which are
licencing supervision stricto sensu sanctioning and crisis. Governments often delegates the
banking supervisory functions to central through some banks are assigned with some of the
responsibilities only for some of the stages, for example, licensing. The government may also
delegate some or all of the stages of the supervision to any institution that the central bank

9
Hanson L. J A dictionary of economics and commerce
10
Goodhart, C, the evolution of central banks of 1988
11
Ibid
12
Ibid
through often working in close connection with it. In the US, for instance, the federal deposit
insurance corporation is a separate agency from the federal deposit insurance corporation is a
separate agency from the federal reserve system.

Another function is Government's bank, historically in exchange for some monopolistic

advantage in note issue, or in corporate status, the central bank, for example the bank of England,
was expected to carry out certain functions for the government. It became standard practice for
the central bank to act as the bank to the government and acting as its fiscal agent and its advisor
in general economic and financial matters and so on.

The other function is development and promotional task, central banks in developing countries
often fulfil development tasks as well. In these countries the research department sometimes
called economic department is to advise on the formulation of monetary policy.

Dept management is an function of the central bank, however dept management is not
necessarily the function of the central bank, it oedema the function linked to the finance of
government. In most countries the ministry of finance or the treasury undertakes debt
management. Nevertheless, Inc the countries like the UK, historical circumstances dictate that
the central bank serves as debt manager. In this country debt management has been used not only
to fund fiscal deficits, but also for monetary policy purposes. Exchange controls is another
function of the central bank, exchange controls are an artificial barrier, extended to protect
national credit markets. Once the controls are abolished and individuals are free to transfer thier
funds abroad, domestic direct controls are likely to be less effective as a lever of monetary
policy.

CONCLUSION

From the aforementioned, it is imperative to note that having examined the traditional functions
of central banking in general, we can conclude that the controversial task is that of monetary
policy. This calls for the central bank to control money as a way of ensuring price stability,
meaning reduction of inflation. The difficulties banks face in relation to this task may be
compromised by the government's political desire to hold to power overlooking this function of a
central bank. In my conclusion the bank of Zambia as a corporate government is not independent
in that in as much as it is a central bank that issues new currency for the bank note it isn't the one
that makes those bank notes but they are imported instead and in areas whereby the governor is
appointed by the president.

REFERENCES

BOOKS
B. Hammond, Banks and politics in America 195

Lastra R.M central banking and banking regulations 199

Davies J. M microeconomics adjustment policy instruments and issues 1992

Hanson L. J A dictionary of economics and commerce

Goodhart, C, the evolution of central banks of 1988

R.S Sayes, central banking after Bagehot 1967

E. Harvey, central banks 1928