Legal Intersection between Corporate Governance and Bank Financing of Companies in Burundi

ABSTRACT 

In Burundi, corporate governance is a new concept in the legal perspective; we find a poor legal system and reluctance to enforce the laws. The end result is that we find many companies in a bad position and in their downfall, they also involve banks that give them debts which they are unable to repay. The main objective of this study is to analyze whether the laws governing bank financing can, in one way or another, influence the way corporate governance is done in companies. What the researcher has found is that through the system of monitoring, bank finance influences corporate governance in Burundi but also that though bank financing plays an important role in corporate governance, the law in Burundi is extremely weak and enforcement inadequate. This to mean that there is still a long way to go, whether in the financial sector or in the arrangements of the regulatory framework before we reach effective corporate governance in Burundi. The main recommendation is that after improving the legal and institutional framework of corporate governance, coaching is necessary to help to reach a good practice in that domain. Also, as banks are a part of the corporate governance system, they should be able to ensure compliance with core company law obligations

TABLE OF CONTENTS

DECLARATION.................................................................................................. i

APPROVAL ...................................................................................................... ii

ACKNOWLEDGEMENT.......................................................................................iii

LIST OF STATUTES AND INSTRUMENTS.............................................................iv

LIST OF CASES................................................................................................ v

ABBREVIATIONS AND ACRONYMS .....................................................................vi

TABLE OF CONTENTS......................................................................................vii

LIST OF TABLES ..............................................................................................xi

ABSTRACT .....................................................................................................xii

CHAPTER ONE ..............................................................................................1

GENERAL INTRODUCTION ...........................................................................1

1.1 Background to the study ............................................................................. 1

1.2 Statement of the Problem............................................................................ 4

1.3 Research Questions .................................................................................... 5

1.4 Research Objective..................................................................................... 6

1.4.1 General Objective .................................................................................... 6

1.4.2 Specific Objectives ................................................................................... 6

1.5 Significance of the Study ............................................................................. 7

1.6 Scope of the Study ..................................................................................... 8

1.6.1 Content Scope......................................................................................... 8

1.6.2 Geographical Scope ................................................................................. 8

1.6.3 Time Scope............................................................................................. 8

1.7 Research Methodology................................................................................ 9

1.7.1 Population and Sampling .......................................................................... 9

1.7.2 Data collection instruments..................................................................... 10

1.7.3 Ethical considerations............................................................................. 10

1.8 Literature Review ..................................................................................... 11

1.9 Clarification of Key Terms.......................................................................... 17

1.9 Organisational Layout ............................................................................... 18

CHAPTER TWO............................................................................................19

CORPORATE GOVERNANCE AND BANK FINANCING..................................19

2.1 Corporate governance: Background............................................................ 19

2.1.1 Definition of corporate governance .......................................................... 20

2.1.2 Importance of corporate governance ....................................................... 22

2.1.3 Important aspects of corporate governance .............................................. 23

2.1.4 Analysis of the aspects of corporate governance ....................................... 25

2.1.5 The continental aspect of corporate governance........................................ 26

2.1.6 The OECD principles of corporate governance ........................................... 27

2.1.7 The level of its applicability..................................................................... 28

2.1.8 The corporate governance regulatory framework....................................... 29

2.2 Banking and Financial Services................................................................... 30

2.2.1 Commercial banks and microfinance ........................................................ 31

2.2.2 The place of banks in developing economies............................................. 32

2.2.3 The Role of Bank Monitoring as Corporate Governance Mechanisms ............ 33

2.3 Conclusion............................................................................................... 34

CHAPTER THREE.........................................................................................35

ANALYSING THE LEGAL FRAMEWORK OF COMPANIES AND BANKS IN BURUNDI....................................................35

3.0 Introduction............................................................................................. 35

3.1 The legal framework................................................................................. 36

3.2 Legal framework on companies in Burundi .................................................. 36

3.2.1 Definition of a company.......................................................................... 37

3.2.2 Categories of companies......................................................................... 37

3.2.3 Regulatory framework on the Board of directors........................................ 38

3.2.4 Characteristics of the company................................................................ 39

3.2.5 Share capital ......................................................................................... 40

3.2.6 Financial statements .............................................................................. 40

3.2.7 Duties of the Statutory Auditors .............................................................. 41

3.2.8 Public companies................................................................................... 43

3.2.9 Statutory auditor and independent auditor................................................ 45

3.3 Legal framework on bank financing in Burundi............................................. 46

3.3.1 The Banking System in Burundi............................................................... 46

3.3.2 Definition.............................................................................................. 47

3.3.3 Bank’s policy regarding lending to companies............................................ 47

3.3.4 Types of loans offered by the Bank .......................................................... 48

3.3.5 Lending criteria ..................................................................................... 48

3.3.6 Policy for recovery of outstanding debts ................................................... 49

3.4 The importance of credit in corporations ..................................................... 50

3.5 The conditions of granting loan.................................................................. 50

3.5.1 The conditions of granting loan in BCB (Bank of Credit of Burundi).............. 51

3.5.2 The conditions of granting loan in Ecobank Burundi and other banks ........... 51

3.6 Conclusion............................................................................................... 52

CHAPTER FOUR ..........................................................................................54

RELATIONSHIP BETWEEN BANK FINANCING AND GOVERNANCE.........................................................54

4.1 Bank Monitoring Mechanism ...................................................................... 54

4.1.1 Mechanisms used by banks to monitor companies ..................................... 57

4.1.2 The effectiveness of bank monitoring....................................................... 58

4.1.3 The bank’s monitoring responsibility toward the company .......................... 59

4.3 Conclusion............................................................................................... 65

CHAPTER FIVE............................................................................................66

CONCLUSIONS AND RECOMMENDATIONS ................................................66

5.1. Summary................................................................................................ 66

5.1.1 Corporate governance situation in Burundi................................................ 66

5.1.2 Threats to good corporate governance in Burundi ..................................... 66

5.1.3 Board composition................................................................................. 67

5.2 Findings .................................................................................................. 68

5.2.1 The National Financial Inclusion Strategy (NFIS) ....................................... 68

5.2.2 Current status of financial inclusion.......................................................... 69

5.3 Recommendations.................................................................................... 69

5.3.1 Need to reform the legal framework: ....................................................... 70

5.3.2 Need to reform the institutional framework............................................... 70

5.4 Conclusions ............................................................................................. 72

ANNEXURE.................................................................................................... 77

BIBLIOGRAPHY.............................................................................................. 78