INTRODUCTION
I will define sound and responsible banking system. I will identify and critically analyze the essential criteria for sound and responsible banking system. Then I will critically analyze the sound criteria and responsible criteria for the effective banking system in developing countries. I will identify the general difficulties or gaps in developing countries for the implementation of these principles. I will critically analyze the KYC rules and role of corporate governance which are to be introduced in developing countries.
Sound banking system means that administration is sound and peoples are highly qualified. The requirement of highly qualified people is not the graduate of Oxford University but should have banking awareness and experience. There is demand of honest people. The soundness means prudence. Prudential banking stands for knowledge based banking system and it has financial strength and further it does not take unnecessary risk.
Responsible banking system
It means that there is a proper legal framework for banking supervision. The proper laws and regulations are in place to ensure responsible banking system. The central bank will have operational independence and adequate resources. There will be provision for authorization and ongoing supervision of banks. The Basel Committee on banking supervision [1] has defined 25 core principles [2] which are needed for effective supervisory system.
ESSENTIAL CRITERIA FOR Sound & Responsible Banking System
There must be system of compliance with the Principles. The assessment of the country's compliance with the Principle will identify the weaknesses in the existing system of supervision and regulation. The Committee has given methodology for the assessment of compliance and the object of which is to initiate a strategy to improve the banking supervision system. The methodology proposed essential and additional criterion against each core Principle. The additional criterion suggested best practices for those who have advanced banking system. The Four grade scale will be used by the external parties which are compliant, largely compliant, materially non-compliant and non-compliant with the Principles. A non-applicable grading can be used whereof the principle does not apply given the structure, legal and institutional features of the country [3] . The system will have clear responsibilities and objectives for supervisors and also publicly disclosed. The laws for banking and for supervision are essential and be updated as necessary to meet with the changing regulatory practices. The supervisor must ensure that information on financial strength and performance of bank is publicly available. The word bank should be controlled as far as possible for the activities licensed. There must present an arrangement for the sharing of information between the supervisors and its protection is ensured. The additional requirement is that supervisors should be appointed for a minimum term. The commercial bank should have compliance section within the bank which produce weekly sheet to update the record. The training of the banking officials should exist for the sound and effective system. The supervisor must be able to do on site and off site checks and act as investigators. The good corporate governance should exist and there must be transparency. The audit committee must also exist. There must be a system management whereof supervisor can control violation of the bank if it runs risks. There must be a system to rectify the position that it will not rise again. The banks should provide privileges to customers. There must be present a culture of know your customers. There must be good management system within the Bank and banks should be scientifically operated. The IT knowledge is very important for the banks. The banks should not take foreseeable and foreseen types of risk. Before lending the money the bank should study the feasibility of the project. According to Basel committee to minimize the sovereign risk [4] there must include two clauses
There must be succession clause
The bank do not lend to Govt. but to state.
So the loan agreement must contain succession clause. The risk exposures must be minimized. The bank should take into consideration the capability and background of the borrower and must supervise the activities of the borrower periodically. Basel report suggests risk study on every desk. There must be internal control system. Safeguarding of assets and audit must be done properly. E.g. Barings fail due to internal control and audit failure [5] . The commercial bank should maintain records up to date and collect adequate information. Generally Good information system is by mechanical means. It should be there in banks for storage, acquisition and transmission of information. Therefore good IT system must be there in Banks. The banking education is very important to create a mass with banking knowledge and banking education at all level is necessary. It is accepted that risk elimination is impossible but special training must be provided to minimize the risk. The capital adequacy must exist. There must be depositor protection scheme in the banking regulation [6] . The banking insurance must be there for e.g. in India there is bank deposit insurance available..
SOUND CRITERIA
The bank should state prudential and risk regulation. The meaning of prudential is risk-free and sensible. The sensible and sound banking system is that which gives confidence to customers because they do not take unnecessary risk. There must have high level of banking awareness. The prudential regulation and requirements are defined in Principle No. 6 to 15 [7] . The principles include in it are capital adequacy, risk management process, credit risks, problem assets, provisions and reserves, large exposure limits, exposure to related parties, country and transfer risk, market risks, liquidity, operational and interest rate risks, internal control and audit and finally know your customer rules. The law, regulation or supervisor must require being maintained minimum capital adequacy ratio and may additionally requires higher capital adequacy standard. It will also define elements of capital which will absorb losses. The required ration should not be lower for internationally active banks. The supervisor must have power to impose limit on all material risk exposures. The supervisor must be authorized to take measures in case bank falls below the minimum capital ratio. The supervisor must ensure the proper structure of bank and minimum capital adequacy must be rigid. Bank should be bias free. The bank should know how to minimize the risk and must have vision to develop the market. The bank should have extra responsibilities with others money. The protection must be given to customer's investment. The confidentiality of the customers must be maintained. The bank should not invest imprudently. The bank managers should advise customers properly. There must be a safety of investment of investors otherwise creditors or investors will not invest. The commercial bank should avoid connected lending as it is the lending to the same group of companies and there are high chances of collapsing. The follow-up system must be in Banks. If the bank has lend the money then bank should follow that borrower is utilizing the money as agreed. The continuous supervision of lending must be there to minimize the risk. The money should be lent in tranches because it is more secured and minimized the risk. The supervision cannot be effective without training to officials and they must have knowledge of banking principles. The lack of information alerts of risk therefore the borrower information collection is very important. The prospective customers should have confidence in Banking. Bank must maintain high level of reserve to keep to the level of risk low. The bank officials must have a 3 eye approach to understand the risk brought by the customer which is to minimize the risk regardless of official documents requirements. The risk management must be thorough.
RESPONSIBLE CRITERIA
The licensing criteria for the commercial bank must be rigid. The criteria must be set in laws or regulation. The licensing authority must have power to reject the application if it does not fulfil or inadequate information was provided. Further, supervisor can revoke the license if false information was submitted. Central banks should operate as advisors and supervisors. There must be friendly cooperation between central and commercial banks. Central banks should provide training in the form of manuals, orientation and there must be continuous development of banks officials. Central banks should have clear criteria to establish bank. There must be a legal framework which should identify the legal relationship between central and commercial bank. The bank act will clearly be drafted. The central banks should not act as dictators because in that case commercial banks may have fears. If commercial banks have any problem with the supervisor then there must be a proper complaint procedure to be dealt with it. It is the central banks who set the limits for the commercial bank staffs. It must be specified in a policy that how central bank can come into commercial bank as investigators. It is the duty of central bank to ensure the competence of commercial banks. The commercial banks must have awareness of banking structure. The independence of both banks must be preserved. Central bank must be privileged to visit the commercial banks any time. The central bank must be immune from proceedings so that it can guide the commercial bank. There should be no favoritism and licensing system should be rigid. The banks must have democratic shareholder. The rights of minority shareholder must be protected. Banks are there to serve the community and heat up the economy. The action against the officials of central bank is not possible except on ill advice. They must be immune from any legal proceedings. The central bank or supervisors continuously review the function of commercial bank without notice. The central bank must have the powers by law to inquire or investigate the commercial banks practices and do spot check. The bank should adopt smooth management system. Central bank should advise commercial bank that how to know your customers. The onsite and offsite supervision by the central bank must include in the policy of the bank. Central banks should seek clarification of their acts. Central bank can ask for reports, accounts if doubts arises that commercial banking is taking unnecessary risk.
GAPS IN DEVELOPING COUNTRIES
There is cultural barrier which originates from democracy. The human resources are insufficient or do not exist at all in developing country. The banking is not sufficiently mechanized in developing country and still there exist a manual based working system. There is no practice of staff development in developing countries. Therefore there is a lack of knowledge, lack of equipment and banking awareness. Central bank does not adopt sufficient control system. Further there is lack of effective legislation. Few commercial banks have improved but majority of the banks are under public control which is not a good practice. There is no updating of knowledge in the work force. The customers have fears with the banking system of taking too much risk on their money. The commercial banks do not know how to interact with customers, to hedge risks and to develop human resources. Customers do not know that how banks are beneficial for them. The mechanization of system is very important and it will not cost much for e.g. traveler cheque cannot be cashed by foreign banks. Rural banking is very primitive where requires decentralization. There is no method of studying risk in primitive cultures/society. There is a short of information in banking. They should inform themselves of new developments.
There is a lack of understanding that banking can make economy rigid. The banking habit must be developed in the culture. There is a lack of training in banking staff and requires training in the enforcement of banking laws. There is no intelligence gathering over there. There is slowness in banking arrangement and fast transaction system must be there. There is a lack of transparency in developing country even employee do not know the crucial matter. There should be more facilities to the customers. For e.g. in Pakistan, Bangladesh most banks are govt. controlled. Prudential regulation is almost absent. The prudential regulation gives protection to customers and investors and it must be developed. There is a lack of protection to depositors or investors in developing countries. There is queue in Banks which is going on and on so mechanical arrangement must be there. There must be a system where customer can deposit cheque or cash without queuing. There lacks record system in developing countries.
According to Patel, 2008 it is very difficult for developing countries to implement Basel Committee principles for having very large requirement [8] .
KNOW YOUR CUSTOMERS KYC-RISK MANAGEMENT
KYC is the core principle which protects the bank from criminal activities [9] . It contributes to the safety and soundness of bank and also mitigates the risk for banks being used for money laundering, terrorist financing and other unlawful activities. There are four elements for sound KYC programme which are customer acceptance policy, customer identification, on-going monitoring of higher risk accounts and risk management [10] . Bank should have guidance on customers those who brought risk higher than the average. Account should be opened only after the proper introduction and physical verification of customer's identity. The internal procedures of the bank must define the required documents for the identification of the customer. These documents are other banking documents such as bank book, driving license, passport etc. or any other legal official documents [11] . For e.g. Royal bank of Scotland was fined £750,000 for a breach of money laundering rules applying to customer identification [12] . The KYC may be hard to apply in developing countries where customers do not have required official documents but it can be can be tackled as in African country by adopting flexible approach [13] . There should be encouragement to customers to come to the Bank which is duty of the commercial bank who has an interaction with them. Bank should encourage business in the community because it is the bank who heats up the economy.
Role of Corporate Governance
The adequate flow of information to market participants is necessary for effective market discipline. The bank should provide accurate, meaningful, transparent and timely information by disclosures and financial reports therefore depositors or investors can assess the risks associated with a bank. The central bank should clear how transparency is present in Banks. The commercial culture should be reviewed by the banks. There are confidentiality issues in commercial world. There must be a tracking system; customer should know where their money is going. IMF [14] , Basel Committee [15] , OECD [16] has published reports on transparency. Risk can be minimized by corporate governance by protecting the interest of the shareholders and investors. Good corporate governance must be in place for every investment.
Conclusions
'Yes' the essential criteria for setting sound and responsible banking system can be introduced to developing countries. I have critically analyzed the prerequisite for sound and responsible banking system by referring to Basel reports. All the developmental activities being brought about by foreign as well as domestic player in the developing countries depends upon the sound banking system. Therefore it is the prime requirement for providing adequate financial support to these developmental activities. The general problem is that there is no or very little management system installed. Further, restrictions on best risk management practices hinder it. The foreign banks are using modern risk methodologies which lacks in developing countries banking system. The WTO [17] also requires that latest methodologies to be installed in the banking system. The compliance with Basel II will bring benefits to the developing countries. There will be improvement in the investment climate of country and faith of foreign investor will also increase. It also reduces chances of loss arising from market failure. But critics argue that the adopting such information would result in the entire money resources of the country eventually turning up in foreign hands. It is not a prudent approach where benefits of globalization have been well documented. The "good governance culture" increases faith of the people in the markets and thus results in financial stability. There must present an independent audit and compliance mechanism. The right choice of competent personnel is vital.
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