A clear and effective legal framework is crucial for the development of the financial sector, as it defines the value of the claims of financial institutions on borrowers, which are to a large extent dependent upon the certainty of the legal rights to these claims.
The legal framework empowering and governing the regulator and the regulatory framework forms the cornerstone of the orderly existence and development of financial markets. Accordingly, the key laws are those governing the formation and operation of the central bank and the laws regulating the operation of banks, the financial institutions and markets.
The key components of an effective legal framework for the regulation and supervision of the financial system are laid out in various international standards for financial sector supervision. These are the Basel Core Principles (BCP) relating to bank supervision, the Core Principles of Securities Regulation developed by the International Organization of Securities Commissions (IOSCO) for securities regulation, and the Core Principles for Systemically Important Payment Systems (CPSIPS).
In particular, the core principles of supervision relating to regulatory governance cover the key legal underpinnings explicitly. The effective governance and operations of both the regulator and the regulated also depend upon the broader legal framework governing insolvency, creditor rights, financial safety nets, ownership, contracts, contract enforcement, accounting, auditing and disclosure.
Legal systems in Africa vary widely as they largely reflect the continent’s diverse historical background. Reflecting the patterns of colonial rule across the continent, some countries follow the common law tradition, while others are based on the civil law system.