PUBLICATION - REPORT - BASEL releases final report on Microfinance Activities and Effective Supervision

Aug 31, 2010: The Basel Committee on Banking Supervision has issued the final version of its paper entitled Microfinance activities and the Core Principles for Effective Banking Supervision that contains supervisory guidance for the application of the Basel Core Principles for Effective Banking Supervision (BCP) to microfinance activities, and the range of practices on regulating and supervising microfinance activities.

The Basel Core Principles for Effective Banking Supervision (the Core Principles) are the global de facto standard for sound prudential regulation and supervision of banks. A consultative version of this paper was released in February 2010. Microfinance Focus was able to source the final paper in a correspondence with the Bank for International Settlements (BIS) Headquarters in Basel, Switzerland.

The Basel Committee’s guidance is intended to point out areas whereby some degree of flexibility in implementing the BCP to the supervision of microfinance activities is appropriate, in light of the unique characteristics of microfinance vis-à-vis conventional retail banking.

With specific references to the need of balancing regulation and supervision with ensuring financial inclusion, the report will assist countries to develop a coherent approach to microfinance supervision that takes account of the need for specialised knowledge of supervisors to effectively identify and measure risks that are specific to microfinance, particularly to microlending.

 

Conscious effort to allocate supervisory resources efficiently, especially where depository microfinance does not represent a large portion of the financial system; and balanced regulatory and supervisory framework that does not add significant costs to microfinance activities across different institutional types are also taken into account for microfinance supervision.

The first part of this report provides guidance on applying the Core Principles to depository microfinance – the result of an analysis of the key issues and challenges faced by supervisors of deposit taking institutions engaged in microfinance. It is intended to highlight the key differences between the application of each Core Principle to conventional retail banking and microfinance in banks and nonbanks, pointing out areas that may require tailoring.

The outcome of the survey undertaken by the Microfinance Workstream to identify the range of practice on regulating and supervising microfinance in deposit taking and non-depository institutions is summarized in the second part of the paper. The survey targeted the most significant risks in microfinance and the systems and processes used to manage and supervise these risks. Respondents comprise all geographic regions and income levels, although a few major countries were not able to participate.

Besides illustrating the general applicability of the Core Principles to the supervision of microfinance activities, the paper highlights key differences from conventional retail banking. Recognising the distinct regulatory challenges and the broader policy goals faced by supervisors engaged in overseeing microfinance activities, the supervisory guidance, as set out in the paper, is intended to point out areas where some degree of flexibility in implementing the Core Principles to microfinance supervision is appropriate. Such a tailored approach will enable countries to strike the right balance between the risks posed by microfinance and the supervisory costs as well as the role of microfinance in fostering financial inclusion.

In developing the guidance, the Committee reviewed the range of supervisory practices and approaches in countries from different regions and with different income levels. A comprehensive view of these practices on regulating and supervising microfinance activities is also included in the paper.

Mr Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, noted that “given the unique characteristics of microfinance and the range of practices on regulating and supervising this line of business, the guidance will assist supervisors in applying the Core Principles in a manner that is commensurate with the type, complexity and size of depository microfinance activities conducted in their jurisdictions”.

Source : http://www.microfinancefocus.com/news/2010/08/31/basel-releases-final-report-on-microfinance-activities-and-effective-supervision/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+MicrofinanceFocus+%28Microfinance+Focus%29 - Aug 31, 2010