Microfinance activities and the Core Principles – Basel Committee issues consultative paper

February 09, 2010: The Basel Committee on Banking Supervision today issued for consultation Microfinance activities and the Core Principles for Effective Banking Supervision. The Basel Core Principles for Effective Banking Supervision are the global de facto standard for sound prudential regulation and supervision of banks.

In many countries, microfinance – the provision of financial services in limited amounts to low-income borrowers and small, informal businesses – is increasingly being offered by banks and non-banks (eg microfinance institutions, financial cooperatives) that take deposits. The Committee’s report contains supervisory guidance for the application of the Core Principles to microfinance activities. It also reviews the range of practices on regulating and supervising such activities.

The report is based on a careful analysis of key regulatory and supervisory issues relevant to microfinance activities. It includes a comprehensive snapshot of current practices and experience in countries from different regions and with different income levels. The main conclusions from the report illustrate the general applicability of the Core Principles to the supervision of microfinance activities and consistently highlight four key needs:

• to allocate supervisory resources efficiently, especially where depository microfinance does not represent a large portion of the financial system but comprises a significant number of small institutions;

• to develop specialised knowledge within the supervisory team to effectively evaluate the risks of microfinance activities, particularly microlending;

• to recognise proven control and managerial practices that may differ from traditional banking but may suit the microfinance business in both small and large institutions; and

• to achieve clarity in the regulations concerning permitted microfinance activities for different institutional types, while retaining flexibility to deal with individual cases.

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