Financial Access and Financial Regulation and Supervision Issues and Practices

Transcription

1 Financial Access and Financial Regulation and Supervision Issues and Practices Seminar for Senior Bank Supervisors Federal Reserve and the World Bank October 18, 2006 Presented by: Anjali Kumar World Bank

2 This presentation includes references to materials by: R. Christen C. Cuevas K. Imboden J. Isern T. Lyman R. Rosenberg G. Westley and others

3 Microfinance vs Financial Access Access to finance aids growth and reduces poverty and inequality Not only depth of a financial system, and its soundness, but also, distribution and penetration of financial services Need for regulation and supervision to recognize this objective Expanding access was once Microfinance - increasingly recognized that access is a much wider spectrum of issues Microfinance has a place among them 3

4 Microfinance A Function? Microfinance as function vs as an institutional form Provision of low value transactions to low income clients Diversity of services credit, savings, payments Size, terms and conditions of the transactions Loans: small and unsecured, or with unconventional guarantees» Group lending methodologies» Principles of co-insurance Deposits small balances (opening as well as average balances). Small transfers / payments (remittances) often regular 4

5 Microfinance An Institution? Multiple institutional forms engaged in microfinance provision Government run financial service entities:» State banks» Agricultural development banks» Postal savings banks» Special state run funds Commercial Banks (could be MFIs, or have MFI portfolios) NBFIs finance and leasing companies Cooperative financial institutions NGOS (could be dedicated MFIs) Greater outreach and sustainability with scale and regulation and supervision Regulatory challenge: need for special regulatory windows for some segments? 5

6 Microfinance Special Regulatory Windows? Special Regulatory Windows (1) BancoSol Bolivia. Licensed as a bank, subsequent introduction of special category MFI Special Regulatory Window (2) Uganda Micro Deposit Taking Institution (MDI) law 3003 Enables MFIs to legally extend deposit services downmarket. Four top-performing MFIs have converted to MDIs Now mobilize a volume of savings comparable to all other MFIs and cooperatives combined. But prospects for MDIs to expand their geographic reach appear limited But cost of becoming a MDI, or expanding branches are high to meet Bank of Uganda requirements for reporting and security at branches. Inhibits branch expansion and MDI expansion MFIs licensed under existing bank laws: Indonesia Bank Rakayat s Unit Desa Program Mexico Compartamos (a finance company turned bank) Peru MiBanco (commercial bank) 6

7 Regulation Prudential, Non-Prudential and Enabling Prudential Regulation: Aimed at protecting the safety of small depositors and ensuring systemic stability Capital adequacy, asset quality, provisioning / reserves, liquidity Deposit protection? Linkage to payments systems? Broad principles: prevent arbitrage Avoid prudential regulation and supervision if no depositors to protect Weigh viability and emergence with regulation Weigh costs and benefits Non-Prudential Regulation Consumer protection against abusive lending practices interest rate ceilings? (but distort access, can be evaded) Truth-in-lending newer apporoach Competition Fraud and financial crime prevention Taxation, credit reference services Enabling or promoting regulation? 7

8 The Challenge of Cooperatives Regulation the legal framework Specialized Acts or Decrees eg Colobia, costa Rica, El Salvador Peru Banking Act: Argentina, Bolivia, Ecuador, Uruguay Coop society Acts (special windows) Guatemala, honduras, Dominican Republic, Venezuela) Supervision - Direct, Delegated or Auxiliary? Independent oversight (Bolivia, Chile, Costa Rica, Nicaragua ) Finance Ministry oversight (Trinidad, Colombia, Mexico) Oversight by Central Bank (Brazil, Argentina, Uruguay) Self Regulation? Potential conflicts of interest 8

9 New Arrangements to Expand Access Branchless Banking Delivery of financial services outside traditional bank premises or branches: Internet banking ATMs Bank-issued payment cards and point of sale (POS) devices Banks working through retail agents outfitted with POS devices or other ICTs Mobile phone telcos working through retail agents Prepaid card issuers working through retail agents outfitted with POS devices or other ICTs Partnerships between banks and non-banks can enable expansion of outreach at low costs Examples: Brazil correspondent banking via lottery shops Walmart? Exponential expansion of access possible But challenges for policy makers and regulators: How to adapt or apply existing regulatory norms to new branchless business models? Any new risks to consider? Are consumers protected against losses caused by retail agent (e.g., fraud, negligence)? Regulatory arbitrage between banks and non-banks (labor laws, security requirements, etc) - 9

10 Recent Debates 1. Basel II and Microfinance 2. Basel Core Principle Revisions and Microfinance 3. AML CFT: Anti-Money Laundering and Combating Financial Terrorism and Microfinance

11 June 2004: Basel II Revised Framework for the International Covergence of Capital Measurement and Capital Standards - Basel II or New Capital Accord Endorsed by G-10 in June 04, implementation before end of this decade in 13 BC members Risk based supervision with more focus on : Credit Risk Evaluation Pillar 1, Supervisory Review Pillar 2 Market Discipline Pilllar 3 Relies more on banks own risk measurement Recognizes risk mitigation techniques Includes capital charges for operational risk When properly applied, can be a force in improving systemic supervision as well as Institutional risk management

12 Basel II and Emerging Markets Early 2004: Questionnaire launched by the Financial Stability Institute: 88 non-bcps jurisdictions indicated their intention to adopt Basel II before the end of the decade EU all banks and securities firms must adopt Capital Adequacy Directive More caution elsewhere US has started with largest banks first Emerging Markets: China has announced that it is not yet ready India Debate on how to implement Relies more on banks own risk measurement Other supervisory issues may be a greater priority in many of these countries eg Proper valuation Internationally recognized accounting standards Significant administrative burden Significant need for additional skills

13 Implications for Microfinance - 1 Administrative issues for regulated microfinance institutions? Supervisors can choose to which institutions Basel II would apply, within their jurisdictions Suggested criteria would appear to exclude MFIs: Size Nature and complexity of business International presence and interaction with international markets Involvement in significant activities or business lines Other supervisory considerations: risk resource trade off Higher capital requirements? Regulated MFIs likely to adopt the Standardized approach Hence the regulated MFIs would not face changes in required capital Unregulated borrowers need 100% capital in both old and new frameworkds 13

14 Implications for Microfinance - 2 However, most microfinance portfolios are extremely granular Low aggregate exposure to any single client This portfolio would fall under other retail and would have the same risk categorization as SME loans Various European constituencies lobbied for lower capital for retail portfolios Banks with greatest reductions in capital requirements are those with large retail portfolios Theoretically, this could benefit regulated MFIs But supervisors may not do this due to perceptions of higher risk Indeed could call for a higher capital requirement Or a higher offset to operational risk Pillars 2 and 3 will require: More interactions with supervisors More market discipline - disclosure and transparency Studies to date suggest higher CAR for microfinance (Stefan Staschen) Higher market capital will likely also offset possible gains 14

15 Implications for Microfinance - 3 In practice, most MFIs are well capitalized ie, under leveraged But this may be due to difficulties in accessing capital because of risk perceptions Microloan portfolios of large banks: Lower weighting due to granularity retail? Higher weighting due to risk perceptions? In practice, unlikely to receive a lot of attention retention of 100% risk weighting as under Basel 1. What about MFIs as Borrowers, in capital markets? Unrated institutions could find it more difficult Negative impact on international risk diversification? 15

16 April June 2006: Proposed BCP Revisions- 1 Ongoing discussion of revision of Core Principles methodology Consultative document circulated in spring 2006 Limited areas impacting upon access to finance however: Principle 2, Essential Criteria 4: (Permissible Activities) Deposit taking is limited to institutions licensed and supervised as banks Footnote 11 recognizes existence of non-bank deposit takers However do not want to suggest that these institutions do not need regulation / supervison Suggestion: Modify to read that such institutions should be subject to a form of regulation and supervision commensurate to the type and scale of their transactions 16

17 April June 2006: Proposed BCP Revisions- 2 Principle 18 (Abuse of Financial Services) Provides for risk-based reviews in the context of customer identification and verification Could this provide enough documentational flexibility? Low income clients / households Micro and small businesses 17

18 Anti Money Laundering and Access Financial Action Task Force on money laundering ) has developed a comprehensive general framework for anti-money laundering (AML) and combating the financing of terrorism (CFT). Individual countries are responsible for introducing regulatory regimes and for defining the vulnerability of various financial service providers to money laundering and terrorist financing For the poor who depend on microfinance services, the increased costs of institutions compliance and tighter restrictions may have the unintended consequence of driving low-income clients out of the formal sector. Client profile of microfinance providers reduces their risk of being used for money laundering. Most microfinance clients are natural persons, not legal entities such as companies or trusts, and their transactions savings, loans, transfers tend to be very small, so sudden large transactions would stand out easily to authorities. 18