"Sound Banking" - Implications for MFIs

"Sound Banking" - Implications for MFIs

A recent IMF document outlined a framework for 'Sound Banking'. This framework makes interesting reading since it has clear implications for microfinance institutions (MFIs) themselves, and how they can improve their programmes.

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Framework for Sound Banking
The IMF’s Executive Board has broadly agreed that the following objectives should provide guidance for strengthening financial systems:

increasing transparency and the role of market forces;
limiting distortions created by official safety nets;
controlling risk through regulatory and supervisory oversight;
strengthening the broader structural framework;
fostering national and international supervisory coordination.

Some of the reasons cited for 'unsound' banking included -

weak internal governance of banks leaves the system vulnerable to macroeconomic shocks;
financial deregulation, competition, and innovation outstrip the capacity of banks to manage risks prudently;
financial deregulation takes place before adequate prudential regulation and supervision are in place;
weak and insolvent financial institutions are allowed to continue operations, thus weakening the entire system;
capital account liberalization occurs before the soundness of the domestic financial system and macroeconomic policy is assured; and
declining business profits, together with excessive corporate indebtedness, lead to a deterioration in asset quality.

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Hari Srinivas - hsrinivas@gdrc.org
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A recent IMF document outlined a framework for 'Sound Banking'. This framework makes interesting reading since it has clear implications for microfinance institutions (MFIs) themselves, and how they can improve their programmes.
.	Framework for Sound Banking The IMF’s Executive Board has broadly agreed that the following objectives should provide guidance for strengthening financial systems: increasing transparency and the role of market forces; limiting distortions created by official safety nets; controlling risk through regulatory and supervisory oversight; strengthening the broader structural framework; fostering national and international supervisory coordination. Some of the reasons cited for 'unsound' banking included - weak internal governance of banks leaves the system vulnerable to macroeconomic shocks; financial deregulation, competition, and innovation outstrip the capacity of banks to manage risks prudently; financial deregulation takes place before adequate prudential regulation and supervision are in place; weak and insolvent financial institutions are allowed to continue operations, thus weakening the entire system; capital account liberalization occurs before the soundness of the domestic financial system and macroeconomic policy is assured; and declining business profits, together with excessive corporate indebtedness, lead to a deterioration in asset quality.	.