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The Building Block Approach – A tool for regulatory and supervisory reforms

for microfinance

European MF week 2012, Luxembourg, 16th November

GIZ Financial Systems Development

Rainer Schliwa and Florian Henrich


GIZ’s role in the implementation of regulatory and supervisory reforms

Support partners in developing supervisory capacity Act as a facilitator and provider of technical

assistance No off-the-shelf solutions Understand the local context Build ownership

Long-term commitment is key


Countries vary in terms of stages of regulation & supervision Draft rules may not be enacted; law may not be in place Implementation of international standards (Basel I, II, Basel Core Principles) Limits on permitted products / services Financial institutions may be regulated by different entities Regulator may view microfinance not as primary responsibility Regulator may lack expertise and understanding to effectively identify, assess

and manage microfinance specific risks Regulators may still be largely unfamiliar with non-prudential risks (e.g.

Consumer Protection) Regulatory actions may not be in line with the market (e.g. interest rate caps) Regulator may be risk averse to financial innovations

Need for tailor-made solutions according to country context


Supervisory capacities should follow the development path of the Financial System


Supervisory Capacity

+

FSD stage Standards

Wholesale approach Incremental approach

Regulatory Standards


+FSD stage

Balance regulatory standards and supervisory capacity

RegulatoryStandards


+FSD stage

Imbalance can lead to financial sector instability


“Building Block” Approach – a method to prioritize, sequence and adapt international standards to local context

Background: While international best practice of supervisory standards exists, there is a need to provide guidance on how to adapt those to the local context.

1. Identify thematic blocks of the Basel Core Principles, and/or Basel I – III and cluster them into thematic categories

2. Sequence those thematic blocks in accordance with financial sector development


Step 1: Identify thematic blocks (“Building Blocks”) of the Basel Core Principles and cluster them into thematic categories

3: Licensing Criteria

7: Risk ManagementProcess

11: Exposure to Related Parties

13: Market Risk

2: Permissible Activities

1: Objectives, Independence, Powers, Transparency, and Cooperation

8: Credit Risk

6: Capital Adequacy

5: Major Acquisitions

4: Significant Transfer of Ownership

12: Country risk and transfer risk

9: Problem Assets, Provisions, and Reserves

15: Operational Risk

14: Liquidity Risk

19: Supervisory Approach

18: Abuse of Financial Services

17: Internal Supervision/Auditing

22: Accounting and Disclosure

21: Supervisory Reporting

25: Home-Host Relationships

10: Large Exposure Limits

16: Interest rate risk in banking book

20: Supervisory Techniques

23: Corrective and Remedial Powers

24: Consolidated Supervision

Licensing, definitions and preconditions

Basel Core Principles

3. Supervisory processes

1. Licensing, definitions

and preconditions

2. Setup of supervisory institutions

4. Risk Management

Thematic Categories, which cover the process of building supervisory capacity


Time

Foundation Advanced Sophisticationt0

5: Licensing Criteria

4: Permissible Activities

1: Responsibilities, objectives and powers

16: Capital Adequacy

Basel I

8: Super-visoryApproach

10: Super-visoryReporting

9: Super-visoryTechniques

11: Corrective and sanctioningPowers

7: Major Acqui-sitions

6: Transfer of significant Ownership 28:

Disclosure and Transparency

Disclosure Require-ments

Capital require-ments

Internal capital adequacy

assessment process (ICAAP)

Super-visory

review and evaluation process (SREP)

22: Market Risk

17: Credit Risk (incl. 18, 19, 20)

25: Operational Risk

24: Liquidity Risk

13: Home-Host Relation-ships

12: Consoli-dated Supervision

29: Abuse of Financial Services

21: Country risk and transfer risk

Basel Core Principles (2012)Basel IBasel II

Lic

ensi

ng

, d

efin

itio

ns

and

pre

con

dit

ion

sR

isk

Man

agem

ent

Set

up

of

sup

er-

viso

ryin

sti-

tuti

on

s

Su

per

viso

ryp

roce

sses

Financial Sophistication

BCP - 2012

26. Internal Control

15: Risk Management Process

Step 2: Logical sequencingaccording to the stage of financial sector development


Considerations for prioritization: Balance financial stability and development concerns (e.g. financial access / financial inclusion)Consider regulator’s reform capacity (e.g. central bank)Consider changes in the independence of the regulator

Process: Consultative: stakeholder discussions should involve the regulator, industry associations, government, and donorsShould be in line with the development of the sector (e.g. new risks, new topics – take account of inherent sector dynamics)

Success factors and challenges:Strong commitment of the partnerLocal presence of the facilitatorInconsistency of particular interests

Conclusion I


Supporting infrastructure and conditions to complement effective supervision – some examples

Financial Stability

Stable macroeconomic environment

Credit reference bureaus

Deposit insurance schemes

Effective market discipline

Conclusion II


Thank you for your attention

[email protected] the building block approach – a tool for regulatory and supervisory reforms for...

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