Risk-based Supervision of Banks Involved in Microfinance

Drawing from Philippine, the paper says that adopting a risk-based regulation and supervision of microfinance banks that is more appropriate to their nature and set-up are needed to further expand their reach to a wider clientele. Using clientele, loan products, lending and collection technology, and the associated risks surrounding their loan portfolios, it examines banks involved in microfinance and conditions for expansion. It explores:

• Strategy for microfinance;
• Regulation of microfinance banks;
• Banking law and microfinance;
• The key issues associated with the proposed risk-based approach to microfinance.

The paper makes policy recommendations in the area of supervision, client screening loan approval, interest rates, monitoring asset quality, management information system, and reporting standards. Concludes that:

• Crucial component of the microfinance strategy is having an appropriate regulatory framework that can enhance the efficiency and competitiveness of the financial;
• Since liquidity is the lifeblood of microfinance operations, an adequate management information system will enable bank management and supervisors to keep track of asset quality, capital adequacy and the liquidity position of microfinance banks.