Dr. Atiur Rahman
Governor, Bangladesh Bank :
Basel based standard setters frame global prudential standards in the context of advanced financial markets of developed economies; these require major adaptations to fit in with substantially different country specific market contexts of developing economies. The adaptation challenges are starker for financial inclusion initiatives spawning new services and new service delivery modes for new inclusion client segments, bringing in new risk patterns. Bangladesh’s approach in oversight of risk management in inclusion initiatives is to let these begin with rough thumb-rule adaptations of prudential regulatory standards, fine tuning subsequently as needed. The approach has not posed problem because systemic implications of small sized transactions in inclusion initiatives are quite modest; the alternative of laying out elaborate regulations in advance of actual initiatives would have stifled zeal for innovation and progress.
A look first at Bangladesh’s evolving supervision structure for financial inclusion initiatives. Besides initiatives of banks supervised by Bangladesh Bank (BB), Non Governmental Organizations (NGOs) registered with the government’s NGO Bureau began micro finance operations countrywide in the nineteen seventies, often alongside their other social development programs. NGO Bureau’s oversight on NGO microfinance operations couldn’t have been much more than perfunctory, but in somewhat a delegated supervision mode these NGOs came under more intrusive oversight of the government-sponsored Palli Karma Sahayak Foundation (PKSF) as they borrowed from it for microfinance operations.
In 2006 the newly created Microcredit Regulatory Authority (MRA) took over regulating and supervising of Micro Finance Institution (MFIs). BB Governor’s ex-officio chairing of the MRA Board ensure consistency and coordination its policies with those of the broader financial sector. MRA’s prudential rules are stricter and more bank-like for deposit taking MFIs than for the others, with liquidity requirements and advance-deposit ratio prescriptions, besides requiring at least three and ten year spells of viable operation before accepting savings and time deposits respectively.
While banks are to maintain required liquidity in cash balances with BB and in treasury securities, MFIs do so in deposits with licensed commercial banks. The MRA is now setting up a deposit insurance structure for depositors in MFIs, on lines of deposit insurance scheme for depositors in banks.
Delegated supervision also features in oversight of agents (licensed MFIs, retail shops and establishments acting as cash points, vendor POS terminals etc.) of banks in the fast growing mobile phone/smart card based banking and in other off branch financial service delivery including agricultural and MSME loan disbursement and recovery. Mobile phone banking regulations and agent banking regulations make banks responsible for full AML/CFT KYC due diligence and performance oversight on their agents; the banks can in turn delegate to agents the KYC due diligence routines on service recipient clients. The KYC routines on clients vary in rigor according to nature, size and frequency of transactions; simple and minimal for personal transactions of inclusion clients of low financial means; and more elaborate and intrusive for transactions of businesses. KYC due diligence routines are likewise simpler and minimal also for no-frills bank accounts of small farmers, social safety net benefit recipients, day laborers and other individuals in lowest income brackets opened with nominal 10 Taka (about 12 US Cents) deposits.
In mobile phone based banking, caps on transaction size and frequency aim at minimizing ML/TF risk concerns. (Co-operative credit societies in Bangladesh supervised by office of the Registrar of Cooperative Societies have evolved more as closed organizations of members from the same business, crafts or other occupational groups than as organizations open to and eager for broadening membership, and are not considered here as inclusive financing promotion vehicles of significance.)
Prudential prescriptions regarding credit risks in financial inclusion initiatives of both banks and MFIs are broadly the same as in other financing in terms of loan classification, income recognition and provisioning. However, unlike banks the MFIs are not subject to risk weighted capital adequacy on their microfinance loan portfolios; instead MRA regulations require their continual accumulation of reserve funds @ ten percent of yearly income surplus.
Over years, loan recovery performance and asset quality in microfinance and SME financing portfolios of banks and MFIs have consistently remained favorably comparable with those in corporate and other loan portfolios, indicating broadly appropriate application of proportionality in prudential regulatory standards. Work on establishing a separate credit information bureau for microfinance operations is progressing fast, to help MFIs and banks maintain satisfactory quality of expanding microfinance assets as in their portfolios.
Prudential concerns relating to operational risks in financial inclusion initiatives of banks and MFIs are addressed by BB and MRA oversight on good governance in banks and MFIs respectively, with particular focus on quality of internal audit and internal controls, transparency in roles and responsibilities of board and senior management, disclosure transparency and adequacy, and customer interest protection. BB has put in place a Customer Interest Protection cell (CIPC) at its head office receiving and promptly addressing financial services customer complaints received through hotline open all hours. BB’s opting for bank led model in promoting mobile phone/smart card based banking has minimized settlement risks arising in the payments system from such transactions; banks being participants in the BB regulated payments system.
Periodic FSAP reviews monitor the extents of convergence of prudential regulations of country jurisdictions, including those on financial inclusion initiatives, with the global standards.
The objective of balanced, proportionate application of global standards in these initiatives in various country jurisdictions may be well served by more frequent rounds of self evaluation followed by peer group evaluation on the aspects of FSAP review relating to financial inclusion initiatives. Experience so far with financial inclusion initiatives indicates these to be supportive of rather than harmful to financial stability.
Inclusion initiatives shouldn’t therefore get bogged down by concerns about these falling short of global prudential supervisory standards. The AFI-SSB sub-committee may work together in putting together a set of inquiry questions, broadly along lines of those used in FSAP reviews, on the inclusion initiatives related prudential regulatory structures of country jurisdictions vis-a-vis global standards; to be used for periodic self evaluation by country authorities followed by AFI peer group mutual evaluation. This approach is already working well in FATF guided review and evaluation of AML/CFT regimes of country jurisdictions.
