"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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