"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.
. 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.
Hari Srinivas - firstname.lastname@example.org
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