"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 - hsrinivas@gdrc.org
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