1. contact@e-mfp.eu www.e-mfp.eu The Building Block Approach – A tool for regulatory and supervisory reforms for microfinance European MF week 2012, Luxembourg, 16 th November GIZ Financial Systems Development Rainer Schliwa and Florian Henrich

2. contact@e-mfp.eu www.e-mfp.eu GIZ’s role in the implementation of regulatory and supervisory reforms Support partners in developing supervisory capacity Act as a facilitator and provider of technical assistance No off-the-shelf solutions Understand the local context Build ownership Long-term commitment is key

3. contact@e-mfp.eu www.e-mfp.eu Countries vary in terms of stages of regulation & supervision Draft rules may not be enacted; law may not be in place Implementation of international standards (Basel I, II, Basel Core Principles) Limits on permitted products / services Financial institutions may be regulated by different entities Regulator may view microfinance not as primary responsibility Regulator may lack expertise and understanding to effectively identify, assess and manage microfinance specific risks Regulators may still be largely unfamiliar with non-prudential risks (e.g. Consumer Protection) Regulatory actions may not be in line with the market (e.g. interest rate caps) Regulator may be risk averse to financial innovations Need for tailor-made solutions according to country context

4. contact@e-mfp.eu www.e-mfp.eu Supervisory capacities should follow the development path of the Financial System

5. contact@e-mfp.eu www.e-mfp.eu Supervisory Capacity + FSD stage Standards Wholesale approachIncremental approach Regulatory Standards Supervisory Capacity + FSD stage Balance regulatory standards and supervisory capacity Regulatory Standards Supervisory Capacity + FSD stage Imbalance can lead to financial sector instability

6. contact@e-mfp.eu www.e-mfp.eu “Building Block” Approach – a method to prioritize, sequence and adapt international standards to local context Background: While international best practice of supervisory standards exists, there is a need to provide guidance on how to adapt those to the local context. 1.Identify thematic blocks of the Basel Core Principles, and/or Basel I – III and cluster them into thematic categories 2.Sequence those thematic blocks in accordance with financial sector development

7. contact@e-mfp.eu www.e-mfp.eu Step 1: Identify thematic blocks (“Building Blocks”) of the Basel Core Principles and cluster them into thematic categories 3: Licensing Criteria 7: Risk Management Process 11: Exposure to Related Parties 13: Market Risk 2: Permissible Activities 1: Objectives, Independence, Powers, Transparency, and Cooperation 8: Credit Risk 6: Capital Adequacy 5: Major Acquisitions 4: Significant Transfer of Ownership 12: Country risk and transfer risk 9: Problem Assets, Provisions, and Reserves 15: Operational Risk 14: Liquidity Risk 19: Supervisory Approach 18: Abuse of Financial Services 17: Internal Supervision/Auditing 22: Accounting and Disclosure 21: Supervisory Reporting 25: Home-Host Relationships 10: Large Exposure Limits 16: Interest rate risk in banking book 20: Supervisory Techniques 23: Corrective and Remedial Powers 24: Consolidated Supervision Licensing, definitions and preconditions Basel Core Principles 3. Supervisory processes 1. Licensing, definitions and preconditions 2. Setup of supervisory institutions 4. Risk Management Thematic Categories, which cover the process of building supervisory capacity

8. contact@e-mfp.eu www.e-mfp.eu Step 2: Logical sequencing according to the stage of financial sector development

9. contact@e-mfp.eu www.e-mfp.eu Considerations for prioritization: Balance financial stability and development concerns (e.g. financial access / financial inclusion) Consider regulator’s reform capacity (e.g. central bank) Consider changes in the independence of the regulator Process: Consultative: stakeholder discussions should involve the regulator, industry associations, government, and donors Should be in line with the development of the sector (e.g. new risks, new topics – take account of inherent sector dynamics) Success factors and challenges: Strong commitment of the partner Local presence of the facilitator Inconsistency of particular interests Conclusion I

10. contact@e-mfp.eu www.e-mfp.eu Supporting infrastructure and conditions to complement effective supervision – some examples Financial Stability Stable macroeconomic environment Credit reference bureaus Deposit insurance schemes Effective market discipline Conclusion II

11. contact@e-mfp.eu www.e-mfp.eu Thank you for your attention