Opening remarks by Mr Malcolm Knight at the FSI Conference on Promoting Inclusive Financial Systems

Opening remarks by Mr Malcolm D Knight, General Manager of the BIS, at the FSI Conference on "Promoting Inclusive Financial Systems", 11 October 2006.


In opening the Conference on Promoting Inclusive Financial Systems organised by the Financial Stability Institute of the BIS jointly with the World Bank, Mr Knight provides some thoughts on the benefits of extending the reach of financial services. He also poses some questions to central banks and supervisory authorities regarding how best to oversee the activities of institutions engaged in microfinance and to encourage innovation and product development while continuing to promote stable financial systems.

Full speech

Good morning, ladies and gentlemen, and an especially warm welcome to Her Royal Highness Princess Maxima of the Netherlands, of whose deep interest in the issue of microfinance we are well aware.

I am pleased that the BIS's Financial Stability Institute is partnering with the World Bank to provide this opportunity for central banks, financial sector supervisors and development institutions to share ideas on promoting more inclusive financial systems. The Bank for International Settlements has a long history of fostering financial stability and serving as a forum to promote discussion and policy analysis within the international financial community. Hence it seems particularly appropriate that we are hosting this Conference at a time when many countries are addressing the issue of how best to broaden the reach of financial services to those segments of the population that have been, historically, "unbanked" or "underbanked".

A central element of the promotion of inclusive financial systems is the development of microfinance - the provision of financial services such as loans, savings instruments and payment functions at affordable cost to individuals and groups that have typically been excluded from the organised financial system due to their limited means and low economic status.

I am particularly pleased to see the wide range of experience that is represented at this conference. It should certainly lead to a positive exchange of views and generate practical ideas on how best to move forward in this key dimension of financial deepening. I know that you will be concentrating on issues related to the supervision and regulation of microfinance activities and on how the central banking community and the supervisory community can most effectively promote services to the historically unbanked groups in the economy while continuing to foster a safe and sound financial system.

Extending the reach of financial services to a larger portion of the population has the potential to create many tangible benefits. It assists poor households in moving from mere subsistence to improved living conditions, including better nutrition, health care and education. It can thereby promote economic growth, it can enhance job creation and it can improve the distribution of income.

Many microfinance and microcredit programmes focus specifically on women. The ability to borrow funds to invest in small income-producing enterprises has reduced the economic vulnerability of women and their families. This process often generates modest savings that foster a culture of thrift, capital formation and stronger economic growth. In recognition of these benefits of financial deepening, many national governments have been adopting laws that require or encourage the extension of financial services to a broader spectrum of the population. But these are initiatives pursued by legislative bodies and they are therefore most likely out of the immediate realm of influence of most of us in this room today.

What, then, can central banks, supervisory authorities and other government institutions do to support the evolution of more inclusive financial systems, not only in emerging market economies but in advanced countries as well? There are several key groups of players in the microfinance arena: financial institutions that focus almost exclusively on microfinance activities, typically referred to as microfinance institutions or MFIs; commercial banks that offer microfinance products and related services to the poorest households and the smallest entrepreneurs as part of their broader range of activities; and cooperatives and credit unions that often target a base of customers of modest means. Should MFIs be regulated and supervised? If so, how? In what ways can established commercial banks and other financial institutions be encouraged to focus more attention on microfinance activities?

The financial supervisory authorities represented in this room, and those around the world, have decades of experience in overseeing commercial banks. This experience now needs to be accessed to develop the best ways of overseeing microfinance activities. The key question is: how can we encourage innovation and product development in this area while simultaneously continuing to promote safe and sound financial systems? Is there a need for special guidelines for commercial banks wishing to engage in microfinance activities?

Because circumstances vary from one country to another, no single approach to the supervision of microfinance is universally applicable. Nevertheless, it is worth asking whether a basic template, founded on sound principles and providing guidance on a variety of ways to approach oversight responsibilities, might not be useful to national supervisory authorities. Perhaps such a template could be used by banking supervisory authorities as part of their overall supervision of commercial banks and other financial institutions that undertake microfinance activities, and in their supervision of MFIs, if they have that responsibility.

We also must not forget that private sector financial institutions will need to invest in developing this type of business. In order for them to be encouraged to invest, they need to see it as a profitable business line for the long term. Banks will need to take decisions about the range of services to be provided. They will need to acquire or train staff to handle the unique characteristics of microfinance activities. We are all aware of the fact that a person of modest means who applies for a loan of, let's say, $100 may not be able to produce the sorts of financial statements, collateral or other components that are typically required for a traditional bank loan. How can banks develop the expertise to make decisions about such loans? This might be an area where partnering with institutions that have experience in making microloans could be productive.

Lastly, let me stress that, in supporting inclusive financial systems, we must never forget the importance of sound prudential standards related to corporate governance, risk management, internal controls, capital adequacy and appropriate accounting policies. MFIs, commercial banks, and cooperatives conducting microfinance activities should not be held to a lower standard simply because of their activities. But I believe that these same standards can be "customised" in order to address appropriately the nature of the activities and risks involved in microfinance.

There is much discussion these days about the cross-border integration of our financial systems, about global risk contagion and the need for supervisory cooperation and communication. But we also need to be concerned about strengthening and deepening our financial systems, thereby making them more robust and efficient. Microfinance is an important element of this deepening. Therefore, I hope that your discussions during the next two days will take place with the understanding that promoting inclusive financial systems in all regions of the world is an important issue for all of us.