BIS home Press & speeches BIS management speeches 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.
Abstract:
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.
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