30 January 2015

BCBS: Range of practice in the regulation and supervision of institutions relevant to financial inclusion

There has been over a decade of engagement by international standard setting bodies (SSBs) on the relevance of financial inclusion objectives to banking regulation and supervision. Initially, the focus was on microfinance activities conducted by banks and other deposit-taking institutions. In 2008 and 2009, the International Liaison Group of the Basel Committee on Banking Supervision (BCBS) conducted a survey to identify the range of practice in both BCBS member and non-member jurisdictions with significant experience in regulating and supervising microfinance activities by such institutions (2008-2009 Survey).

The 2008-2009 Survey targeted the most significant risks in microfinance and the systems and processes used to manage and supervise these risks, using the 2006 version of the Core Principles for Effective Banking Supervision (Core Principles) as the framework of analysis. The results of the 2008-2009 Survey informed the 2010 Microfinance Activities and the Core Principles for Effective Banking Supervision (2010 Guidance), the first set of guidelines issued by the Basel Committee related to financial inclusion.

Over the past decade, the focus of providers and others interested in financial inclusion has broadened to include the full range of financial products and services that low-income and poor households may use to manage typically uneven income and expenses; accumulate assets; and mitigate economic shocks. This period has also been marked by a growing recognition that financial inclusion raises issues that are relevant not only to the Basel Committee, but to other global SSBs. Further, innovations that serve the needs of excluded or underserved low -income households now have potential to extend the reach and nature of financial services provided by banks and non-banks. These developments are, in turn, changing the nature of risks that are relevant to banking supervision, and triggering issues of relevance to multiple SSBs.

In parallel to these significant developments, the global financial crisis has prompted new thinking about the relationships among the core safety and soundness objective of banking supervision and the objectives of financial inclusion, financial integrity and financial consumer protection. Awareness of the risks of financial exclusion has also increased. In the case of the Basel Committee, the concept of proportionality was reinforced in the revision of the Core Principles in 2012.

In undertaking the revisions, the Committees ought to achieve the right balance in raising the bar for sound supervision while retaining the Core Principles as a flexible, globally applicable standard. By reinforcing the proportionality concept, the revised 2012 Core Principles and their assessment criteria accommodate a diverse range of banking systems. The proportionate approach also allows assessments of compliance with the Core Principles that are commensurate with the risk profile and systemic importance of a broad spectrum of banks and other deposit-taking institutions - from large internationally active banks to small, non-complex deposit-taking institutions.

The 2013 Range of Practice Survey (Survey), the results of which this report analyses and summarises, aims to capture the current regulatory and supervisory approaches towards financial institutions and activities that are relevant to financial inclusion. The findings set forth below should not be considered exhaustive, nor should they be read as a compilation of best practices. The analysis presented in this report is intended to provide a snapshot of how some banking supervisors are responding to the rapidly evolving financial inclusion landscape.

This report is based on work done by the Workstream on Financial Inclusion, which is a work stream of the Basel Consultative Group (BCG). The BCG is the main outreach group of the Basel Committee).

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