Access to Finance, Microfinance, and International Capital Adequacy Standards for Banks: A New Approach to Development

Abstract

International banking regulation comprises, inter alia, transnational quasi-legal standards concerning the capital adequacy of internationally active banks, though their usage is normally much wider. These standards originate from the Basle Committee on banking supervision. The main rationale for their emergence has been the fashioning of national and transnational regulatory systems that are adept at preventing systemic crises and protect bank depositors from bank failures. This article suggests that, in addition to systemic stability and depositor protection, international capital adequacy standards may be utilized to facilitate access to finance. The degree of access to finance is a major criterion of financial sector development (FSD). FSD is generally viewed as an essential ingredient of sustained economic growth and thus a very effective means to foster development and fight poverty in developing countries. The first step in utilizing international capital adequacy standards to facilitate access to finance is through the assignment of lower capital requirements to private development finance loans under the Basle framework, in order to reflect their very low default rate. Such an amendment of the Basle framework would give international banking institutions a clear incentive to be involved in private development lending lowering interest rates for microfinance and other similar schemes. Relevant lending would be greatly facilitated by the intermediation of centralized country schemes that would on-lend funds to the end lenders.

Keywords: Access to Finance, Microfinance, International Capital Adequacy Standards, Development Finance

JEL Classification: G15, G18, G24, 016