Friday, July 15, 2011

Branchless regulations to stimulate

Banking regulators have a very important job to do. They are the custodians of the stability of our financial systems. We should not under-estimate this responsibility. It is interesting how different regulators approach this task. Some have a very restrictive and prescriptive approach: their regulations are characterised by offering the banking fraternity with systems cast in stone. In these countries it is extremely difficult to innovate as the central bank does not allow anything to be different than what they prescribe. As one can imagine, progress in these markets are slow. I am sure the readers will be able to name such countries without me being explicit about them.

On the other hand, central banks can create rigid frameworks that will ensure the stability of the financial systems, yet allow for innovation within these frameworks. As the solutions start to evolve, the central bank could then loosen some of the limits and constraints in these frameworks. This is of course a much better approach, as it stimulate growth, without compromising the financial system.

A case is point is the State Bank of Pakistan (SBP). The initial branchless banking guidelines released by the bank providing sufficient room for very innovative solutions to be launched in Pakistan - solutions that achieved good traction. The SBP has now released new guidelines that relaxes some of the previous guidelines. (Read here). Some of the steps forward is the creation of a new level of KYC-compliance, that relaxes some of the previous constraints, as well as an increase in limits. This approach should lead to faster growth in the industry in Pakistan.

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