by Hio Kyeng Lee - Regulation -

WHO’S WHO IN MICROFINANCE: Supervisory Tools for Regulators and MFIs at the CGAP Reference Library

Regulators and microfinance institutions (MFIs) have resources available to them in order to implement the supervision of microfinance activities within their purview. The Consultative Group to Assist the Poor (CGAP), located at the Worldbank Group, has a reference library which lists supervisory tools geared towards the regulation of microfinance activity. This article will focus on a few examples of the supervisory resources available to regulators and MFIs through the reference library at CGAP. In addition to the examples discussed below, the reference library brings together a wealth of information regarding current practices in microfinance regulation and supervision, how-to guidelines and a discussion of the broader issues affecting microfinance regulation.[3] For additional microfinance resources at CGAP, Microcapital.org has previously reported on other resources available on the CGAP website in an article titled, “WHO’S WHO IN MICROFINANCE: The Microfinance Gateway (www.microfinancegateway.org), Provided by World Bank’s Consultative Group to Assist the Poor (CGAP).”[1]

Regulators can access a collection of manuals located at the Microfinance Gateway’s Audit Information Resource Center in order to perform audits of MFIs. Where external audits of a regulated MFI are not available or not credible, CGAP has a piloted version of the Loan Portfolio Review Toolkit.[2] Although designed with the investor in mind, the Loan Portfolio Review Toolkit can also help MFI regulators to assess the primary risk posed by the misrepresentation of microcredit portfolio quality.[2] The tool is organized around three tiers of review, with “gradually deepening, levels of review that provide the user with ever-increasing degrees of certainty about the underlying quality of loan portfolios, regardless of how they are being reported.”[2] The Toolkit will help the supervisor or regulator evaluate whether there are sound loan management practices, which provides the basis for good loan quality portfolios.

Another tool for MFI regulators that is referenced at CGAP’s library is called the ACCION CAMEL management tool which refers to an existing international rating system, “CAMEL,” later adopted by ACCION, a network of commercial MFIs, as a diagnostic and management tool for MFIs.[3] By way of background, the CAMEL rating system was established as an international standard for the supervision of a bank’s overall condition. The acronym stands for the six components of a bank’s condition that are the subject of the assessment: Capital adequacy, Asset quality, Management, Earnings, Liquidity.[8] ACCION “CAMEL” was based on a bank supervisory rating system developed in 1978 by the U.S. Federal Reserve to evaluate the solvency of U.S. banks and stood for the first five components of a bank’s condition.[8] As stated on the CGAP website, “central bankers in Honduras, Bolivia, India, and across Africa have received training in the use of ACCION CAMEL.”[3]

A supervisory tool available for MFIs to supervise its microfinance activities is the use of the external audit. The Microfinance Gateway’s Audit Information Resource Center provides tools for analysis, as well as a discussion forum for MFIs to understand effective approaches to auditing microfinance activities.[2] The Audit Information Center has an interactive feature which allows users to submit questions about external audits and also to follow an archive of prior audit related discussions.[2] For example, in one discussion string initiated by an internal auditor for an MFI in South Africa, the internal auditor requested information on how to develop an audit plan as well as a risk assessment process.[4] The responses were posted by other subscribers of the Audit Information Center, including an individual from a bank as well as a business and process consultant based in Nairobi, Kenya. The discussion topics are also further organized by subject matter, including a discussion of the special purpose audits.[4] According to one subscriber from a microfinance consulting firm, special purpose audits refers to a “non-financial statement audit where a group of transactions are selected for examination and an opinion rendered on how well the MFI has performed in following their own policies and procedures.”[5] For MFIs engaging in an external audit of its operations, CGAP has published a guideline for conducting a credible audit.[6]

Make your comment at:
http://microfinanceassociation.ning.com/forum/topic/search?q=Audit

By Hio Kyeng Lee, Research Associate

Bibliography:
[1] “WHO’S WHO IN MICROFINANCE: The Microfinance Gateway(www.microfinancegateweay.org), Provided by World Bank’s Consultative Group to Assist the Poort (CGAP),” by Stephanie Rubin, published by Microcapital.org, (October 28, 2009), located at, https://www.microcapital.org/who%e2%80%99s-who-in-microfinance-the-microfinance-gateway-wwwmicrofinancegatewayorg-provided-by-world-bank%e2%80%99s-consultative-group-to-assist-the-poor-cgap/

[2] CGAP, Microfinance Gateway’s Audit Information Resource Center, located at the reference library:
http://www.microfinanceregulationcenter.org/section/resourcecenters/auditcenter

[3] CGAP’s description and link to ACCION CAMEL, located at,
http://www.microfinanceregulationcenter.org/resource_centers/reg_sup/reference_library/_tools/_accion

[4] For discussion string, go to external audit plan discussion topic, located at, http://www.microfinanceregulationcenter.org/content/discussion/discuss?mode=message_detail&id=3860&msgid=4084

[5] Posting on special purpose audits, located at
http://www.microfinanceregulationcenter.org/content/discussion/discuss?mode=message_detail&id=3860&msgid=3944

[6] “Guidelines for Conducting an Audit”, published by CGAP (1996), located at, http://www.microfinanceregulationcenter.org/content/article/detail/2724/

[7] Basel II Revised International Framework, “Part 3: Supervisory Review Process,” (June 2006) located at, http://www.bis.org/publ/bcbs128c.pdf

[8] In 1997, Sensitivity to market risk was added as a sixth component and the acronym changed to CAMELS. The definition of CAMELS Rating System, located at: http://www.frbsf.org/econrsrch/wklyltr/wklyltr99/el99-19.html#subhead1

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