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Costs and Benefits of Supervising Financial Institutions

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A recent study analyzed the costs and benefits of supervising financial institutions, focusing on microfinance institutions (MFIs). The findings suggest that the cost of supervision depends on the type of supervision executed, with on-site inspections being more costly than off-site observations.

Relationship between Supervised Assets and Cost/Benefit

The graph below illustrates the relationship between the volume of supervised assets and the cost and benefits of supervision. A straight line represents the supposed benefit of supervision, measured in supervision fees and indirectly the volume of savings and public resources protected. The fixed cost of supervision is high due to costs such as authorization, information systems, and other parts of its operating capacity.

Break-Even Point

The study found that the break-even point for conventional banks is OA, where the benefits of supervision exceed the costs. However, MFIs face a higher cost of supervision, with the total cost of supervising their assets being thirty times more expensive than in the case of commercial banks.

External Stakeholders and Supervision

Apart from these opposed interests, there are external stakeholders of microfinance who would prefer to see intermediaries increasing their outreach while improving performance. However, few stakeholders are prepared to bear the costs of supervision, as this activity is not often carried out in proximity to ultimate target groups.

Regulation in Nicaragua

The financial system in Nicaragua remains relatively weak in Central America. Despite experiencing a period of restructuring and consolidation between 1997 and 2001, the volume of total assets in 2002 was only USD 1,920 million, while the total liabilities hovered around USD 1,800 million.

  • The reorganization of the banking sector contributed to a drop in international reserves of about USD 130 million between the end of 1999 and the end of 2001.
  • Aggregate domestic credit fell from C$ 14,100 million (USD 1,230 million) in June 2000 to C$ 9,000 million (USD 630 million) in June 2002.

Need for Effective Supervision

The study highlights the need for effective supervision of MFIs, particularly in Nicaragua. The country’s financial system is still recovering from the restructuring process, and the lack of adequate supervision could lead to instability in the sector.

Conclusion

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In conclusion, the costs and benefits of supervising financial institutions are complex and influenced by various factors. While conventional banks have a lower cost of supervision, MFIs face a higher cost due to their specific characteristics. The study highlights the need for effective supervision of MFIs, particularly in Nicaragua, to ensure stability in the financial sector.

References

  • Blijdenstein, J., et al. (2002). Donor Support Strategies for Microfinance: A Study of Effectiveness.
  • CGAP (2002). Supervision of Microfinance Institutions: An Overview of the Challenges and Opportunities.
  • Schmidt, R. H. (1999). Solvency in Microfinance: A Review of the Literature.

Source

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Note

The article is written in a formal tone, as if it were an article from a financial news publication. The language used is technical and assumes some knowledge of financial concepts.