Near-banks

image015While some nearbanks, such as finance companies, can be seen as an annex to the com­mercial banking system, some smaller scale near-banks may have sufficient development importance to call for special treatment. Such near-banks consist of specialized micro­finance firms, cooperative credit unions, specialized mortgage banks, and government – sponsored specialized development intermediaries. Because of their modest size or the fact that their source of funding is stable and may come from stable external or wholesale sources, they do not raise systemic stability concerns but do expand access to financial services. Some near-banks provide a focused set of services to a broad clientele (e. g., postal savings banks and mortgage banks); others specialize in serving a particular economic sec­tor (e. g., specialized microfinance institutions [MFIs] that may target microenterprises or the poor and near-poor).

Many categories of nearbanks are not operated on a for-profit basis (especially donor – promoted microfinance entities, government-owned development banks, and, to an extent, cooperatively owned entities such as credit unions). This feature generally calls for a distinct regulatory framework, and a review will be appropriate in many countries where those institutions are sizable.13

Among the major categories are non-depository finance companies, many of which specialize in particular types of lending such as leasing and factoring. Many of them are captive subsidiaries of banks that have been separately constituted for reasons of legal convenience or in response to regulatory restrictions on banks. The funding of those insti­tutions is typically from the parent bank. Independent finance companies need to find funding in the wholesale markets, typically through private placement of notes, though they may use an organized bond market if one is present. The entities can be important in providing borrowing facilities for SMEs, and obstacles to their effective operation should be monitored.

Mortgage banks (see box 4.3), savings banks, and cooperative credit unions typically concentrate on the needs of households both in terms of deposits and for lending prod­ucts. However, some savings banks operate as narrow banks, lending their resources to government. To the extent that they are locally or regionally based, their survival increas­ingly depends on the effectiveness of national umbrella organizations. They also depend on not suffering from tax discrimination (though they will often go further and argue for tax privileges that are hard to rationalize from a welfare point of view). Interviews with those entities will often reveal special environmental challenges that inhibit their effective functioning. Because detailed prudential regulation of the institutions is not cost-effective, they often operate under blanket restrictions that limit their expansion and activities. Judgment must be exercised as to whether such restrictions can safely be relaxed.

Non-deposit-taking microfinance firms (typically donor funded) may not require pru­dential regulation from the financial authorities, although an element of forced saving is often built into their operations. Increasingly, though, MFIs seek to move into offering deposit services, so the challenge of ensuring that prudential regulation is no more intru­sive than is needed arises here also.

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The indications are that sustained effectiveness of MFIs will require that they should operate on a relatively large scale. If so, policies that encourage larger-scale operation over a proliferation of small entities is to be preferred. Subsidized interest rates offered by MFIs are not compatible with graduation to self-sustaining operation and are generally not to be encouraged, though the limited spillovers into mainstream finance mean that a subsidy need not be considered crucial.

Subsidized lending by larger government-sponsored development banks causes dis­tortions (see box 4.4). Those banks can seriously distort the incentive for a balanced provision of lending products by commercial banks, as well as creating the conditions for corruption. Moving government-sponsored development banks as far as possible either (downstream) toward a commercial operation or (upstream) to become explicitly the lending arm of the fiscal authority (with loans at unsubsidized rates) will, in most cases, seem the optimal direction of policy.

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