IMF urges SBP to fix vulnerabilities of microfinance banks

October 11, 2024 (MLN): The International Monetary Fund (IMF) stated in its report that the State Bank of Pakistan (SBP) should address the persistent vulnerabilities and weak business models of microfinance banks (MFBs) before they join the deposit insurance scheme.

This is because these MFBs play a critical role in financing the poorer segments of society.

Similarly, SBP should take action in line with its supervisory framework to ensure that currently undercapitalized private banks complete recapitalization or otherwise be placed under resolution in case recapitalization efforts fail.

The well-advanced wind down of the public bank should also be completed.

To support financial stability, regulatory standards should be reinforced (via the restoration of capital conservation buffers) and consistently enforced (including adherence to prudential leverage ratios).

IMF further noted that amendments to the bank resolution and deposit insurance legislation, which should be advanced expeditiously and operationalized subsequently, will further strengthen Pakistan’s crisis management and bank resolution framework and improve tools to address failing banks.

Taking actions to unwind the interconnections resulting from the sovereign-bank nexus—including fiscal consolidation, better cash management, and capital market development—will limit risk of financial contagion.

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