Putting Decent Work into Financial Policies

Central banks play a key role in the management of money, finance and capital. The quality of financial intermediation is determined as much by the market as by policies, i.e. the extent to which the financial sector is accessible to the smaller market participants. Policies together with the market determine whether financial institutions supply resources for investment that lead to employment, especially in the sectors of the economy where jobs are of an acceptable quality. Most central banks traditionally consider market access issues a by-product of financial sector deepening. They assume that the access for the poor and for job-creating enterprises like SMEs will improve automatically if the financial sector is only stable and competitive enough. The record of financial sector reform and liberalization in Latin America and Africa shows, however, that this is not the case.

As one of the first central banks that realized the shortcoming of the invisible hand in the financial market to ensure access for the majority, the BCEAO decided in 1992 to integrate micro-finance into the financial sector .The BCEAO is the monetary authority for 8 countries in West Africa. It requested the assistance of the ILO to design a policy for the promotion, regulation and integration of micro-finance. This programme (PASMEC) reaches 275 micro-finance institutions with 3,8 million members. Every fifth household in these countries - some of the world’s poorest - is linked to a micro-finance institution. The approach is a well-dosed balance of regulation and promotion. The law governing member-based micro-finance institutions, for example, is an adjusted version of the bank law. Its prudential provisions extend only to the proper accounting for arrears and losses, there are only very general ceilings imposed to ensure portfolio risk diversification (no single borrower should have debts of more than 10% of the entire portfolio; and managers of the MFI may not get loans from the MFI for more than 15% at any single point in time.

At the same time the central bank promotes actively the emergence of sound, viable and professionally managed micro-finance institutions: by developing manuals for financial management in local languages, by offering courses on financial ratios, by bringing together banks and micro-finance institutions and by encouraging the emergence of associations of micro-finance institutions. Like all central banks the BCEAO has three major concerns: stability of the sector, confidence in financial institutions, allocative efficiency. Secondly the central bank in a developing country must make sure that financial institutions reach out to more than just 10% of the population and if banks cannot do it, then alternative suppliers should be encouraged to fill the gap. Lastly, central banks have the responsibility to make sure that the financial market is not distorted by policy interventions, including its own. The BCEAO is therefore increasing the macroeconomic research on how different financial sector reform measures affect the access of the poor and job-creating enterprises to capital for investment and employment.