In this case, we need to conduct a bit more research before we implement any macroprudential policies. The caps on financing tenure, together with requirements to comply with responsible financing practices (including adoption of prudent debt service ratio (DSR) threshold and  BIS central bankers’ speeches  1  definition of income and debt obligations for computation of DSR), were not limited only to banks. The caps were also imposed on non-regulated entities in order to avoid regulatory arbitrage or shifting of risks to these non-bank lenders. Third, preserving appropriate discretion for authorities to act is important, with respect to the timing, mix and calibration of measures. We do not adopt a rule-based approach to the implementation of macroprudential measures. The reason is that, it can avoid a “self-fulfilling prophecy” if the formula for determining the timing, quantum and criteria for the deployment of macroprudential policies are made public or applied in mechanistic way – unintended consequences could arise or systemic risk could suddenly build up right before the effective date as economic agents try to “beat the clock” by getting ahead of the implementation. This approach provides us with greater flexibility to use an optimal mix of macroprudential and other measures under varying circumstances – this is different from the UK where legal constraints limit the choice of macroprudential instruments that can be used, or compared to Turkey which uses quantitative triggers for the new reserve requirement framework.

Of significance, proportionate regulation protects the stability and integrity of the financial sector, and at the same time encourages innovative financial inclusion solutions. It is important to recognise that regulation that is proportionate to risks does not necessarily equate to “lighter regulation” as many perceive. For example, there are fundamental differences between the risk drivers in microfinance and commercial banking. Microfinancing is labour-intensive, usually highly decentralised, and among the borrowers, the factors that are predictive of repayment capacity are very different from commercial bank borrowers. These differences need to be better understood to achieve well-designed regulatory frameworks. For example, Mexico’s tiered bank account approach prescribes different degrees of KnowYour-Client (KYC) requirements and transaction restrictions that are proportionate to the value of the account. A low value account requires less KYC requirement due to typically lower money laundering risk. However, the lower KYC requirement is compensated by more transaction restrictions. The proportionate approach expanded access to bank accounts. On stability, Pakistan introduced proportionate capital requirements for microfinance institutions based on the size of the population they intended to serve. Microfinance institutions at district, regional, provincial and national levels have varying capital requirements, so that they could serve distinct market niches sustainably without the burden of holding excess capital that is disproportionate to the risk. The global Standard-Setting Bodies (SSB) have adopted proportionality as a principle in developing risk-based standards. SSBs are collaborating with developing countries through the Alliance for Financial Inclusion (AFI) to clarify implementation of standards, build supervisory capacity and address data issues.