product that addresses the needs of the agriculture sector, specifically the poor farming households. definitely, there is room for complementation. first, many clients of microfinance are also engaged in agriculture activities. in the philippines, it has been proven that those who are involved in small agricultural activities also manage other forms of enterprises. these agricultural workers usually maintain microenterprises to meet consumption needs and other short term expenses of the household. in this regard, microfinance may be extended to this worker, with some modifications on the proven methodology and technology of microenterprise lending. for instance, traditional client selection using character and cash flow analysis … may be supplemented by technical criteria relating to the particular agricultural activity. this way, the selection process is more attuned to the intricacies of the household, its microenterprise, as well as its agricultural activity. second, the basic feature of flexibility in microfinance can be similarly applied to agriculture finance. flexibility in terms of repayment schedules, delivery channels and even collateral requirements is very important. some microfinance institutions that have successfully catered to the agriculture market have created flexible repayment schedules and payment options that attract a wide range of agricultural activities. clients are still expected to have frequent repayments with the option of having a certain percentage of the loan as bulk payment. while these schedules take the crop cycle and produce sales into consideration, they still emphasize that repayment is expected regardless of the results at the end of the crop cycle. flexibility in delivery channels can also be very beneficial for agriculture finance. microfinance institutions, both in the bank and non - bank sector, continue to expand their branching networks, thereby enhancing access to finance. innovations in technology are also increasing delivery channels for microfinance. in the philippines, for instance, the development of mobile phone banking and electronic cash platforms have provided the opportunity for both enhanced access and lower costs. finally, flexibility insofar as collateral requirements is also an option for agriculture finance. microfinance institutions have proven that collateral substitutes such as group guarantees, peer pressure or even the use of personal property have been effective in reducing reliance on traditional capital and in ensuring repayment. this may be studied further to see what arrangements could be flexible, yet prudent enough for agriculture loans. risk mitigating factors that are applied by microfinance institutions such as portfolio diversification, inclusion of savings and insurance products may also be effective for agriculture finance. it is important that we remain

status of the underlying assets. we are incorporating these items into our supervisory monitoring screens, and we assume market analysts are also making use of these public data for their own analysis of banking risk. clearly, more can and should be done by banking organizations to demystify and clarify the risks they are taking. other areas being discussed include disclosures on the risk profile of bank credit portfolios by internal risk ratings. the first three elements of risk management that i have discussed are fundamental to bank safety and soundness, but without the fourth element - - internal controls - - none of the other elements can be effective. for that reason, an evaluation of internal controls has always been a fundamental part of bank supervision. it is a key to improving the odds that problems are found early and addressed before the bank insurance fund or taxpayer dollars are at risk. in response to a rising trend of unexpected weaknesses in control found at banks, supervisors are seeking to ensure that risk - focused supervision is striking the right balance between reviewing riskmanagement processes and performing procedures to validate whether the procedures are working as advertised. supervisors need to place more emphasis on determining whether the strength and effectiveness of those controls are tested by an independent third party other than supervisors and if they are, how frequently. in particular, as part of our risk - focused supervision, we have endeavored to use the work of internal auditors when it is deemed to be reliable. however, it is becoming clearer that we must bring a new level of skepticism to bear in this area for some institutions. in that regard, supervisors must return to the fundamentals of risk - focused supervision and require substantive verification procedures to confirm the effectiveness and reliability of internal audit, before placing substantial reliance on its findings. in the past, supervisors have taken some comfort in the fact that external accountants have also been looking at an institution's internal controls. as you know, for many banks the federal deposit insurance corporation improvement act ( fdicia ), section 112, requires that the external auditor attest to management's assertions regarding the adequacy of internal controls over financial reporting. recent events among certain banks that have had material financial consequences have caused us to question the usefulness of these attestations. in certain instances, we have been asking external accountants for their fdicia 112 work papers for banking organizations that we have found to have had significant control weaknesses. we are looking into that work to formulate some views on whether this area needs improvements and what actions