The regulation of the (micro)finance sector in the Palestinian Territories depicts a unique case– especially regarding its complexity. The features of its business environment encompass the lack of control over major economic and fiscal policy instruments, as well as high degrees of economic uncertainty, public sector salary volatility, and extreme levels of political instability and violence. To promote the sector as a whole and to set incentives for investors, the microfinance sector is stabilised against shocks and crises through a balanced prudential regulation. The improvement of the sector’s soundness makes it reliable for consumers, creating trust and avoiding hardships and social impacts.

In detail, the continuous crisis preparation and corresponding regulation entails a differentiated compilation of tools. For all financial institutions, it ensures the business continuity in times of crisis, especially institutional infrastructure and internal capacities are regulated to meet the needs of sudden crisis escalations. The institutions are for example asked to prepare action plans following intensively discussed scenarios. In some cases, even alternative locations to operate business from exile are part of the regulator-imposed guidelines.

Complementing the business continuity from the financial preparedness side, the regulations require institutions incl. MFIs to hold a considerable minimum capital, adhere to a rigorous leverage ratio and additional provision schemes. The PMA runs sophisticated stress tests to identify weaknesses.

During crises, aforementioned measures are applied to maintain consumers’ trust into the financial system and its liquidity, to avoid bank runs and violence against bank employees and its premises. Specific circulars are issued in such situation, for example during the 2014 escalations in the Gaza Strip, the PMA forced financial institutions to freeze repayments of loans for 6 months, and ensured at the same time with a pragmatic and collaborative approach that this would not harm neither clients’ scores nor the banks’ and MFIs’ capital and other formal prudential requirements.

Post crisis actions include the assessment of the applied measurements, as well as the enhancement of financial inclusion and improvement of internal communication structures.

By Julia Erdelmann