Basel II implementation in developing countries and effects on SME development.

This Issue Paper examines the implementation of Basel II in low-income countries
(LICs). The aims are to assess the low-income countries’ views and concerns on Basel II,
whether and how they intend to implement the new Basel Capital Accord, and the
challenges they may face in doing so. The paper discusses in particular the possible
implications of Basel II implementation for competitiveness of LIC banking sectors and
financial inclusion. Drawing on a survey covering low-income countries especially from
Africa, the paper finds that in addition to technical challenges that include the need to
build long and reliable data base to run sophisticated risk assessment models, and to build
supervisors’ capacity to assess, validate and monitor the use of such models, LICs face
broader issues related to Basel II implementation, such as competitiveness of national and
foreign banks, access to credit by SMEs, potential increased pro-cyclicality of bank
lending and their macroeconomic impacts. The paper concludes that LIC regulators may
not need just technical assistance but also more ‘political’ support for their negotiations
on regulations with international banks to ensure that their regulatory regimes are
consistent with national aims for both financial stability and sufficient credit, especially
to SMEs.

Published in the proceedings.