Sa-Dhan Newsletter Volume 3 Issue 2

Microfinance Regulation

Microfinance Regulation and Enhancing Resource Flows:

International Experience - Kathryn Imboden (WWB New York)

MICROFINANCE AS PART OF FINANCIAL SYSTEM

Liberalized interest rates for microfinance, using

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competition rather than interest rate ceilings to encourage

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icrofinance needs to be recognized as a vital part of

efficiency and lower interest rates over time.

the financial system, dedicated to meeting the financial

Elimination of market-distorting subsidies, notably in

needs of poor clients in a responsive and profitable manner.

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government programs.

This financial systems approach recognizes the important

role that different organizational and legal structures can and

Modifications in financial sector policies, regulations and

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do play in meeting the evolving financial service needs of

legal structures to promote the entry and expansion of

poor households. It recognizes the important roles of both

sound microfinance services by a range of structures,

regulated and unregulated institutions in the microfinance

to encourage the offering of multiple financial products,

system: grassroots savings and credit groups and microfinance

and the explicit recognition of the important roles that

NGOs, along with universal commercial banks, finance

unregulated NGOs and grassroots structures have in the

companies, cooperative banks, regulated MFIs, insurance

delivery of microfinance services.

companies, and wholesale financing institutions.  This

Promotion of performance indicators and standards, that

financial systems approach looks to remove policy, regulatory

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encourage transparency and sound performance across

and legal barriers to the provision of sound financial services

the range of institutions engaged in microfinance.

to poor people by each class of institution. It also looks

to building the institutional infrastructure to: facilitate access

-Permission to mobilize deposits from the public for

to finance by high performing institutions at different stages;

those regulated institutions that meet prudential standards,

build shared performance standards in the microfinance

with more liberal treatment of savings mobilization from

industry; and encourage capacity building and innovation.

MFI borrowers.

Fair tax treatment, including temporary tax incentives for

The integration of microfinance into the financial sector does

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microfinance institutions undertaking the costs of

not mean that all microfinance institutions should be regulated.

converting to formal, regulated structures.

It means promoting strong regulated and unregulated

institutions of all types that work to provide services on a

Simple reporting requirements and supervision for

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sustainable basis, and creating enabling regulatory frameworks

microfinance activities and institutions, with a focus on

and legal structures for those MFIs that seek to mobilize and

performance.

intermediate savings from the public.

Top policy makers from finance ministries and central banks

While donors and other sources of subsidized funds will

around the world recognize the importance of microfinance,

continue to have important roles to play in supporting MFIs

and are ensuring that those officials responsible for drafting

on the road to financial sustainability, microfinance in the

laws and regulations, and for supervising MFIs understand

twenty-first century will be dominated by those institutions

the business and the special features of providing financial

that are or can get integrated into domestic financial markets,

services to large numbers of poor people.

through wholesale financing arrangements, commercial

REGULATION  PROTECTS  CLIENTS  AND

borrowings and/or broad-based savings mobilization.

SUPPORTS MORE SOPHISTICATED FUNDING

Savings mobilization is key as a highly valued service to

Regulation, for all types of financial institutions, addresses

poor people, as a source of funds, and as a basis for real

public policy goals: ensuring the solvency and soundness

local accountability. As demonstrated by SEWA Bank in India,

of financial intermediaries, protecting the stability of the

Bank Rakyat in Indonesia and other successful pioneers,

country's payments system, protecting consumers against

when simple, responsive savings products are offered, broad-

bank failure, fraud or opportunistic behavior by management,

based savings can become the dominant source of funds for

promoting market efficiency and appropriate functioning of

the microloan portfolio.  Prudential regulation is key in

competitive market forces.

broad-based savings mobilization to protect depositors.

MFIs seek to be regulated in order to mobilize public savings,

attract equity capital, attract commercial funds for on-lending

KEY FEATURES OF THE POLICY

and other commercial funding instruments for on-lending

Policy makers and microfinance leaders have built agreement

and building a capital base. Sooner rather than later, many

of the larger microfinance institutions will need to rely on

on key features of a policy framework that supports the

development of a robust and responsive microfinance industry

a combination of equity capital, commercial loans,

mobilization of institutional and individual savings, and bond

include the following:

issues to finance their growth. Recent experience indicates

A pro-poor economic policy stance, including the

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the advantages that regulated financial institutions have over

recognition of sustainable microfinance services as a key

NGOs in offering borrowers deposit facilities, mobilizing

vehicle in tackling poverty. :

institutional savings, issuing bonds, and providing assurances

Solid macroeconomic policies, avoiding high inflation.

to commercial lenders.

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