Sa-Dhan Newsletter Volume 3 Issue 2

Microfinance Regulation

to encourage sound microfinance by regulated financial

A VARIETY OF COUNTRY EXPERIENCE

institutions.

In several countries, conventional regulatory requirements

have been modified to fit microfinance. Exemptions from

International experience has shown that self-regulation as an

interest rate ceilings were introduced, collateral free lending

alternative to "real" regulation rarely works. The case of

is permitted, minimum capital requirements were lowered and

successful use is that of the Guatemala federation of credit

reserve requirements were adjusted to the needs of

unions; this involved a very small number of institutions,

microfinance. In the Philippines, changes to existing legislation

who committed to reporting and to censures where necessary.

introduced special requirements and more flexibility so that

In South Africa, the Microfinance Regulatory Council overseas,

rural, thrift and commercial banks could offer microfinance

registration, certification and receives complaints, but no

services; exemptions were made on rules on interest rates,

savings mobilization is involved. In Peru, spme categories

a five year exemption on gross profits tax was introduced.

of credit unions are supervised by the national federation,

Although there are as yet few strong institutions, this tiered

but the ventral bank is responsible for sanctions.

approach has worked so far and had allowed for a range

of institutions. In Ghana, similar modifications were made

ENHANCED RESOURCE FLOWS?

in support of rural banks, savings and loan associations and

credit unions providing microfinance services.

Few if any converted MFIs have developed broad-based

savings mobilization from the public; most rely on a narrow

In other cases, special microfinance legislation has been

set of institutional depositors, donor-funded equity and debt,

passed to create new microfinance-friendly legal structures.

and commercial borrowings as their sources of funds. This

In Bolivia, private financial funds, with a reasonable capital

experience comes from Latin America, in particular, where

requirement, have been allowed since 1995; they can mobilize

a savings culture is not strong.  With limited efforts to

savings and offer other financial services. In Peru, a similar

mobilize savings from the public, the underlying rationale

model exists, with tougher requirements to mobilize savings.

for prudential regulation is not (yet) widely fulfilled. Work

remains at the institutional level to introduce savings products.

The pool of domestic commercial investors in for-profit

A FEW WORDS ABOUT SELF-REGULATION

microfinance institutions in most developing countries is

Confusion has been created though the loose use of the term

extremely limited.  In fact, the ownership structure of all

"self-regulation." The term regulation should be used only

converted microfinance NGOs is dominated by various

when the regulator has the power to disband the institution,

combinations of donors, donor funded funds, international

withhold a license, or provide other censures.  Other

NGOs, and the originating NGO. In Latin America however,

performance monitoring systems are important in building

"reconstituted" non-profits (banks, finance companies) have

transparency and commitment to excellence in the microfinance

had increased access to commercial funding. In order to

industry; "self-regulation" in this sense is an excellent thing,

expand funding sources, there is a need to place more

but should not be seen as a substitute for building the

emphasis on information and transparency and there is a

changes in prudential regulations and legal structures needed

need to get around transaction costs for the commercial

funders of lending (relatively) small amounts to MFIs.

Shri D. C. Gupta, Secretary (Banking & Insurance) addressing the

gathering at the Sa-Dhan Annual Policy Forum on 4th September, 2002

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