Sa-Dhan Newsletter Volume 3 Issue 2

Microfinance Regulation

policies, regulations and support systems to encourage the

CONCLUSIONS

growth of a sound, responsive financial system that works

Emphasis needs to be given to introducing changes that

for the poor majority.

reflect the needs of microfinance operations--regardless of

whether these are conducted by a specialized microfinance

LIST OF REFERENCES

institution or form a small part of the overall portfolio of

a commercial bank or finance company.  The policy and

Conroy, John D.; McGuire, Paul B.; Thapa, Ganesh B.; Getting

regulatory framework for microfinance is to encourage entry

the Framework Right: Policy and Regulation for Microfinance

and expansion of microfinance services by a broad range of

in Asia; Foundation for Development Cooperation, 1998.

regulated financial institutions, Increasingly, policy makers

Conroy, John D.; Cornford, Robyn; The Role of Central Banks

and regulators are recognizing microloans as an important

in Microfinance in Asia and the Pacific: Country Studies;

and legitimate loan class, with its own features

Asian Development Bank, 2000.

Prudential regulation is needed for those specialized MFIs

Gallardo, Joselito, A Framework for Regulating Microfinance

that seek to mobilize savings from the public.  Banking

Institutions: The Experience in Ghana and the Philippines,

regulation need not apply to MFIs engaged exclusively in

The World Bank, Financial Sector Development Department,

microlending, those that mobilize mandatory savings from

October 2001.

borrowers as a collateral substitute or small community

based institution that mobilize small amounts of savings from

Jansson, Tor, Microfinance: From Village to Wall Street, IDB,

non-borrowing members.

Debate exists on whether

November 2001.

unregulated microfinance institutions should be able to

mobilize savings from borrowers.  Careful analysis is

Staschen, Stefan, Regulation and Supervision of Microfinance

required to weigh the risks to clients against the costs of

Institutions: State of Knowledge, GtZ, August 1999.

regulation

Van Greuning, Hennie; Gallardo, Joselito; Randhawa, Bikki;

A Framework for Regulating Microfinance Institutions; The

Increasingly, financial sector policy makers are recognizing

World Bank, February 1999.

the importance of microfinance, understanding its special

features, and working with local microfinance leaders to

WWB, "Country Scorecard on Financial Systems that Work

ensure that the needed changes are made in financial sector

for the Majority," 2000.

Visit to Microfinance Regulatory Council (MFRC), Johannesburg,

South Africa - D. Narendranath (PRADAN)

W

into entering the sector, and now intense efforts at educating

hat does microfinance mean in the context of South

both the lenders and borrowers about best practices.

Africa? What does regulation mean in the context of

microfinance here? Who does the regulation? How? These

Traditionally Microfinance in South Africa was subsumed

were some of the questions that I had when I walked into the

under the larger world of finance, the same legal and

swanky premises of the Microfinance Regulatory Council

regulatory frameworks applying to both. There was an Act (it

office, at Park Lane in Johannesburg. The following note

is still there), called the Usury Act which regulated all

seeks to answer these questions to the extent, that I was able

financing activities. The regulation was done by the South

to gather information from the discussions, that lasted for

African Reserve Bank (SARB) and the Usury Act deemed that

more than three hours with Mr Paxton Ramothata, the

there was to be no lending above the interest cap of 25% per

Complaints and Enforcement Manager, and a brief interaction

annum. This created a lot of skewedness in the market, in the

with Mr Gabriel Havel, the Chief Executive Officer. For me, it

words of Gabriel Havel, the CEO of MFRC, with no lender

was an educating experience to talk to them, who actually

wanting to make legal, small loans at that rate. The market

have no direct counter-parts here in India. At the same time

rates for small loans varied from 60% to 360%. Thus the

as I sat there I was also wondering about the direct replicability

access of above-board loans to the poor remained restricted.

of the South African model here, given the contextual

Either they had to resort to taking loans that were neither

differences, social, economical and political.

reported nor regulated, or had to pay a variety of additional

"The primary aim of the regulatory council has been identified

service charges, file charges, insurance charges and so on,

as the promotion of the money-lending industry so as to

to compensate for the reduced interest rates. It also happened

allow for sustainable growth in the industry and to serve

that in most of the cases the borrowers learnt about the

legitimate unserved credit needs." This is the preamble that

implications of these charges only when they started

greets you in the MFRC web-site (www.mfrc.co.za), in their

repayment.

reports and in all the documentation that MFRC has produced.

As instances of such unscrupulous practices increased, the

In the South African context that included a number of policy

SARB issued an exemption notice to the Usury Act, in June

interventions and creation of a regulatory structure with legal

1999, waiving interest caps of any sorts on loans below

powers to impose sanctions, enabling a lot of new players

R5000 (1 Rand = Rs 5.50). This created a flurry of lending

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