Archive for: Regulation

After over a year’s worth of research and preparation, I’m excited to announce the launch of the new Financial Inclusion Regulation Center on CGAP’s website this week.

As the microfinance industry has evolved in recent years to encompass a number of different types of institutions offering a wide range of financial services to the poor, enabling regulatory environments have become increasingly important.

However, it is often difficult to find information on financial inclusion laws and regulations. In fact, until I began working on this project, I had not fully realized how difficult it can be to find any accurate and timely legal information in developing countries. I’ve come to appreciate the importance of the freedom of legal information, particularly when that information is available online, easily accessible, and reliable.

The Regulation Center includes detailed profiles of nearly 30 countries across the globe. These profiles provide an overview of the financial inclusion regulatory environment, and a selection of laws and regulations related to microfinance and banking, branchless banking, and consumer protection for each country. Each law or regulation is briefly summarized, and a copy of the legal text is provided. Links to government regulatory bodies and recommended reading related to financial inclusion are also included in the country profiles.

My hope is that the Regulation Center serves as a tool for the industry, and is shaped by the industry. The main value that this unique resource provides is in gathering in one place an extensive collection of legal texts and objective information on financial inclusion regulation and sharing this information across the globe to facilitate comparative analysis. The Regulation Center is meant to serve as an expanding repository that will only grow through industry contribution and input from those on the ground. Therefore, we highly encourage the use of links placed throughout the site that allow users to submit information on new regulatory developments related to financial inclusion.

Jennifer Chien

Jonathan Morduch, a guest blogger for the Microfinance Blog, is sharing his thoughts about regulating microfinance.

That is indeed the question when regulators so often find themselves playing catch up – trying to figure out if and how something that’s already happening should be supervised.

When it comes to prudential regulation – or safeguarding deposits – the stakes are particularly high. In microfinance, most MFIs aren’t big enough to threaten the health of the financial systems they’re part of if they run into trouble. However, if prudential regulation of microfinance is inadequate – or when it fails – poor customers stand to lose their savings entirely. And the stakes really don’t get much higher than that.

As with other forms of regulation, the basic dilemma is that regulators of microfinance want to ensure the health of financial institutions without creating undue burdens on the institutions, or on themselves. Striking the balance is tricky when experience with regulating financial access and evidence to support hypothetical costs and benefits are so thin.

In his third Policy Framing Note for the Financial Access Initiative, David Porteous sheds some light on why these challenges are so, well, challenging, and describes early experiences with prudential regulation of microfinance in India, Nigeria, the Philippines and Nigeria.

According to the paper, there are two basic ways to integrate microfinance into regulatory frameworks. One is to amend existing regulations; the other is to write new laws that open special “windows” for microfinance. The window approach is appealing, since microfinance is a rather unique animal in the world of financial services. But, as CGAP points out in its 2003 “good practice” guidelines, for the sake of consistency and efficiency, financial regulation really works best when it focuses on activities or functions, not on types of institutions.

In the end, there’s no such thing as off-the-rack regulatory policy, and amending existing regulation to incorporate microfinance just isn’t always doable. Some activities, like mobile banking, are so distinct they simply demand their own sets of rules. What’s more, regulation should always be considered on a country-by-country basis. But paying close attention to early experiences with prudential regulation of microfinance will certainly help policymakers start to make smart choices.

In a recent post David Roodman questions the role of funders and particularly lenders in the microcredit delinquency crises in Bosnia, Morocco, Pakistan, and Nicaragua. The exuberant growth seen in these four countries was indeed fuelled by lenders eager to place capital.  A Bosnian MFI manager was blunt: “Some funders started lending to second and even third tier MFIs.  They just dumped the money; they did not look at the market at all.” Why did these lenders take such risks?

Microfinance investors, asset managers, and maybe rating agencies have tended to underestimate MFI risk for a long time.  But maybe regulatory issues form part of the problem?

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