Approaches to Regulating Microfinance: A Comparative Analysis

1. United Nations Department of Economic and Social Affairs Panel Discussion on Regulation of Microfinance New York, 10 April 2007 Approaches to Regulating Microfinance: A Comparative Analysis Presentation by Joselito Gallardo Counsellot, Business Outreach Center Network, New York City

2. Contours of Microfinance Development • From microcredit to inclusive financial systems • Shift from narrowly-focused microcredit to broad range of financial services: loans and credits, savings products, microinsurance, inward remittances from overseas workers. • From credit-specialized NGOs and non-profits to a broader range of institutional providers of finance • Credit-only NGOs and microfinance institutions, credit unions and savings & credit cooperatives, specialized limited-service banks, non-bank finance institutions, commercial banks • Creation and application of strategic alliances between and among different institutional types

3. Contours of Microfinance Development (continued) • Rapid development and expansion of microfinance as an industry and integral part of the financial system has attracted: • Increased interest and attention of regulatory authorities and international development agencies. • Entry of international and private investors as stakeholders in registered / licensed / regulated microfinance institutions (regular commercial banks and specialized banking institutions with microfinance focus, non-bank financial institutions, some Apex-type organizations)

4. Basic Types of Approaches to Microfinance Regulation • Recognition of microfinance as a financial sector activity to be regulated or prudentially supervised. • Expansion of jurisdiction of banking and/or financial sector regulatory authorities to include microfinance institutions / activities (often, still no distinction between regulating institutions vs. activities)

5. Basic Types of Approaches to Microfinance Regulation (continued) • Specialized regulatory and reporting frameworks for microfinance institutions or activities • Certain types of microfinance institutions are still excluded from main regulatory regime, and are regulated by other agencies (e.g., credit unions, savings & credit cooperatives) • Promoting and inducing institutional transformation of NGOs and non-profit institutions to registered / licensed status • Regulation of microfinance industry to protect or insulate formal financial system

6. Observations on Country Experiences • Time period (8 years on average) to put in place and implement effective regulatory framework. • A long and costly process to elaborate rules, expand supervisory capacity, transform institutions, and sort out political conflicts. • Tension between maintaining soundness of financial system as a whole and of microfinance segment versus achieving outreach expansion and deepening.

7. Observations on Country Experiences (continued) • Need to preserve and cultivate existing forms and structures with potential to support sustainable growth. • In spite of instances of abuse and regulatory arbitrage by founders of microfinance institutions, country experiences underscore need for balance and realism in entry requirements and standards. • Complexity embedded in financial system’s components, and insulation of reform process from market forces and realities obstructs effective operation of sustainable regulatory frameworks.

8. Observations on Country Experiences (continued) • Governments still tempted to use policy mandates and subsidized credit / wholesale funds to force expansion of the microfinance industry and deepen its outreach. • The all important message still remains: address market needs and fix market failures – this is a main characteristic of the trade-off between financial deepening vs. expansion of financial services