Microfinance Legal-Regulatory Environments: An Assessment Tool for Policy and Programming Decisions Patrick Meagher IRIS

1. Microfinance Legal-Regulatory Environments: An Assessment Tool for Policy and Programming Decisions Patrick Meagher IRIS Center, University of Maryland

2. Why a tool? Structure and content of the tool Using the tool: Factor analysis Scenarios and case studies Policy/program development Examples Discussion Overview

3. The main question: How to help policymakers and aid donor agencies identify priorities, lessons, and cost-effective solutions that correspond to their specific situations? Why this is important  Why a Tool?

4. Recognized need for effective regulation and supervision that: Does not overburden regulator Provides modicum of legal recognition to MFIs eager to access formal funding sources. Problem: extent, nature and reach of optimal public oversight depends on many factors in the economy, the financial services market, and the institutional environment Why a Tool?

5. Environment for microfinance is shaped by a range of institutional factors: Governance quality: policymaking, red tape, efficiency, corruption Financial, private sector, revenue policies Commercial law and enforcement mechanisms Policymakers, donors, stakeholders need to: Sharpen diagnostic of market conditions and focus on key institutional constraints Move beyond traditional responses: free money, microfinance window Why a Tool?

6. Policymakers and aid donors are increasingly asked to provide assistance to the development of policy frameworks. These requests (often by MFIs) may be self-interested or ill-informed. They need to consider all relevant aspects of the market environment when designing microfinance programs and policies -- BUT: They often lack instruments to determine whether the situation warrants government intervention, and how to implement it. Time and resources are limited. Inappropriate institutions, policies, and programs have a high cost. Why a Tool?

7. Growing body of resources: CGAP Consensus Guidelines, WBI Microfinance Regulation Training Toolkit, CGAP/IRIS Resource Center on Regulation and Supervision on Microfinance Gateway (http://www.cgap.org/regulation) The assessment tool builds on these sources of information to facilitate the design of policies and programs that fit specific situations Why a Tool?

8. Evaluate key factors in the microfinance legal-regulatory environment Factor analysis leads to policy/program scenarios and decision-points Real case-studies show lessons learned and benefit/cost of different choices at decision-points The composite “picture” shows how policy/ program choices fit together, aids prioritizing & sequencing Structure of Tool

9. Economic and MF market conditions Governance institutions Business/investment policy climate Financial services regulation Regulatory capacity Transformation options Key factors

10. Economic and Market Conditions Is low access to finance a binding constraint to SMMEs and low-income households? NO

11. Economic and Market Conditions Is low access to finance a binding constraint to SMMEs and low-income households? YES

12. Key concerns: Rule of law, property rights, contract enforcement Integrity of financial system, regulatory capture, corruption, policy distortion Effectiveness of governance determines policy/program design: Impact: weak gov. may impede, distort, or undermine reforms; strong gov. may make reforms unnecessary Sequence: key concerns must be addressed before/along with regulation Focus: in adverse setting, try non-state standards, oversight, enforcement Governance Institutions

13. Key concerns: Investment, commercial, tax laws Organizational form, registration, governance, capital requirements Trust and efficiency in transactions, dispute resolution Politics: biases against enterprise, banking, foreigners, interest, profit? Bureaucratic empire-building? Impact on MF policy choice, impact: Impact: reduced if setting is adverse – e.g. corporate or tax rules may make new MFIs unprofitable Sequence: address business climate before/along with financial regulation. Focus on the most cost-effective reform. Caveat: financial reform may be distorted by political biases Business/investment policy climate

14. FS regulation facilitates microfinance: Clear rules, appropriate incentives and treatment of risks, no regulatory arbitrage Focus: MFI capacity, transformation, other FSR is neutral or ambiguous: Legal effect of silence/vagueness: Permissive: use existing licenses for now Prohibitive: new license (“window”) OR amendment to allow/facilitate the activity within existing system FSR creates obstacles Financial Services Regulation

15. Financial Services Regulation

16. Key question: Sufficient capacity to implement proposed regulations? Key concerns: Public sector & corporate governance Quality and incentives of officials Skill base: accounting, audit, enforcement Match between responsibility & resources Response: match reforms to capacity Do not overextend regulators Develop basic systems and skills, secure necessary authority Regulatory Capacity

17. Key questions: How important are NGOs as a segment of existing or potential MFIs? Is the transformation procedure clearly defined? How difficult, costly? Reponses: NGOs important but transformation process unclear/costly  define, streamline process Otherwise: focus on new MFIs, other Transformation Options

18. South Africa: Situation: Banks well-run and supervised, but limited reach. Few formal, effective NBFIs. Diagnosis: Weaknesses in economic conditions, commercial framework gradually being addressed Key constraint: restrictive bank licensing & usury laws Response: Phase 1: liberalize microlending; set conditions; delegate licensing, market integrity & consumer protection to “hybrid” regulator Phase 2: address bank incentives, reform FS tiers, etc. Problem: chronic economic & commercial environment problems, FS concentration & lack of competition, populist politics Case study analysis: example

19. Composite ‘picture’

20. The tool is to be used for participatory development of policies & programs Can we apply it to Brazil? If so: Break into 6 groups Each group analyzes one factor Report back: analysis of factors, composite analysis, discuss/develop responses Policy/program development

21. Why a tool? Structure and content of the tool Using the tool: Factor analysis Scenarios and case studies Policy/program development Examples Recap

22. Do you think this tool can be useful to policymakers? To international donor agencies? Others? Is it relevant to your work? Where is it appropriate to use it? Brazil? Elsewhere? How can it be improved? What changes would you suggest? Questions

23. Thank You