(IMF Working Paper, Prepared by Anupam Basu, Rodolphe Blavy, and Murat Yulek1, September 2004)
Overall, the rationale for microfinance regulation is to create a healthy environment for microfinance activities while not stifling the growth of the sector by imposing undue requirements. The experiences of the four countries reviewed here suggest that the frameworks for licensing, regulating and prudential supervision need to be well adapted and flexibility designed to reflect the specific characteristics and the stage of evolution of the microfinance sector in a given country. The peculiarities of the microfinance sector necessitate either a dedicated law for the sector, or that the peculiarities be addressed adequately under other legislation that can be applied to regulate the sector. For example, in Benin there is a dedicated microfinance law, and in Guinea such a law is currently being finalized. On the other hand, in Ghana and Tanzania, the microfinance sector is regulated under commercial banking laws, and separate laws for cooperatives and non-bank financial institutions. Box 5 reviews regulation and supervision practices in all four surveyed countries.
Given differences in types of formal microfinance institutions, particularly when there are separate deposit-collecting institutions and credit-only institutions, adaptive and flexible microfinance regulation has proven to be effective. In the case of Benin, the microfinance law provides the framework for regulating deposit-collecting institutions while the creditonly institutions are regulated mostly through individually signed framework agreements with the Ministry of Finance. In Guinea, the prudential regulations vary with the type of the institution, classified into three categories: MFIs that collect deposits and lend only to members, those that collect deposits and lend to non-members, and those that undertake mainly donor financed lending operations. In Ghana and Tanzania, three-tiered systems of regulation and supervision have emerged, where the most formal institutions are regulated as banks, and the semi-formal institutions as nonbank financial institutions, while the informal institutions remain unregulated. Box 5 provides more details on laws and regulations in the four countries selected in this study.
Size and linkages with other microfinance institutions or commercial banks which may increase systemic risks is a key consideration in the design of prudential legislation, given the wide variety of microfinance institutions. At the higher end of the range of microfinance institutions, there are large deposit collecting institutions with linkages to commercial banks, and at the lower end, there are very small institutions with characteristics similar to informal sector activities. Due to the high unit cost of supervising and monitoring microfinance institutions and the limited supervisory resources, there is a clear need to prioritize the tasks at hand, with the larger institutions and/or more risk-prone MFIs receiving greater attention from regulators and supervisors. The current practice varies widely although this principle is commonly applied. In Benin, the prudential aspects of the microfinance regulation covers all major microfinance institutions, although the prudential rules are less demanding than those on the commercial banks. In Ghana, out of the two main categories of microfinance institutions, rural credit banks are subject to prudential rules under the commercial banking law while saving and credit cooperatives are subject to those under the non-bank financial institutions law.
The stages through which microfinance institutions evolve during their life cycles, which extend from informal initiatives (such as susus in Tanzania or “banquiers ambulants” in Benin) to mature and formalized microfinance institutions are also important in the design of regulatory frameworks. Regulation should provide clear guidelines for “semi-formalizing”
(becoming registered but not subject to supervision) the relatively larger informal institutions, and for fully formalizing semiformal institutions (becoming registered and subject to supervision) after satisfying certain criteria (as in the case of Benin). The authorities in Tanzania and Ghana have developed a different two-pronged approach. The first approach is to permit the nonregulated institutions to become licensed and prudentially regulated. To this end, the Tanzanian authorities have adopted a tiered structure of entry requirements, which require lower amounts of minimum capitalization for nonbank financial institutions than for banks. The second approach is to encourage the already licensed and regulated banks to develop and expand their microfinance operations.
Finally, in some countries, the microfinance institutions have found it useful to set up an apex or umbrella institution for the microfinance sector to coordinate and supervise their activities. Thus, in Benin, the Federation of Rural Savings and Loan Cooperatives (Fédération des Caisses d’Epargne et du Crédit Agricole Mutuel – FECECAM) was established in 1993, as an umbrella organization for SLCs. The FECECAM organization currently includes four levels. At the village level, the Village Saving and Credit Cooperatives are associated with the cooperatives at the town/city level. These are called Local Saving and Credit Cooperatives, with each covering between 20 to 30 villages, and organized under regional level unions, themselves members of the FECECAM. FECECAM includes also a technical secretariat in charge of overseeing implementation of the federation’s policies, and providing technical support to the SLC regional unions.
FECECAM coordinates and supervises the activities of the member SLCs, provides refinancing and a placement widow for excess liquidity, allows “deficit” SLCs—which are mainly in the very remote areas—to survive through special credit lines and financial contributions, offers technical support and training and serves as a lobbying unit vis-à-vis the authorities.
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