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What is the role of the financial regulator in supporting the development of microfinance? FAQ

Guest post by: Microfinance Gateway

Article Overview: Many feel that the most important role of a financial regulator in supporting the development of microfinance is to create an alternative institutional type that allows sound financial NGOs, credit unions, and other community-based intermediaries to obtain a license to offer deposit services to the general public and obtain funds through apex organizations.

What is the role of the financial regulator in supporting the development of microfinance? FAQ

Many feel that the most important role of a financial regulator in supporting the development of microfinance is to create an alternative institutional type that allows sound financial NGOs, credit unions, and other community-based intermediaries to obtain a license to offer deposit services to the general public and obtain funds through apex organizations. In a few countries, this may be an appropriate strategy. In most countries, however, the general level of development of the microfinance industry does not yet warrant the licensing of a separate class of financial institutions to serve the poor. And, in most countries, budgetary restrictions faced by bank regulators make it very unlikely that they will be able to supervise a whole host of small institutions; these institutions' total assets may make up a tiny percent of the total financial system, but the cost of adequate supervision could eat up between 25 and 50 % of the total budget of the agency.

Rather, regulators can work with the nascent microfinance industries of most countries on issues such as modifying usury limits as stated in the commercial code to allow appropriate levels of interest, generating credit information clearinghouses to share information on defaulting borrowers to limit their ability to go from one MFI to another, working with civil authorities to ensure that private loan contracts can be recognized by courts in those transition economies that lack even basic legislative infrastructure, and reporting requirements that will prepare MFIs to eventually become regulated.

Regulators can also examine the laws, executive decrees, and internal regulations that limit the ability of traditional banking institutions to do microfinance. These regulations include limits on the percent of a loan portfolio that can be lent on an unsecured basis, limits on group guarantee mechanisms, reporting requirements, limits on branch office operations (scheduling and security), and requirements for the contents of loan files. Not least, banking regulators may need to look at the way in which they would evaluate microloan portfolios within large banks.

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Article Tags: bank regulators, banking institutions, development, development, financial institutions, financial regulator, financial system, microfinance, microfinance, microfinance industries, microfinance industry



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