Microfinance Regulation Issues and Solutions

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Microfinance Regulation Issues and Solutions

• Sanabel
• 5th Annual Meeting of the Arab Microfinance
  Network
• Tunis, 6-7 May, 2008
• Rainer Hartel
• KfW, Senior Financial Sector Specialist
• Financial Sector and Private Sector Development

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Why Prudential regulation of the financial
sector ?

• Depositors and small investors have an interest
  in the soundness of the FI, where they invest
  their money
• Financial system is a public good that needs to
  be protected
• Regulation promotes good standards in the
  financial services industry
• Good Standards and disclosure promote trust in
  the public

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Financial Sector Regulation Areas and
Instruments

• Macroeconomic Management
• Allocative Controls and Incentives (Problematic)
• Financial Structure and Service Controls
• Prudential Regulations
• Capital Market Regulation
• Consumer Protection

4
Is Regulation Important for Microfinance?

• Perhaps less critical, where
• competent institutional investors and lenders are
  sole fund providers
• business is so small that no system risks are
  involved
• Business is among a small group of persons
• Issue absence of regulation undermines business
  growth and sustainability
• Regulation of Microfinance is a must, once
• It is considered important for economic
  development
• Many small depositors and small investors fund
  MFIs and their viability becomes
  a public interest

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Is Regulation of Interest for FIs who engage in
microfinance?

• Provides perspective for business to grow
• Provide full banking services to the poor
  diversify product range
• Mobilize low cost deposits
• Reduce Dependency from Agency and Government
  funding
• Reduce foreign exchange risk exposure
• Promotes Transparency and Good Governance
• Professional standard
• Accountability and audit
• Trust in the Public

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Possible Obstacles of Prudential Regulation for
Microfinance

• Interest (markup) rate caps undermine profitable
  and sustainable business with the poor
• High Minimum Capital Requirement low level of
  business
• Documentation for licensing of institutions and
  products
• Geographical restrictions may undermine
  appropriate risk diversification
• High reporting requirements
• Higher Level of Capital Adequacy compared with
  banks
• High Provisioning Requirements compared with
  banks
• Cumbersome Supervision

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Possible Solutions Minimum Capital Requirements

• Allow other institutional types beside banks
• Bolivia minimum capital for a Fondo Financiero
  Privado is one third compared to a bank
• Pakistan minimum capital for MFI at 8 compared
  to bank
• Different capitalization with regional license
  (Pakistan)
• Countrywide 500m Rupees (8m) min cap
• Province 250m Rupees (4m) min cap
• District 100m Rupees (1.6m) min cap
• Sequenced licensing (SC Cooperatives in Bolivia)
• Cat A start-up , deposits and loans,
  geographically limited, cap requirement increases
  with business
• Cat D full banking license

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Summary Prudential Regulation is beneficial for
financing the poor

• Well prepared prudential regulation is essential
  to stimulate microfinance market
• High minimum capital requirements can be
  addressed
• Higher Capital adequacy rates are prudent, not an
  obstacle
• Stringent loan classification provisioning is
  prudent, not an obstacle
• Prudential regulation provides incentives for
  sound microfinance basis for growth and
  sustainability
• Directive interest rate credit allocation
  policies undermine
• Profitable and sustainable microfinance
• Access of the poor to microfinance
• Product innovation

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Thank you for your attention!

• Contact
• Rainer Hartel
• KfW Entwicklungsbank
• Senior Financial Sector Specialist
• Financial and Private Sector Development
• 49-69-7431-2606
• Rainer.Hartel_at_kfw.de
• Arlina Elmiger
• KfW Entwicklungsbank
• Division Chief Financial Sector and Social
  Infrastructure
• North Africa and Middle East
• 49-69-7431-2908
• Arlina.Elmiger_at_kfw.de