The regulation of microfinance is being discussed all over the world. The incentive for many MFIs is the legal right to accept deposits for onlending, and thereby to expand the scope of their programmes. Other actors may have different motivations that may not be beneficial to microfinance, such as the desire on the part of many governments to impose interest-rate ceilings. This article cautions against the 'rush to regulate'. It first outlines the practical problems faced by bank supervisors who are asked to take responsibility for MFIs, and points to the costs of supervising MFIs. The various options for regulation are discussed, and the recommendations include the following: Credit-only MFIs should generally not be subject to prudential regulation in which the government supervisory agency is expected to monitor the financial soundness of the licensed institution. Small community-based MFIs should not be prohibited from deposit taking just because they are too small or remote to be regulated effectively. The push to create special regulatory windows for MFIs may make sense in a few developing countries, but in most it is probably premature right now, running too far ahead of the organic development of the local microfinance industry. Self-regulation by MFI-controlled federations is highly unlikely to be effective.
In remote rural areas, usually the only form of viable microfinance is some form of community-managed loan fund (CMLF). Professionally managed MFIs usually provide more secure, well-managed services, but their higher running costs prevent them from operating in many rural areas where CMLFs can succeed. This article, drawing on a review of the performance of many CMLF projects established by donors and NGOs, finds that their success or failure is linked to the source of their funds, and also to the quality of external support they receive. It finds that most CMLFs that rely on external funding from the start fail. The article concludes with implications for development agencies that support CMLFs.