Towards a market-friendly environment for microfinance - legal and regulatory reform in Zambia
Microfinance institutions (MFIs) must be able to integrate into financial markets and mobilize private capital at some point in their organizational lives, and to make this possible an appropriate and flexible legislative environment is required. Currently, most microfinance providers across the world are able to operate due to selective non-application of the rules, or they function inefficiently while adhering to existing laws. Thus regulatory reform, far from being restrictive, enhances MFI expansion and creates a more predictable operating environment for investors and clients. Zambians recently passed new legislation for this purpose. This article briefly reviews several categories of legislation, discussing which laws support MFI growth, which ones create obstacles to it, and what kinds of changes would be useful to liberalize the sector. Next, the reforms suggested by the legislative overview are outlined: (i) legislative changes needed immediately to legalize microfinance and to enhance responsible growth; (ii) the outline of a possible tiered system to provide all levels of microfinance operation with appropriate regulation; and (iii) complementary legal/regulatory changes needed in the long term. The process of reform in Zambia is also described, demonstrating that such reform efforts require open give-and-take between stakeholders and government, a core group of reform champions to drive the process ahead, willingness by government and the regulating agency to integrate feedback from the public into a reform package, and framing of legislation in ways that parliamentarians can understand and accept.