Robert Peck Christen
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.
This article describes the experience of the successful Bangladeshi microcredit institution, ASA, in introducing savings accounts. Aiming to increase its access to capital, and to provide a greater range of financial products to its clients, from 1997 ASA launched open-access savings accounts, a contractual savings accounts and a term deposit account. ASA soon found that its overall savings balances increased, but no more than would have been expected if only its original compulsory savings account had remained. Although deposits increased rapidly, so did withdrawals, leaving ASA without the expected additional capital, and with the additional costs of extra transactions. Capital could be mobilized more cheaply elsewhere. In spite of the advantages to clients (particularly women) of being able to save small amounts secretly, ASA decided in the interests of institutional sustainability to drop the new accounts. This article goes on to compare a situation where savings products have taken off: BRI, Indonesia. It is suggested that most of ASA's clients have little to spare once they have re-paid their loans to make any additional savings. The near saturation of the market for microcredit in Bangladesh means that many poor people are becoming over-indebted, and this is likely to mean higher levels of defaults for all MFIs in future.