Regulating microfinance - the options

Robert Peck Christen | Richard Rosenberg

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.