Microfinance Consensus Guidelines: Guiding Principles on Regulation and Supervision of Microfinance Institutions
Christen, R. P., Lyman, T. R. & Rosenberg, R.
Publication Date: Jul 2003
Published by: Consultative Group to Assist the Poor (CGAP)
Document Type: Paper
How to regulate microfinance?
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Captured here is broad consensus on many principles of good practice in regulation and supervision of microfinance. The guidelines summarizes these principles for government regulators and others engaged in moving microfinance into the formal financial sector.
The authors argue that in order to reach its full potential, the microfinance industry must eventually be able to enter the arena of licensed, prudentially supervised financial intermediation, and regulations must eventually be crafted that allow this development. There is an emerging international consensus about principles that ought to guide regulation and supervision of microfinance:
• Problems that do not require the government to oversee and judge the financial soundness of regulated institutions should not be dealt with through prudential regulation. Relevant forms of non-prudential (or “conduct of business”) regulation, including regulation under the commercial or criminal codes, tend to be easier to enforce and less costly than prudential regulation.
• Thus, prudential regulation should not be imposed on “lending-only” microfinance institutions (MFIs) that merely lend out their own capital, or whose only borrowing is from foreign commercial or non-commercial sources or from prudentially regulated local commercial banks.
• In some countries—mainly transition economies—legal changes are needed to make it clear that non-governmental organizations and other private bodies may conduct a lending-only business without having to be prudentially licensed and regulated
• Depending on practical costs and benefits, prudential regulation in some cases may not be necessary for MFIs that take cash collateral (compulsory savings) as part of a loan contract, but do not take other savings (especially if the MFI is not lending out these funds).
• Financial cooperatives—at least large ones—should be prudentially supervised by a specialized financial authority, rather than by an agency that is responsible for all cooperatives.
• Designers of new regulation for microfinance need to pay much more attention than usual to issues of likely effectiveness and cost of supervision. In issuing financial intermediation licenses, the government invites public reliance and implicitly promises effective measures to mitigate depositor risk. Before issuing licenses, a government needs to be clear about the nature of such promises and its practical ability to honor them.
• In particular, design of microfinance regulation should not proceed very far without realistically estimating supervision costs and identifying a sustainable mechanism to pay for them. Donors who encourage governments to take on supervision of new types of institution should be willing to help finance the start-up costs of such supervision.
• Minimum capital for MFIs needs to be set high enough so that the supervisory authority is not overwhelmed by more new institutions than it can supervise effectively.
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