The Implications of the Evolving Microfinance Agenda for Regulatory and Supervisory Policy

Abstract

The growth in microfinance institutions (MFIs) has been accompanied by a widening of the range of financial services provided to the poor, to include voluntary savings facilities. This entails prudential risk to clients and poses the policy question of the most appropriate form of regulatory framework for MFIs. This article examines the implications for regulatory policy of the recent trend towards MFI provision of microfinancial services encompassing savings, credit and insurance, by evaluating what we know of the existing regulatory approaches, the main concerns with these approaches, and the merits of recent regulatory proposals for MFIs.Five years after the notable paper by Berenbach and Churchill (1997) on microfinance regulation and supervision, the appropriate level of government-supplied regulation in the industry remains unclear. Although subsequent studies have successfully identified the basic options available to regulators, namely, no regulation, self-regulation, existing banking regulation, and special regulations, the literature has yet to establish a clear set of core principles which national regulators can translate into specific performance benchmarks, guidelines, rules and regulations.This article contributes to the literature by advocating a regulatory and supervisory framework that reflects the evolving microfinance agenda. The article starts with a review of the current state of knowledge on the delivery of financial services to the poor and traces the recent trend towards the provision of microfinancial services encompassing savings, credit and insurance. It then considers the implications for regulatory policy by evaluating what is known of the existing regulatory approaches, the main concerns with these approaches and the merits of recent regulatory proposals designed to match the pace of innovation, diversity and development in the microfinance industry. It concludes with suggestions of areas to which future research might be usefully directed. The evolving microfinance agendaWhile there is a long-standing consensus that access to financial markets is important for poor people, an on-going debate exists on the most appropriate type of institution and method for delivering financial services to the poor. Matin et al. (2002) classify such institutions into three groups: formal, semi-formal and informal. Formal institutions are those that are subject to the banking laws of the country; they provide

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