Regulation and supervision of microfinance institutions: state of knowledge

Publication Date: 1999
Published by: GTZ - Deutsche Gesellschaft für Technische Zusammenarbeit GmbH

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Review of current policy answers (and questions)

Compares the theoretical rationale for regulating financial institutions with current practice in microfinance

Argues that

• The most common method so far ( offering MFIs the same regulatory frame-work as for formal banks as the only option) has not proved effective
• regulation by means of a special law for MFIs is in danger of stifling institutional variety and innovation in microfinance
• self-regulation in its pure form, i.e. without direct or indirect statutory influence, suffers from a large enforcement problem
• a multi-tier system, with each tier controlled by the next higher one, can help cut costs and make use of information advantages
• MFIs must be regulated, if they start mobilizing deposits from the general public including non-members. Also member-based institutions should be regulated, if they exceed a certain size
• small MFIs in the informal sector must not be forced to submit to regulation, even if they mobilize local savings (e.g. RoSCAs, but not NGOs)
• regulation of credit-only institutions may be desirable to raise standards in the microfinance sector, but there is no imperative for government to take action
• the task of supervising MFIs can be delegated to an (possibly also private) institution
• due to their distinctive institutional features and business characteristics, the prudential ratios of MFIs differ from those of traditional commercial banks.
• controlling risk management procedure and institutional structures is more important than controlling ratios (risk management instead of ratio management).