Financing Microfinance: Do Regulatory Environments Matter?

A new paper commissioned by USAID surveys the legal and regulatory considerations affecting investor confidence in financing microfinance. Check out “The Ultimate Balancing Act: Investor Confidence and Regulatory Considerations for Microfinance.”

This paper explores the legal and regulatory framework for MFI investment transactions and its impact on investor confidence in the transition to private capital. Drawing upon recent field visits to Uganda, Peru and the Philippines, the paper attempts to address the questions: What regulatory practices promote investor confidence and provide the impetus to increase private investment in microfinance? At what point do legal and regulatory obstacles become too costly to bear and deter commercial investment in microfinance?

Written by Kate Druschel at the IRIS Center at the University of Maryland, the paper discusses the consequences of two extremes: light and heavy regulatory oversight. Light regulatory oversight could involve a lack of or unclear legal status, insufficient oversight of the institutions, an inability to pledge intangible assets as collateral for debt finance, and a lack of protection of minority investor rights. On the heavy regulatory oversight end, however, are found such practices as restrictions to the types of capital allowed, limits on loan size or term, interest rate caps, capital and reserve requirements, and ownership restrictions. In addition, the cost of regulatory compliance and tax burdens are discussed in terms of their impact on financing strategies for MFIs.

Finally, Ms. Druschel discusses the national process required to balance the interests of regulators with the interests of investors. Engaging in this process would result in a sound enabling environment for increased private capital investment in microfinance.