There are a number of key principles of microfinance regulations. However, empirical research indicates that some key principles such as governance, and capital adequacy should be the main focus of the microfinance regulation and supervision. CGAP (2012) developed the Consensus guideline for the supervision and regulation of the microfinance institutions (MFIs). CGAP indicated that the MFIs should have a higher capital adequacy ratios as compared to the commercial banks since the microloans issued by the MFIs have insufficient security and the borrowers main motivation to repay the loans is the expectation that they would receive more loans. The MFIs are at a higher risk of loan delinquency contagion that can lead to a significant increase in the de-capitalization. Berger agreed with the above view by stating that MFIs need to have minimum capital adequacy as a means of helping the organizations to overcome the volatilities. The researcher thus concurs that capital adequacy should be a key principle in the regulation and supervision of the MFIs due to the volatilities associated with low collateral quality in the MFI loans, and increased risk of loan repayment delinquency. However, the principle should only apply to the MFIs that offer uncollateralized loans or in the cases where the security is not adequate to effectively cover the loan.
At a glance
- Examines a cited study using financial data from 245 microfinance institutions
- Discusses a cited study using MIX data from 99 countries
- 20 sources in the bibliography
Table of Contents
1. Introduction
2. What are the key principles of microfinance regulation and supervision?
3. When is microfinance regulation and supervision needed?
4. Conclusion
Aim and Topics
This work examines the principles of microfinance regulation and supervision and asks when such oversight is needed. It considers how regulatory choices relate to the protection of depositors and consumers, financial access, institutional sustainability and supervisory capacity.
- Capital adequacy, governance, currency and liquidity risks
- Loan documentation requirements
- Timing and conditions for new regulatory frameworks
- Prudential and non-prudential supervision
- Consumer protection, lending permissions and financial crime prevention
Excerpt from the Book
Timing and state of industry
By considering the timing and the state of the given industry, a clear picture of the new regulatory window for the deposit taking microfinance institutions can be determined. Many countries are in the process or have already created new window for the regulation of deposit taking MFIs. For the countries that are considering new regulatory window, the considerations should be how and whether the existing regulations in the financial sector hinder the MFIs from providing financial services to the poor or hinder the MFIs from raising deposits to allow for the expansion of their services. In the event that the policy makers determine that the regulation that exists does not hinder the MFIs, then a new regulatory window is not needed as a means of improving access (CGAP, 2012, p. 19). When it is determined that access to the services by the poor or the ability of the MFIs to raise funds is not hampered by the existing regulations, then new regulatory window will not be needed. However, even when it is determined that the existing regulations in the country can lead to the inhibition of the development of the deposit taking MFIs that serve the poor, regulations may still not be needed as alternatives can be explored. Such alternatives include provision of exemption or amendments to the current regulation rather than focusing on the development of new window. The development of a new regulatory window is a complex process that can lead to significant challenges in the provision of access or even the expansion of the financial services.
The new regulatory window can also be used to attract new capital and investment in the sector. The policy makers need to consider the takers for instance start-up operations that may be interested. Such takers can include those who offer technical expertise as well as those with foreign investments that can be pumped into the economy. The actors can also be local start-ups that are interested. However, when the consideration is for the local actors, factors such as the demonstrated profitability, experience in collecting and making micro loans, the level of entrepreneurship of the private sector also need to be considered. The consideration of the factors above are critical as many countries have shown. Several countries that have developed sound regulatory windows for the MFIs have achieved little success and response. The state of the industry is thus important as countries that have developed new windows in a micro lending industry that is strong have achieved greater success (CGAP, 2012, p. 20). It can thus be stated that by relying solely on a new supervisory window, the country cannot be able to achieve a significant emergence of new providers.
Chapter Summaries
1. Introduction: Introduces microfinance and its clients, then identifies the two questions guiding the work: which regulatory principles matter and when supervision is needed.
2. What are the key principles of microfinance regulation and supervision?: Discusses capital adequacy, governance, foreign exchange and liquidity risk, and loan documentation in relation to regulatory guidance and empirical studies.
3. When is microfinance regulation and supervision needed?: Examines the timing of regulatory intervention and distinguishes prudential from non-prudential oversight. It considers capital, funding, market entry, consumer protection and financial crime.
4. Conclusion: Brings together the discussion of regulatory principles and circumstances for intervention, including trade-offs involving access, profitability and sustainability.
Keywords
microfinance, microfinance institutions, financial regulation, supervision, capital adequacy, corporate governance, liquidity risk, foreign exchange risk, prudential regulation, consumer protection, financial inclusion, financial crime
Frequently Asked Questions
What is this work about?
It examines how microfinance institutions are regulated and supervised and when regulatory intervention may be needed.
What are the central topics?
The discussion covers capital adequacy, governance, financial risks, loan documentation, consumer protection and different forms of oversight.
What questions guide the work?
It asks what the key principles of microfinance regulation and supervision are and when regulation and supervision are needed.
What research method is used?
The work discusses regulatory guidance alongside published empirical studies, using their evidence to examine regulatory principles and choices.
What does the main discussion cover?
It first examines regulatory principles and then considers the circumstances in which prudential and non-prudential measures may be appropriate.
Which keywords characterize the work?
Key terms include microfinance, prudential regulation, capital adequacy, governance, financial inclusion and consumer protection.
How does the work distinguish prudential and non-prudential regulation?
It describes prudential regulation as oversight of institutional financial soundness, while non-prudential regulation addresses business conduct and related public-policy concerns.
What does the work consider before introducing a new regulatory framework?
It considers existing barriers to financial access and deposit-taking, the state of the industry, institutional capabilities and supervisory capacity.
How are consumer protection and financial crime addressed?
The work discusses lending transparency, abusive collection practices and interest rates, as well as fraud, money laundering and terrorism financing.
- Quote paper
- International Business Management David Onditi (Author), 2019, MFI regulation and supervision, Munich, GRIN Verlag, https://www.grin.com/document/477467
