Policies, Regulations, Governance and Systems that Promote Sustainable Financial Services to the Poor and Poorest

This paper highlights the key features of policy and regulatory changes that will be needed to help ensure sound, responsive microfinance operations, as well as the key features in the available legal structures for those microfinance institutions (MFIs) that seek to become for-profit, regulated legal entities.

Beginning from the global consensus that microfinance should both work for the poor and be globally sustainable, the paper:

• Highlights the role of regulated and unregulated financial institutions in the provision of microfinance services;
• Recognizes that policies and support systems should encourage a range of institutional types to enter and expand microfinance services;
• Outlines the key roles of government policy makers;
• Emphasizes the importance of microfinance networks, and others, in building systems to monitor performance.

The paper outlines the features of a policy framework that supports the development of a responsive microfinance industry as:

• A pro-poor economic policy stance;
• Solid macro economic policies that avoid high inflation;
• Liberalization of interest rates;
• Elimination of market-distorting subsidies;
• Promotion of performance indicators and standards;
• Permission to mobilize deposits from the public;
• Fair tax treatment;
• Simple reporting requirements.

The paper concludes that the following are the key requirements for a sound policy framework for microfinance:

• Listening to the needs of poor clients;
• Recognizing that microfinance is a vital part of the financial system;
• Sharing performance standards, transparency and accountability;
• Having prudential regulations for those specialized MFIs that seek to mobilize savings from the public.