Regulation and Supervision of Microfinance

This brief outlines issues related to microfinance regulation. Microfinance needs to reach large numbers of people. It must, therefore, move into institutions that are licensed and supervised by a country’s financial authorities. Country authorities will need to adjust existing banking laws to accommodate licensed microfinance. Not all countries, however, need to address regulation in the near term. The following considerations should guide decisions about whether to regulate microfinance:

• Deposit-taking MFIs need prudential regulation to prevent them from losing small depositors’ money and damaging confidence in the financial system;
• Credit-only MFIs that fund themselves through donors or commercial loans do not need prudential regulation, but they may require relatively light non-prudential regulation;
• Effective prudential supervision would be too expensive for community-based, deposit-taking organizations that are very small or remote;
• Regulators have allowed very small, community-based, deposit taking intermediaries to operate without prudential regulation and supervision.

Finally, countries need to wait until they have a critical mass of MFIs before setting up a licensing regime for microfinance. Regulation has tended to follow rather than lead development of the industry in countries that have implemented microfinance regulation smoothly and effectively.