Supervising and Regulating Microfinance in the Context of Financial Sector Liberalization: Lessons from Bolivia, Colombia and Mexico
This paper explores how the responses of regulators in various countries are linked to the overall process of financial sector reform and liberalization. The paper examines several major features of liberalization and their impact on MFIs, these include:
- Universal banking;
- Closure or reform of public banks;
- Interest rate restrictions;
- Eliminating directed credits;
- Microfinance initiatives.
The paper analyzes the regulation and supervision scenario in the countries of Bolivia, Colombia and Mexico. It identifies factors contributing to good microfinance regulation and supervision which highlight that:
- A successful system should be tailored to the needs of the microfinance industry in each specific country;
- Governments should engage in a consultative process to arrive at a well-designed system that provides the basis for growth and development of a healthy industry.
The paper discusses the creation of a supportive regulatory framework for microfinance and highlights the prerequisites in the financial sector and microfinance environment which include:
- Building political will;
- Emergence of a critical mass of financially viable MFIs;
- Financial sector reforms underpinning a strong microfinance regulatory framework.
Finally the paper suggests that the regulators need to keep the following points in mind while designing regulations for microfinance:
- Treating microfinance as a business rather than an institution;
- Creating policing mechanisms for small and medium-sized cooperatives;
- Allowing organizations not involved in deposit mobilization to operate without direct regulation and supervision by the banking authority.
