Regulation and Supervision of Microfinance Institutions in Kenya

This paper discusses the various aspects of regulation and supervision of MFIs in Kenya including:

• The Government-proposed Deposit Taking Microfinance Bill, which aims to ensure that licensed MFIs contribute to poverty alleviation and comply with the requirements of financial sector safety;
• The need for implementing microfinance legislation that clearly defines roles for the Government, the Central Bank of Kenya and microfinance practitioners.

The paper states that regulation and supervision is expected to:

• Improve quality;
• Broaden the funding base for MFIs eligible to mobilize deposits;
• Initiate the process of integrating MFIs into the formal financial system;
• Enable authorities to define procedures for their operations;
• Create an environment for fair competition and efficiency.

The paper states that the proposed bill will specify three different tiers of MFIs and the regulatory and supervisory authorities:

• First tier: formally constituted deposit-taking MFIs will be regulated by the Central Bank of Kenya;
• Second tier: formally constituted credit-only MFIs will be regulated and supervised by the envisaged microfinance unit in the Ministry of Finance;
• Third tier: informally constituted MFIs will not be supervised by an external agency of the government. The paper advises associated donors, commercial banks and governmental agencies to make informed decisions about them.

The paper concludes by discussing current developments regarding the proposed Microfinance Bill.