Regulation and Supervision of Microfinance in Nicaragua

This paper discusses the benefits of the development of a sound legal framework for the development of the microfinance sector in Nicaragua. After introduction section, the paper is composed of four sections.

Section 2 presents an overview of the main elements included in the legal framework of the microfinance sector such as the legal base and objectives, subjects and implementation modes. It states the objectives of regulation to:

• Protect the financial system;
• Protect small depositors;
• Maintain competition.

Section 3 analyzes the costs and benefits of supervision, taking into account the differences between commercial banks and regulated microfinance institutions (MFIs).

Section 4 discusses the present context of the legal framework for the microfinance sector in Nicaragua. It discusses the proposed bill for microfinance and the microfinance regulating committee.

Section 5 discusses the conclusions of the analysis as follows:

• Not allowing MFIs to mobilize savings from the public puts them at a disadvantage;
• Supervision costs are heavy;
• MFIs do not receive legal protection.

The paper recommends the following measures to create an enabling environment for MFIs in Nicaragua in accordance with market principles:

• Elimination of the interest rate cap introduced by Law 374;
• Gradual authorization to raise savings from the public;
• Greater autonomy for MFIs and consolidation of the sector.