The Impact of Regulatory Policies on Provision of Financial Services to the Poor

This paper assesses the strengths and weaknesses of the existing legal framework for microfinance and how this enhances or hinders access to the poor. It looks at issues internationally and focuses particularly on the regulation in Pakistan. The paper:

• Identifies legal drivers that are necessary for the growth of the sector;
• Assesses the extent to which the current framework provides an environment for growth;
• Suggests additional measures that could support the sector.

The paper illustrates, with examples from round the world, that it is important for microfinance to operate in a regulative framework that is conducive to growth. It states that:

• Microfinance has followed a distinct institutional pattern and a common growth trajectory from one country to the next.
• The regulation in Pakistan is poised to support the following potential sources of growth:
  • The transformation of NGOs into banks;
  • The establishment of microfinance banks;
  • The downscaling of commercial banks to offer microfinance services.
• The “Microfinance Ordinance 2001” has encouraged the entry of private sector players into the microfinance sector in Pakistan and is also poverty-focused.
• Regulation has simplified licensing procedures, supervisory regulations and disclosure standards.
• International experience demonstrates that:
  • It is important for regulatory requirements to suit the specific needs of microfinance rather than stipulating coverage for the poor,
  • When regulatory authorities create new institutional categories to accommodate microfinance, they must set minimum capital requirements.

The paper concludes with specific recommendations regarding microfinance regulation in Pakistan.