From Margin to Mainstream: The Regulation and Supervision of Microfinance

What lessons have been learnt from the experiences of regulating MFIs?

The first development stage of microfinance has witnessed the achievement of scale and sustainability by the best performing NGOs. The second stage, which this monograph focuses upon, is when regulated institutions begin to access capital from local and international financial markets to lend to the microenterprise sector. The role of regulatory agencies and microfinance managers at this point is crucial. Regulators must maintain the goals of prudential regulation and supervision whilst enabling microfinance to serve the poor. Managers must adapt to the discipline of a supervisory system whilst also accepting costs and changes in corporate culture as a result of regulation. 

Reviews the main issues relating to regulation and supervision of MFIs:

  • Provides an overview of the context in which microenterprise services are being delivered, with reference to recent financial sector reforms in Latin America;
  • Outlines basic characteristics of microfinance that differentiates it from traditional banking, as well as the application of basic principles of prudential regulation to microfinance;
  • Examines financial characteristics of microfinance by presenting earnings, asset quality, and capital adequacy of leading institutions. Provides suggestions on how Superintendencies can address the question of risk related to this type of lending;
  • Presents the case of BancoSolidario, S.A.(BancoSol) in Bolivia, the first private commercial bank in the world created to provide financial services to microenterprises, and explores its supervisory and regulatory dimensions;
  • Presents the experience of the Private Financial Funds (PFFs) in Bolivia, created two years after BancoSol to meet the need for a different type of regulated institution more suited to microenterprise lending;
  • Summarizes the regulation experiences of additional microfinance institutions: Accion Comunitaria del Peru (ACP) in Peru, Finansol in Colombia , Multi Credit Bank in Panama, and Caja de Ahorro y Prestamo Los Andes in Bolivia.

Provides clear conclusions and recommendations specific to policymakers, supervisory agencies, donors, commercial banks, and microfinance institutions involved in this process.