Doing Well By Doing Good: The Future Of Microfinance Via Regulated Financial Institutions

Is there a need to regulate the microfinance market?
Download 11 pages

This paper highlights the need and advantages of a regulated microfinance market. The author argues that banks and other regulated financial institutions bring many competitive advantages to microfinance as they are experienced in:

  • Managing financial risk;
  • Raising their own funds via savings mobilization, capital market borrowing, or equity contributions;
  • Establishing extensive retail distribution networks, such as branch offices and electronic banking outlets;
  • Offering a wide range of financial services, including loan products, savings instruments, and funds transfers;
  • Creating sound ownership and governance structures, together with management systems that maximize profitability while maintaining compliance with prudential norms and regulations.

The paper asserts that the main reason for an NGO to become a regulated financial institution is to achieve long-term sustainability. This can be achieved through:

  • Growth in the scale and scope of operations, which increases the magnitude of development impact while reducing operational costs and diversifying operational risks;
  • Access to funds, which decreases funding dependency and uncertainty while increasing capital leverage and the scope for business expansion;
  • Improved governance and operations;
  • Enhanced customer service, in the form of a wider range of products and delivery systems.

To conclude, the author cautions that the landscape of commercial banking is littered with failed attempts to undertake microfinance profitably. He suggests that if structured effectively, micro-banking institutions are financial intermediaries for low-income citizens delivering financial services to previously un-banked entrepreneurs and communities.

About this Publication

By Rosengard, J. K.