The Ultimate Balancing Act: Investor Confidence and Regulatory Considerations for Microfinance

This paper explores the legal and regulatory framework for MFI investment transactions.It discusses impact of regulatory practices on investor confidence in the transition to private capital. The paper draws upon field visits to Uganda, Peru and the Philippines.

Facilitating private sector investment in microfinance is a challenge for regulators. At some point along the regulatory spectrum, regulators can achieve a balance where they promote sound practices that also build investor confidence. The paper describes environments characterized by light regulatory oversight, with unclear legal status, low level of monitoring and poor protection of minority investor rights, and heavy regulatory oversight, where MFIs face restrictions due to legal status or type of capital, limits on loan size or term, interest rates caps, restrictions on ownership, capital reserve requirements and tax burdens.The paper states that as external factors evolve, regulators and stakeholders must continually re-evaluate the balance required to promote investor confidence. Lessons include:

• Transparent regulation of financial institutions provides security for institutions and investors;
• Government attitude towards microfinance and investment is very important;
• Clear communication about requirements is helpful for MFIs and potential investors.