Microfinance Regulation Curtail Profitability and Outreach?
This paper examines implications of regulation and supervision compliance for MFI profitability and outreach to small-scale borrowers and women. It draws on a database that combines financial data on 245 of the world's largest MFIs with newly-constructed data on their prudential supervision. There are multiple reasons for MFIs bearing higher costs for regulation and supervision. Smaller banks face higher average costs than larger banks in complying with regulations on account of scale. Compliance involves managerial and legal skills, which are typically in short supply at MFIs and are costly to acquire. Interest rates necessary to cover all costs are high for MFI loans. The benefits of supervision include better protection of depositors' funds and stability for the sector. Whether these benefits outweigh the resulting reduction in outreach remains an open question. Study results indicate that:
- Supervision is associated with substantially larger average loan sizes and less lending to women;
- Profit-oriented MFIs absorb supervision costs by curtailing outreach to market segments that tend to be more costly per dollar lent;
- Onsite supervision is positively associated with average loan size and negatively associated with share of lending to women.