United Nations Department of Economic and Social Affairs Panel Discussion on Regulation of Microfinance New York, 10 April 2007 Approaches to Regulating Microfinance: A Comparative Analysis Presentation by Joselito Gallardo Counsellot, Business Outreach Center Network, New York City

Contours of Microfinance Development 1. From microcredit to inclusive financial systems  Shift from narrowly-focused microcredit to broad range of financial services: loans and credits, savings products, microinsurance, inward remittances from overseas workers. 2. From credit-specialized NGOs and non-profits to a broader range of institutional providers of finance  Credit-only NGOs and microfinance institutions, credit unions and savings & credit cooperatives, specialized limited-service banks, non-bank finance institutions, commercial banks 3. Creation and application of strategic alliances between and among different institutional types

Contours of Microfinance Development (continued) 4. Rapid development and expansion of microfinance as an industry and integral part of the financial system has attracted:  Increased interest and attention of regulatory authorities and international development agencies.  Entry of international and private investors as stakeholders in registered / licensed / regulated microfinance institutions (regular commercial banks and specialized banking institutions with microfinance focus, non-bank financial institutions, some Apex-type organizations)

Basic Types of Approaches to Microfinance Regulation 1. Recognition of microfinance as a financial sector activity to be regulated or prudentially supervised. 2. Expansion of jurisdiction of banking and/or financial sector regulatory authorities to include microfinance institutions / activities (often, still no distinction between regulating institutions vs. activities)

Basic Types of Approaches to Microfinance Regulation (continued) 3. Specialized regulatory and reporting frameworks for microfinance institutions or activities  Certain types of microfinance institutions are still excluded from main regulatory regime, and are regulated by other agencies (e.g., credit unions, savings & credit cooperatives) 4. Promoting and inducing institutional transformation of NGOs and non-profit institutions to registered / licensed status 5. Regulation of microfinance industry to protect or insulate formal financial system

Observations on Country Experiences 1. Time period (8 years on average) to put in place and implement effective regulatory framework.  A long and costly process to elaborate rules, expand supervisory capacity, transform institutions, and sort out political conflicts. 2. Tension between maintaining soundness of financial system as a whole and of microfinance segment versus achieving outreach expansion and deepening.

Observations on Country Experiences (continued) 3. Need to preserve and cultivate existing forms and structures with potential to support sustainable growth. 4. In spite of instances of abuse and regulatory arbitrage by founders of microfinance institutions, country experiences underscore need for balance and realism in entry requirements and standards. 5. Complexity embedded in financial system’s components, and insulation of reform process from market forces and realities obstructs effective operation of sustainable regulatory frameworks.

Observations on Country Experiences (continued) 6. Governments still tempted to use policy mandates and subsidized credit / wholesale funds to force expansion of the microfinance industry and deepen its outreach. 7. The all important message still remains: address market needs and fix market failures – this is a main characteristic of the trade-off between financial deepening vs. expansion of financial services