As the emerging asset class of microfinance spirals slowly to the surface, MicroCapital looks at one of its main stumbling blocks: regulation and supervision. Vijay Mahajan, CEO of the BASIX Group, a micro-bank in India, refers to regulatory frameworks as one of the “triple helix” of constraints to microfinance expansion: low-quality regulation, inadequate financial resources; and the weak institutional capacity of most micro-banks, any of which may be the ruling constraint at a given time. BASIX, one of the first microfinance institutions (MFIs) in the world to attract commercial equity investment internationally and within India, has been a major influence for successful changes in Indian policy framework.
As in mainstream financial sectors, predictable regulatory standards for microfinance reduce uncertainty and increase the attractiveness of the investment. The challenge is to strike a balance between preventing abuse of markets and consumers, and encouraging industry expansion.
This paper will:
åð explore the unique challenges of microfinance regulation;
åð advocate "regualtion by risk;"
åð consider balancing financial system integrity with costly microfinance regulation that inhibits investment;
åð review the hugely positive role that rating agencies have played in facilitating transparency and risk assessment for investors and regulators alike.
We will also take you to Peru, a burgeoning market for microfinance in which regulators seemed to have figured out how to control risk while promoting investment in microfinance.
Download the paper here.
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