"El Financiero," a Mexican Finance newspaper, tells a story where, at first, all is bright for our hero microfinance: the Mexican government representatives talk of poverty reduction and the displacement of loan sharks. These loans are really working! The story then crescendos: the situation is so good for these micro-businesses that the Mexican government now plans to establish "The Fast Opening Business System," a new government program to help all the poor micro-entrepreneurs register their businesses formally. Does this mean greater regulatory burden for all those struggling to make ends meet?
A point of explanation is needed: people from the developed world often assume that micro-enterprises are new ‘start-ups,’ but such is not the case. Due to the dearth of formal jobs in the developing world, most people are self-employed, and have always been self-employed. So, the Mexican government is not making it easier for common folks to ‘open’ a business as the catchy name of their new bureau implies. Instead, the government seeks the registration of businesses that micro-entrepreneurs have been running for years to feed their families.
Is there something in this for the micro-business owners other than new taxes, paperwork, and bureaucrats winking for a greased palm?
Of course the formal registration of micro-enterprises should be supported, and of course one of the great benefits of successful microfinance is that it creates wealth, which in turn enlarges the tax base, hopefully helping to stabilize and clean up dreadful governments. However, this should be a natural evolution. Once a micro-enterprise starts to grow, the proprietor has ever-more reasons to formalize her business: i.e. renting commercial space, offering the business as a micro-loan guarantee, or offering benefits to her employees. In this way, the best thing governments can do for new recipients of micro-loans is stay out of the way, not think up new bureaus over U.N. luncheons.
Moreover, plenty of reform of existing legislation is essential if microfinance is to reach its potential, such as streamlining red tape for all businesses. The article ends on yet another gloomy note. Amidst the excitement of the U.N. meeting, an attending government official generously offers the important participation of his particular bureau, adding that more government programs should get involved!
Again and again, we are reminded of how the domination of microfinance by charities and governments harm micro-banks and their clients. Only business-people sitting at the table can change this dynamic.
Below is a list of the most promising forms government activity can take in the field of microfinance:
1) Don’t place ceilings on interest rates
2) Promote the concept of microfinance as a crucial means to resolve poverty
3) Adapt existing legislation rather than promulgate new laws
4) Eliminate unfair competition from public institutions, which often loan at below market-level interest rates
5) Actively work to improve and stabilize the business environment and general macroeconomic situation (benefits include reducing interest rates to make more capital available, stabilizing interest and exchange rates, improving infrastructure)
6) Scale-up microfinance by integrating it with the formal financial sector (benefits include economies of scale, risk management expertise, physical infrastructure and branch networks, and information, administrative and accounting systems)
7) Encourage commercial entry into the financial sector by reducing high reserve requirements to increase available capital
8) Non-prudential regulation
9)Encourage a diversified environment of regulated and unregulated institutions that meet performance standards
10) Develop transparency and performance standards
Additional Resources
1) Main article discussed in entry, El Financiero: "Viables."
2) Consultative Group to Assist the Poor (CGAP): "The Impact of Interest Rate Ceilings on Microfinance"
3) Women’s World Banking (WWB): "Policies, Regulations and Systems that Promote Sustainable Financial Services to the Poor and Poorest"
4) "Impact of Government Regulation on Microfinance"
5) CGAP: "Guiding Principles on Regulation and Supervision of Microfinance"
6) "Regulatory Requirements for Microfinance: a Comparison of Legal Frameworks in 11 Countries Worldwide"
