Microfinance Legal-Regulatory
Environments:
An Assessment Tool for Policy
and Programming Decisions
Patrick Meagher
IRIS Center, University of Maryland
1
Overview
• Why a tool?
• Structure and content of the tool
• Using the tool:
– Factor analysis
– Scenarios and case studies
– Policy/program development
• Examples
• Discussion
2
Why a Tool?
The main question:
How to help policymakers and aid donor
agencies identify priorities, lessons, and
cost-effective solutions that correspond to
their specific situations?
Why this is important 
3
Why a Tool?
Recognized need for effective regulation
and supervision that:
 Does not overburden regulator
 Provides modicum of legal recognition to MFIs
eager to access formal funding sources.
Problem: extent, nature and reach of optimal
public oversight depends on many factors in the
economy, the financial services market, and the
institutional environment
4
Why a Tool?
Environment for microfinance is shaped by a
range of institutional factors:
• Governance quality: policymaking, red tape, efficiency,
corruption
• Financial, private sector, revenue policies
• Commercial law and enforcement mechanisms
Policymakers, donors, stakeholders need to:
• Sharpen diagnostic of market conditions and focus on
key institutional constraints
• Move beyond traditional responses: free money,
microfinance window
5
Why a Tool?
Policymakers and aid donors are increasingly asked
to provide assistance to the development of policy
frameworks. These requests (often by MFIs) may be
self-interested or ill-informed.
They need to consider all relevant aspects of the
market environment when designing microfinance
programs and policies -- BUT:
 They often lack instruments to determine whether the situation
warrants government intervention, and how to implement it.
 Time and resources are limited.
 Inappropriate institutions, policies, and programs have a high
cost.
6
Why a Tool?
Growing body of resources:
• CGAP Consensus Guidelines,
• WBI Microfinance Regulation Training Toolkit,
• CGAP/IRIS Resource Center on Regulation
and Supervision on Microfinance Gateway
(http://www.cgap.org/regulation)
The assessment tool builds on these sources
of information to facilitate the design of policies
and programs that fit specific situations
7
Structure of Tool
Evaluate key factors in the microfinance legalregulatory environment
Factor analysis leads to policy/program scenarios and
decision-points
Real case-studies show lessons learned and
benefit/cost of different choices at decision-points
The composite “picture” shows how policy/ program
choices fit together, aids prioritizing & sequencing
8
Key factors
•
•
•
•
•
•
Economic and MF market conditions
Governance institutions
Business/investment policy climate
Financial services regulation
Regulatory capacity
Transformation options
9
Economic and Market
Conditions
Is low access to finance a binding constraint to
SMMEs and low-income households? NO
Analysis
Demand suppressed by
instability? Predation? Adverse
climate for SMMEs?
Responses
Address security, governance,
business climate until demand
recovers
Demand met by social transfers, Examine causes of poverty, cost
charity, public or directed
efficiency of system. Sequence
lending: Adequate? Efficient?
transition to private finance.
Demand met by informal
finance: Adequate and
sustainable? Why informality?
Examine and address: costs of
informality, product mix and price,
entry barriers, formalization
Demand met by formal finance:
Sustainable? Crowded market?
Focus on institutions’ governance,
sustainability, entry conditions
10
Economic and Market
Conditions
Is low access to finance a binding constraint to
SMMEs and low-income households? YES
Analysis
Responses
Dysfunctional banking sector:
Focus on financial restructuring,
policy, governance, solvency
social safety nets; strengthen
problems. NBFIs few or unviable. NGO-MFI sector
Banks well-run and supervised,
but limited reach. Few NBFIs.
Address bank incentives,
commercial environment, tiered
financial licensing (“windows”)
Full range of banks and NBFIs,
some deepening but insufficient
Address bank & NBFI incentives,
competition, product mix
Market will meet demand over
time, with continued deepening
and down-scaling by banks, etc.
Facilitate transformation of
NGOs, informals as appropriate
11
Governance
Institutions
Key concerns:
– Rule of law, property rights, contract enforcement
– Integrity of financial system, regulatory capture,
corruption, policy distortion
Effectiveness of governance determines
policy/program design:
– Impact: weak gov. may impede, distort, or undermine
reforms; strong gov. may make reforms unnecessary
– Sequence: key concerns must be addressed
before/along with regulation
– Focus: in adverse setting, try non-state standards,
oversight, enforcement
12
Business/investment
policy climate
Key concerns:
– Investment, commercial, tax laws
– Organizational form, registration, governance, capital
requirements
– Trust and efficiency in transactions, dispute resolution
– Politics: biases against enterprise, banking, foreigners, interest,
profit? Bureaucratic empire-building?
Impact on MF policy choice, impact:
– Impact: reduced if setting is adverse – e.g. corporate or tax
rules may make new MFIs unprofitable
– Sequence: address business climate before/along with financial
regulation. Focus on the most cost-effective reform.
– Caveat: financial reform may be distorted by political biases
13
Financial Services
Regulation
FS regulation facilitates microfinance:
– Clear rules, appropriate incentives and treatment of
risks, no regulatory arbitrage
– Focus: MFI capacity, transformation, other
FSR is neutral or ambiguous:
– Legal effect of silence/vagueness:
• Permissive: use existing licenses for now
• Prohibitive: new license (“window”) OR amendment to
allow/facilitate the activity within existing system
FSR creates obstacles 
14
Financial Services
Regulation
Problem
Response
Entry barriers: minimum capital,
documentation, procedure,
structure, ownership, fitness test
Ensure neutral, permissive rules
within risk-based framework?
Define microfinance as an activity
permitted to existing licensed
institutions, with special conditions
Mandate services (CRA)? Provide
incentives?
Adjust an existing services tier?
A new MFI tier (“window”)?
Capital, liquidity requirements:
capital adequacy, reserves,
provisioning rates & schedule
Supervision and reporting:
frequency, on and off-site,
intrusiveness, burden
Operating rules: branching,
security, records, interest rates,
products, concentration, control
Analysis: is benefit/cost of reform
greater than for status quo?
15
Regulatory Capacity
Key question: Sufficient capacity to implement
proposed regulations?
Key concerns:
–
–
–
–
Public sector & corporate governance
Quality and incentives of officials
Skill base: accounting, audit, enforcement
Match between responsibility & resources
Response: match reforms to capacity
– Do not overextend regulators
– Develop basic systems and skills, secure necessary
authority
16
Transformation
Options
Key questions:
– How important are NGOs as a segment of
existing or potential MFIs?
– Is the transformation procedure clearly
defined? How difficult, costly?
Reponses:
– NGOs important but transformation process
unclear/costly  define, streamline process
– Otherwise: focus on new MFIs, other
17
Case study analysis:
example
South Africa:
• Situation: Banks well-run and supervised, but limited reach. Few
formal, effective NBFIs.
• Diagnosis:
– Weaknesses in economic conditions, commercial framework gradually
being addressed
– Key constraint: restrictive bank licensing & usury laws
• Response:
– Phase 1: liberalize microlending; set conditions; delegate licensing,
market integrity & consumer protection to “hybrid” regulator
– Phase 2: address bank incentives, reform FS tiers, etc.
• Problem: chronic economic & commercial environment problems,
FS concentration & lack of competition, populist politics
18
Composite ‘picture’
Factors:
Analysis:
Response:
Economic and MF
market conditions
Governance
institutions
Business/investment
policy climate
Financial services
regulation
Regulatory capacity
Transformation
options
Assess each factor
(e.g. positive or
negative), address
specifics of the
situation, identify
causes.
Which constraints
are binding? Rank
in order of priority.
Propose responses to
each binding, highpriority constraint. Rank in
terms of benefit/cost.
How do responses interrelate? Are they
consistent – or need to be
adjusted?
Sequence the responses
– start with basic ‘building
blocks,’ politically feasible
steps, ‘quick wins’
19
Policy/program
development
The tool is to be used for participatory
development of policies & programs
Can we apply it to Brazil? If so:
– Break into 6 groups
– Each group analyzes one factor
– Report back: analysis of factors, composite
analysis, discuss/develop responses
20
Recap
• Why a tool?
• Structure and content of the tool
• Using the tool:
– Factor analysis
– Scenarios and case studies
– Policy/program development
• Examples
21
Questions
• Do you think this tool can be useful to
policymakers? To international donor
agencies? Others?
• Is it relevant to your work?
• Where is it appropriate to use it? Brazil?
Elsewhere?
• How can it be improved? What changes
would you suggest?
22
Thank You
23