Panel Discussion on Regulation of
Microfinance
Initiatives Supporting the Development of Regulatory
Frameworks for Microfinance
Financing for Development Office, UNDESA
New York City
10 April 2007
United Nations Capital Development Fund
p. 0
Presentation Overview

UNCDF: Investing in the LDCs.

UN Advisors Group on Inclusive Financial Sectors.

Brief Survey of Initiatives Supporting Regulatory Frameworks for
Microfinance.
 UNCDF.
 GTZ.
 USAID.
 ADB.
 Microfinance Networks.
 Microfinance Consensus Guidelines: Guiding Principles on Regulation and
Supervision.
 Financial Access Initiative.
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UNCDF: Investing in the LDCs
 UNCDF makes investments in the Least Developed Countries (LDCs):
 Currently working in 28 Least Developed Countries.
- Total population: approximately 625 million.
- Average GDP: approximately US$ 317 per person per year.
 Current investment portfolio about $125 million.
 Our Mission: Reduce poverty in these countries and help them achieve
the Millennium Development Goals (MDGs).
 Our Method: Investing in human and institutional capacity at the local and
national levels and funding and supporting Local Development
Programmes and Microfinance Institutions (MFIs).
 Our Approach: Long-term outlook seeking local and national capital
formation and human development.
 Our Capital: Flexible, high risk and innovative.
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UNCDF Methodology
UNCDF’s Sector Development Approach for building inclusive financial
sectors:
1. Conduct Financial Sector Assessment.
 Gather data on access to financial services to establish a
baseline and measure results.
 Evaluate legal, regulatory, and policy frameworks, and financial
services infrastructure requirements.
 Evaluate human and institutional capacity and constraints.
2. Develop Nationally Owned Policy, Strategy and Action Plan.
 Legal, regulatory, and policy environments.
 Financial Service Providers (FSPs) required to provide
products and services and to strengthen financial sector.
 Financial services infrastructure requirements.
 FSP investment requirements.
 Coordinating, implementing, and monitoring requirements.
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UNCDF Methodology
… continued
3. Execute National Action Plan.
 Establish Investment Committees.
 Composed of government representatives, development partners
and other financial industry participants.
 Solicits investment proposals for broad range of MFIs, FSPs and
other industry participants.
 Review process is competitive and transparent.
 Make investments in microfinance institutions (MFIs), FSPs, financial
services infrastructure providers, and other industry participants.
 Investments may be grants, loans, or equity.
 Human and institutional strengthening and capacity building
emphasized.
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UN Advisors Group on Inclusive Financial Sectors
 UNCDF also hosts the Secretariat of the UN Advisors Group on
Inclusive Financial Sectors.
 Established in June 2006 for a term of 2 years.
 Seeks to increase global access of poor and low income households
and micro and small enterprises to a broad range of financial products
and services on a sustainable basis.
 Consists of 25 representatives from the UN, World Bank, IMF, CGAP,
African Development Bank, Central Bank of West Africa, Government
Savings Bank of Thailand, World Council of Credit Unions, Accion
International, Goldman Sachs, ABN-Amro, Deutsche Bank, Visa
International, among other institutions.
 Significant opportunity to raise global public awareness regarding
financial inclusion and to place inclusive finance on the global
development agenda.
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UN Advisors Group on Inclusive Financial Sectors
… continued
 UN Advisors Group on Inclusive Financial Sectors and Regulation.
 Of the four Working Groups established, one is focused exclusively
on the issues of Regulation and Supervision.
 Institutions represented in the Regulation & Supervision Working
Group include: CGAP (Chair), IMF, World Bank, UN DESA, Central
Bank of West African Banks (BCEAO), Visa International, Aga Khan
Agency for Microfinance, Central Bank of Malaysia, World Council of
Credit Unions, Foreign Ministry of Affairs of Luxembourg, and World
Savings Bank Institute.
 The Regulation and Supervision Working Group is currently preparing
to conduct a Regional Conference on Regulation to be held in early
2008.
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UN Advisors Group on Inclusive Financial Sectors
… continued
At the UN Advisors Group meeting in Amsterdam, CGAP, as the Chair of the
Regulation Working Group, defined the different components of Regulatory
and Supervisory reform work:
advocacy
and awareness
building
policy analysis
& standard setting
country-level
diagnostic work
implementation
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countryspecific
Reform
recommendations
*Diagram Source: CGAP
UN Advisors Group on Inclusive Financial Sectors
… continued
The Regulation Working Group also noted that there are multiple actors
involved in one or more of these components.
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UN Advisors Group on Inclusive Financial Sectors
… continued
 The major conclusions of the Regulation Working Group were:
 This is a very crowded space with multiple actors and institutions.
 Donor coordination is a huge challenge.
‫ ־‬to avoid undercutting each other.
‫ ־‬to avoid inconsistent advice.
 All actors need to think carefully about their comparative advantage.
‫ ־‬specialized expertise is needed but in short supply.
‫ ־‬practitioners have vital role to play, but not always seen as
neutral.
‫ ־‬different actors have different influence on decisions makers
(varies by country).
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*Source: CGAP
UN Advisors Group on Inclusive Financial Sectors
… continued
 Within this context, the Regulation Working Group concluded that its
overall objectives should be to:
 Raise public awareness about the importance of inclusive
finance among policymakers, central bankers, and government
officials.
 Advocate for appropriate regulatory and supervisory policies that
encourage and support inclusive financial sectors.
 Identify new areas where further discussions are needed with
governments, regulators and supervisors.
 Focus on particular regulatory and supervisory risks which
potentially constrain access to financial services and products.
 Recently provided input to "Five Key Messages for Four Key
Audiences“: statements of best practices for expanding access to
finance for the poor targeted at regulators, governments, development
partners and the private sector.
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UN Advisors Group on Inclusive Financial Sectors
… continued
 The Key Messages to Regulators include:
 Financial inclusion should be a major objective of financial regulation.
The role of regulators is to establish environments that allow a diverse range
of institutions to provide a wide variety of financial products and services.
 Regulators must be flexible in their approach; they must mitigate risks,
without limiting access to financial services.
 Regulators must assure appropriate supervision of both financial service
providers and their supporting industries, such as telecommunications.
 Regulators must exercise caution that anti-money laundering and related
regulations do not block access to financial transfers that are critical for poor
people.
 Broad-based access to financial services requires an enabling regulatory
environment for telecommunications and technology infrastructure.
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Brief Survey of Initiatives Supporting Regulatory
Frameworks for Microfinance.
p. 12
Country-level Diagnostic Work
… continued
UNCDF:
 UNCDF’s microfinance sector development approach is built upon the
premise that microfinance institutions and other financial service providers
(FSPs) serving the poor should over time become an integrated part of the
formal financial sector.
 Sector development programmes are designed to identify and respond to
new opportunities, and address constraints that keep a financial sector
exclusive.
 One component of the sector development approach is the evaluation of a
country’s legal, regulatory and policy frameworks, as well as financial
services infrastructure requirements.
 Since early 2003, sector assessments have been carried out in Nepal,
Sierra Leone, Senegal, Madagascar, Democratic Republic of Congo,
Malawi, Angola, and Liberia.
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Country-level Diagnostic Work
… continued
UNCDF:
Nepal Country Case Study
 A 2006 financial sector assessment of Nepal conducted by UNCDF
showed no immediate regulatory constraints to building an inclusive
financial sector.
 But Nepal’s Central Bank requested guidance on regulating the growing
microfinance sector. Thus within the context of a $30 million programme
to build an inclusive financial sector in Nepal, capacity building of the
regulator is an integral component.
 Assistance will be provided to help the government develop an
appropriate policy/strategy and to the Central Bank to develop criteria for
determining which institutions should be licensed and regulated and which
institutions might only have a reduced reporting requirement.
 This project will be launched in 2007 and co-funded by UNCDF, UNDP
and the World Bank.
p. 14
Country-level Diagnostic Work
… continued
UNCDF:
Liberia Country Case Study
 One of the findings of a 2004 financial sector assessment was that the
present legal and regulatory environment creates several constraints for
the development of the microfinance sector:
 Low ceiling on interest rates (18% effective) made it unlikely that any
commercial bank would enter the lending side of the microfinance
market.
 High reserve requirements of 50% and 18% for LD$ and USD$
discouraged domestic resource (savings) mobilization.
 Unclear guidance on the percentage of portfolios permissible for cash
collateral was being provided by Liberia’s Central Bank.
 Since the financial sector assessment was conducted, the government
has taken positive steps towards liberalizing the financial sector.
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Country-level Diagnostic Work
… continued
UNCDF:
Microfinance Regulation and Supervision Project In the West African
Monetary Union (BCEAO)
 The Central Bank of West African States (BCEAO) is the common central
bank for 8 countries (Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau,
Mali, Niger, Senegal, and Togo).
 The $2.3 million project is being financed by a consortium of donors
including UNCDF, CGAP, and SIDA. Project goals include:
 Improving the regulatory framework to strengthen MFI governance
and management and refine the region’s approach to supervision.
 Strengthening the effectiveness of supervision, including licensing
new entrants, supervising ongoing operations, and imposing sanctions.
 Improving understanding of the financial sector, institutional risks, and
overall performance of MFIs in the region.
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Country-level Diagnostic Work
… continued
GTZ:
 GTZ supports microfinance operations in more than 40 countries, combining
technical assistance to MFIs with financial sector reform that affects the
institutional environment of MFIs.
 GTZ advises central banks and banking supervisory agencies, and (in some
countries) the ministries responsible for supervising MFIs.
 Some of these projects include:
 Uganda: Financial Systems Development Project - developed and
implemented a regulatory and supervisory framework for MFIs.
 Honduras: Financial Sector Development Project - assisted supervisory
authorities in tailoring regulation and supervision to MFIs.
 Kyrgyzstan: Strengthening and Development of Rural Financial Market developed a legal framework for the co-operative sector.
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*Source: GTZ website
Country-level Diagnostic Work
… continued
USAID:
 A variety of USAID projects have supported regulatory reform for microfinance.
 These projects are usually in conjunction with implementing partners such as
Development Alternatives International (DAI) or IRIS.
 Some of the countries in which USAID has helped to support projects
regarding microfinance regulatory reform are: Armenia, Bolivia, Ecuador,
Georgia, Jordan, Malawi, Mexico, Nepal, Nigeria, Philippines, and Zambia.
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*Source: USAID website
Country-level Diagnostic Work
… continued
Asian Development Bank (ADB):
 Provides assistance in the form of loans and technical assistance to member
developing countries.
 Some of ADB’s microfinance regulatory/supervisory activities include:
 Uzbekistan: Financial Services for the Poor Project – aims to develop an
enabling policy, legal and regulatory supervisory framework for savings and
credit unions.
 Azerbaijan: Microfinance Sector Development Project – seeks to
develop microfinance regulations and collateral framework.
 Laos PDR, Mongolia, Nepal, and Sri Lanka: Rural Finance Sector
Development Programme - supports the creation of an enabling policy for
a regulatory and supervisory framework for rural microfinance.
 Published 2000 study “The Role of Central Banks in Microfinance in Asia
and the Pacific” that examined the role and operations of central banks in
microfinance development in Bangladesh, China, India, Indonesia, Kyrgyz
Republic, Nepal, Pakistan, Papua New Guinea, Philippines, Sri Lanka,
Vanuatu, and Vietnam.
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*Source: ADB website
Advocacy and Awareness Building
Microfinance Networks
 Microfinance Centre for Central & Eastern Europe and the New
Independent States (MFC):
 International, grass-root network of 90 MFIs from the region.
 Along with other Regulation initiatives, it conducts an annual "Policy
Forum on Microfinance Law and Regulation“.
 The main purposes of the annual Policy Forum are to benchmark the
progress of the countries in which initiatives to create favorable
environment for microfinance are taking place or that took place
during the previous year and to increase the awareness of policy
makers from countries not yet selected for MFC Initiatives.
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*Source: MFC website
Policy Analysis & Standard Setting
Microfinance Consensus Guidelines: Guiding Principles on Regulation
and Supervision.
 Published by CGAP.
 Captures a broad consensus on best practices in regulation and supervision
of microfinance. The guidelines summarize these principles for government
regulators and others engaged in moving microfinance into the formal
financial sector.
 Some major principles that have been agreed include:
 Problems that do not require the government to oversee and judge the
financial soundness of regulated institutions should not be dealt with
through prudential regulation.
 In some countries, legal changes are needed to make it clear that NGOs
and other private bodies may conduct a lending-only business without
having to be prudentially licensed and regulated.
 Depending on practical costs and benefits, prudential regulation in some
cases may not be necessary for MFIs that take cash collateral.
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*Source: CGAP
Policy Analysis & Standard Setting
… continued
Financial Access Initiative
 A joint project of Yale University, Harvard University, New York University,
and Innovations for Poverty Action (IPA).
 Formed in 2006 as a research consortium focused on improving access to
financial services for the world’s poor through research on innovation,
regulation, and financial policy.
 Of the three main activities that will be conducted, one focuses on policy
around regulation.
 Aims to describe policy options for central bankers and regulators in a
high-level but accessible format.
 Focus will be on recent experiences across countries, regulatory
constraints, and possibilities.
 Outputs will be independent, rigorous guides for regulatory policy with an
emphasis on direct effects and trade-offs of policy choices.
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Panel Discussion on Regulation of
Microfinance
Initiatives Supporting the Development of Regulatory
Frameworks for Microfinance
Financing for Development Office, UN DESA
New York City
10 April 2007
United Nations Capital Development Fund
p. 23