Self Regulation
Micro finance is a cost-effective instrument to meet the challenges of poverty reduction. It has been practiced in many parts of the world in various forms and by different institutions ranging from informal savings and credit groups, credit cooperatives, non-bank financial institutions, and commercial banks. Micro Finance sector is no longer a recent phenomenon and has expanded and established in many developing countries where poverty preponderate. There has now been recognition that the widening and deepening of micro finance services have both social and commercial implications. The growth of the sector has brought in its wake the issues of sustainability and stability of the sector and also a sense of urgency as to putting the sector on sound footing. The onus is one of regulating the sector, which facilitates the informality, flexibility and innovation in the sector and all the same promoting growth with order.
There has been general consensus that as long as micro finance sectors do not mobilise deposits from the general public they should not be regulated. It is also generally agreed that it is also unnecessary and may even be counter productive to subject them to formal prudential regulation and supervision by Government agency. For instance - in most countries 85 percent of NGOs in micro finance sector are not financial intermediaries – i.e., they are lenders only, and do not take deposits from the public. There is probably no strong reason for public prudential oversight of such organisations, since protection of depositors is usually viewed as the principal rationale for such oversight. Further there would also be significant practical difficulties in subjecting Micro Finance Sector to prudential regulation supervision. One issue would be to find a suitable regulatory agency to regulate them. Most central banks in the ASIA region do not seem to have a unit responsible for microfinance, nor do they have a sound knowledge and understanding of the requirements of micro finance sector. A number of analyst from more than one country argued that in the absence of significant changes in the methods of regulation and supervision, placing micro finance sector under the supervision of the central bank would be likely to stifle them. It is also not obvious that there are any other government agencies that would be better placed to regulate and supervise MFIs of demand / supply stream.
Moreover, in most countries the cost of subjecting micro finance sector to full prudential regulation and supervision would be prohibitive. In Bangladesh, for instance, there are around 1,000 non-governmental organisations (NGOs) involved in microfinance. And while the actors of demand and supply stream in other countries do not have nearly the same outreach as in Bangladesh, the number of intermediaries is no necessarily less. In India there are perhaps as many NGOs engaged in microfinance as in Bangladesh, plus some 90,000 primary agricultural credit societies and thousands of self-help groups. In the Philippines, there are some 500 MFIs reaching a combined total of only 30,000 borrowers. In Thailand there are more than 1,500 community organisations engaged in microfinance. Clearly, it would not be possible to subject all of these bodies to prudential regulation and supervision.
There are substantial non-financial costs as well. Regulation can cramp competition. Perhaps more seriously, it can stifle innovation. The act of writing a set of rules for microfinance involves the rule maker in a certain amount of “model building” – making decisions as to what kinds of institutions are the best to do microfinance, and sometimes even what kind of loan methodologies or operating procedures are best. Boundaries are drawn, and innovation outside those boundaries can be suppressed. This is not just a theoretical concern. If Latin American NGOs had not been allowed to experiment with micro credit products that were inconsistent with the legal provisions of the regulated financial system, it’s hard to imagine how microfinance in the region could have flowered as it did.
In sum, full prudential regulation and supervision by a regulatory agency of demand and supply stream of players in the micro finance sector which do not accepts deposits from the public would appear neither desirable nor practicable.
As such while it is not a point for argument as to the need for regulation of micro finance sector, what is however arguable is the form of regulation. As things stand today self-regulation bids fair to be a better alternative way of regulation. Self regulation may take a wide variety of forms, ranging from a voluntary code of conduct to which demand and supply stream players in the micro finance sector agree to adhere, to a rigorous licensing system administered by a apex body and backed by the force of law. In between, there is a wide variety of possibilities with varying degrees of monitoring and compulsion.
Establishing standards through self-regulation can avoid the tendency for regulatory agencies to impose burdensome regulations that do not take account of the specific needs of micro finance sector. Self-regulation also ensures ownership of the standards by the micro finance sector and there is likely to be much greater acceptance of standards established through self-regulation than of standards imposed from above. The feasibility of various forms of self-regulation depends on a range of factors, including the extent to which there is a apex body that can represent micro finance sector as a whole, the amount of resources available for monitoring and supervision, and the availability of incentives and / or sanctions to enforce compliance.
Apex bodies have the potential to undertake a range of important activities, including information exchange, training, research, and policy dialogue with governments and donor agencies. Over time, they may also become focal points for the establishment of standards for self-regulation.
If the performance of the microfinance sector is to increase over time, it is important to ensure that the standards that are developed are actually enforced or observed in all its earnestness. Just as it is important to establish common and consistent standards, the process is equal important that one ensures that standards should be developed through a process of wide consultation within the sector, to ensure that they meet the needs of the micro finance sector and are accepted throughout the sector.
Nevertheless, it is to be clearly understood that self-regulation as INAFI – INDIA method is a tool to manage the growth and development with order and quality rather than defining it within the narrow confines of financial regulation and supervision. However, it does address the concerns of a financial regulation.
