How does a country's legal and regulatory framework affect the sustainability of microfinance? Does a tiered approach to regulation help to integrate microfinance into the formal financial system? And are there lessons to be learned from the experience of Ghana and the Philippines with a tiered approach?

An earlier Policy Research Working Paper (Hennie van Greuning, Joselito Gallardo, and Bikki Randhawa, "A Framework for Regulating Microfinance Institutions," WPS 2061, February 1999) presented a regulatory framework that identifies thresholds in financial intermediation activities that trigger a requirement for a microfinance institution to satisfy external or mandatory guidelines-a tiered approach to regulation and prudential supervision. The model focuses on risk-taking activities of microfinance institutions that must be managed and prudentially regulated. The author reports on the results of the field testing and assessment of the tiered approach, focusing on the experience of Ghana and the Philippines. The two countries both have a wide range of informal, semi-formal, and formal institutions providing financial services to the poor, but differ in how they regulate financial intermediation activities by microfinance providers. In his assessment and a comparative analysis, the author focuses on key issues in the regulatory and supervisory environment for microfinance-and in the legal system and judicial processes-being addressed by government authorities and microfinance stakeholders in both countries. He gives particular attention to the thresholds at which intermediation activities become subject to prudential regulation and regulatory standards for capitalization and capital adequacy, asset quality and provisioning for nonperforming loans, and liquidity management. seeks to identify the key elements and characteristics of the microfinance regulatory experience of Ghana and the Philippines and to draw the lessons that may be useful for other countries interested in establishing a regulatory environment conducive to the development of sustainable microfinance institutions. The experience of Ghana and the Philippines shows that a transparent, inclusive regulatory framework is indispensable for enabling microfinance institutions to maintain market specialization and to pursue institutional development that leads to sustainability. Clear pathways for institutional transformation facilitate the integration of microfinance institutions into the formal financial system.

How does a country's lega ...

Abstract: The authors investigate the microfinance regulatory regimes in Benin, Ghana, and Tanzania, with a view to identifying key issues and lessons on how the overall regulatory framework affects integration of microfinance institutions into the financial system. The authors find that recognizing different tiers of both regulated and unregulated institutions in a financial structure facilitates financial deepening and outreach to otherwise underserved groups in urban and rural areas. That environment promotes sustainable microfinance under shared performance standards and encourages regulatory authorities to develop appropriate prudential regulations and staff capacity. Case studies of the three countries raise important issues on promoting microfinance development vis-à-vis regulating them. Laws to regulate activities other than intermediation of public deposits into loans can result in disproportionately restrictive and unmanageable standards, even as dynamic microfinance sectors have emerged without conducive regulatory regimes. The authors use the three countries' regulatory experiences to highlight the importance of differentiating when prudential supervision is warranted and when regulatory oversight suffices, and to identify the agencies to carry out regulation. They address an important issue that has received scant attention, measuring and paying for the costs of regulating microfinance, and the need to build technical capacity of supervisory and regulatory staff.

In response to a clear need by low-income people to gain access to the full range of financial services including savings, a growing number of microfinance NGOs are seeking guidelines to transform from credit-focused microfinance organizations to regulated deposit-taking financial intermediaries. In response to this trend, this book presents a practical 'how-to' manual for MFIs to develop the capacity to become licensed and regulated to mobilize deposits from the public. 'Transforming Microfinance Institutions' provides guidelines for regulators to license and regulate microfinance providers, and for transforming MFIs to meet the demands of two major new stakeholders regulators and shareholders. As such, it focuses on developing the capacity of NGO MFIs to mobilize and intermediate voluntary savings. Drawing from worldwide experience, it outlines how to manage the transformation process and address major strategic and operational issues inherent in transformation including competitive positioning, business planning, accessing capital and shareholders, and how to 'transform' the MFI's human resources, financial management, MIS, internal controls, and branch operations. Case studies then provide examples of developing a new regulatory tier for microfinance, and how a Ugandan NGO transformed to become a licensed financial intermediary. This book will be invaluable to regulators and microfinance NGOs contemplating institutional transformation and will be of tremendous use to donors and technical support agencies supporting MFIs in their transformation.

The purpose of the 'Microfinance Handbook' is to bring together in a single source guiding principles and tools that will promote sustainable microfinance and create viable institutions.