Should Principles of Regulation and Prudential Supervision be Different for Microenterprise Finance Organizations?

This paper examines rationale for the regulation of microenterprise finance organizations (MFOs), and looks at the practically adopted regulatory policies, such as:

• Role of government as a lender of last resort;
• Deposit insurance;
• Licensing of financial intermediaries;
• capital adequacy requirements;
• Incentive compatibility.

It concludes that:

• Regulation is desirable because preventive action is more cost-effective than remedial interventions;
• It is critical to recognize that there are no standardized rules for optimum regulation, because MFOs have a great diversity in their institutional designs;
• Frequently adopted policies such as incentive compatible regulations must be designed to reach beyond simple capital adequacy requirements.