Regulation and Supervision of Microfinance Institutions in South Africa

Detailed country study of South Africa's experience with regulation and supervision of its MFIs. The paper outlines reform in the financial sector and efforts made at establishing supervisory authorities and systems for safeguarding deposits including founding of the Policy Board for Financial Services and Regulation and the Alliance of Micro-Enterprise Development Practitioners. Discusses legislation, the Usury Act of 1992 and the Mutual Banks Act in 1993, and assesses their effectiveness. Outlines the regulatory structure of the South African financial system. Credit supply and demand in microfinance is also explained.

Recommendations made for regulating MFIs include:

• State ought to have a role in protecting the public interest in regulation;
• South Africa's self-regulatory system lacks an effective sanction mechanism;
• Self-regulation with no government participation suffers from credibility problems;
• Direct regulation by a supervisory authority like the central bank does not make sense due to restricted capabilities and lack of knowledge of the microfinance sector;
• Practice of adopting laws and then exempting certain institutions from them is inadvisable;
• Mutual banks example shows how unreasonable or repressive banking regulation can heavily restrict the development prospects of a certain type of institution.

Conclusions state that South Africa is a clear example of how regulation is a process.