Principles and Practice: Myths of Regulation and Supervision

As the number of MFIs offering saving service increase, safeguarding client deposits against failure, fraud, and financial service institutions' opportunistic behavior, becomes necessary. The author discusses previous attempts to regulate and supervise MFIs, within the traditional central bank-driven framework and highlights issues that this approach overlooked such as:

• Limited capacities of MFIs;
• Institutional diversity;
• Relative risks for the in placing deposits in the informal sector.

In the subsequent sections, the author discusses:

• Definitions of select terms associated with regulation and supervision;
• Conventional approaches and shortcomings of regulation and supervision in the microfinance industry;
• Theoretical framework for regulation and supervision;
• Alternative approaches to regulation and supervision proposed by microfinance specialists.

The author concludes that MFIs should:

• Use a tiered approach for regulation and supervision;
• Help clients understand the risk of saving with institutions that are hitherto not supervised externally;
• Improve internal supervision (accounting systems, internal control, governance, transparency etc.) instead of external supervision.