Microfinance Regulation in Developing Countries: A Comparative Review of Current Practice

Microfinance activity in many developing countries has grown to the extent that there is a need to frame more appropriate regulatory frameworks. This paper aims to provide the necessary comparative data and analysis to support sound regulatory policy. It outlines the core problems of recognition, regulation and supervision and then draws upon case studies from a range of developing countries to illustrate how each country adopted solutions to these challenges.

The paper draws on these experiences to make a number of recommendations regarding:

• Whether and how to amend a structure of financial services tiers;
• How labor is divided in the system of tiering and supervision, including who is regulated, what entities handle the regulation and supervision, and what kind of regulation is applied;
• Control of entry, including defining the regulated activity or market (i.e microfinance), and the rules governing admission to regulated status and mandatory licensing;
• Adapting prudential norms and the reporting and supervision systems to the lending methodologies used by the regulated microfinance institutions;
• Need for complementary institutions and policies to microfinance regulation and supervision systems.