Increasing Access to Financial Services while Balancing Legitimate Supervisory Interests: A Bank Regulator's Perspective

This paper discusses regulatory and supervisory issues involving financial institutions in general and microfinance institutions in particular - from a bank regulators' perspective. The paper discusses:

Risks inherent in financial services, stating that:

• Financial institutions engaged in deposit-taking from the general public should be subject to prudential regulation;
• Microfinance institutions (MFIs) generally do not engage in the range of risks that require sophisticated forms of regulation.

General principles of regulation and supervision, stating that financial regulation should:

• Strike a balance between protecting the financial system form risks and not stifling innovation;
• Enlist the aid of the marketplace in rewarding safe/fair financial activity and punishing unsafe/unfair financial operations through disclosure and other means.

Applying these lessons to the microfinance industry, stating that:

• A balance in the approach to regulation is critical depending upon the risks the MFI undertakes, the nature of its dealings with the public, and the size and complexity of its operations.

Supervisory standards for microfinancing, stating that the standards relevant for non-bank financial institutions include:

• Some form of licensing or registration;
• Fairness: Assuring that loans are made on an unbiased, arm's-length basis.

The author concludes by stating that the balancing of the costs and benefits of regulation is not easy, but it is worth undertaking at every opportunity that new regulation is contemplated.