Transitions to Private Capital: Regulatory Challenges to Private Sector Investment

This paper looks at two broad sets of regulations that hinder private sector investment in MFIs. The paper examines regulations that limit private investment in MFIs, and the lack of legal clarity and transparency. The paper identifies regulatory restrictions for institutional investors in terms of asset quality and liquidity, and regulations that restrict domestic debt investment in microfinance. It also examines country risk and accounting standards as barriers to private investment in developing countries. The paper states that:

• Regulations constrain foreign as well as domestic investment;
• Private international investment has less demand;
• Regulatory restrictions that inhibit international investment are unlikely to be removed for the benefit of the microfinance sector;
• Regulatory reform with respect to private investment in microfinance is more likely in domestic markets than international ones.

Finally, the paper states that regulators and stakeholders must understand the investment and client markets. They should also affirm property rights and accept the need for a fair return.