Regulate Microcredit to Protect Borrowers

This article highlights the need to regulate microcredit to protect the poor borrowers. The combination of profit seeking companies, minimal competition, and vulnerable, ill-informed, ill-educated borrowers has opened up dangerous potential for exploiting the poor.Regulation is needed to protect microcredit clients in three areas, namely, abusive loan recovery practices, high interest rates and lack of transparency. The article justifies regulation stating that:

• Complex financial products are difficult for even most financially astute consumer to recognize risks;
• Disclosure and information is inadequate, since people often get overwhelmed and make mistakes;
• Microcredit has female clients with high illiteracy rate;
• Exploitation should not become pervasive before implementing consumer protection regulation.

MFIs are unlikely to exercise self-restraint and self-regulation in the context of microcredit industry in developing countries characterized by much less competition, less scrutiny and more vulnerable consumers. Government regulation is needed to protect the microcredit clients.