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A Framework for Regulating Microfinance Institutions


Hennie Van Greuning


World Bank

Joselito Gallardo


World Bank

Bikki Randhawa


World Bank

November 30, 1998

World Bank Policy Research Working Paper No. 2061

Abstract:     
Is there a need to regulate microfinance institutions? If so, what activities should be regulated? Who should regulate them? And what issues are fundamental to the sector's regulation?

The continuum of institutions providing microfinance cannot develop fully without a regulatory environment conducive to their growth. Without such an environment, fragmentation and segmentation will continue to inhibit the institutional transformation of microfinance institutions.

Van Greuning, Gallardo, and Randhawa recommend a tiered approach to external regulation, one that takes into account the different types of microfinance institutions, the products they offer, and the markets they service. A tiered approach can be useful in designing regulatory standards that recognize the basic differences in structure of capital, funding, and risks faced by different kinds of microfinance institutions.

The model they develop for a regulatory framework identifies thresholds of financial intermediation activities, thresholds that trigger the requirement that an institution satisfy external or mandatory regulatory guidelines. It focuses on risk-taking activities that must be managed and regulated.

They illustrate the usefulness of the model by practically applying prudential considerations to various categories and values of financial risk for each of three broad categories of microfinance institution:

° Those that depend on other peoples' money (such as donor or public sector funding).
° Those that depend on members' money.
° Those that leverage the general public's money to fund microfinance loans.

For each category, the model highlights:
° The observed value ranges for selected indicators of financial risk.
° Recommended ranges of value suitable for consideration under internal governance.
° Suggested threshold values that indicate the need for external regulation. A transparent, inclusive framework for regulation will preserve the market specialties of different types of microfinance institutions - and will promote their ultimate integration into the formal financial system. One example of the kind of regulation the authors recommend: Require standard registration documents and procedures - no different from those required of regular corporations - including the designation of a central government agency with which they should register as corporate entities.

This paper - a product of the Financial Sector Development Department - is part of a larger effort in the department to explore ways to provide more financial services to the poor.

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Date posted: November 15, 2004  

Suggested Citation

van Greuning, Hennie and Gallardo, Joselito and Randhawa, Bikki, A Framework for Regulating Microfinance Institutions (November 30, 1998). World Bank Policy Research Working Paper No. 2061. Available at SSRN: http://ssrn.com/abstract=620624

Contact Information

Hennie Van Greuning (Contact Author)
World Bank ( email )
1818 H Street, N.W.
Washington, DC 20433
United States
Joselito Gallardo
World Bank ( email )
1818 H Street, N.W.
Washington, DC 20433
United States
Bikki Randhawa
World Bank ( email )
1818 H Street, N.W.
Washington, DC 20433
United States
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