Regulation of the Microfinance

New techniques are emerging in microfinance that help formal financial services to be availed by low-income customers that were not available to them earlier. But one of the most important needs of the microfinance industry is that its service providers should finally enter the domain of licensed, prudentially supervised financial intermediaries. Therefore, there is a need of a set of crafted regulations that allow this to happen.

Many of developing country governments are now in the course of addressing this challenge. Many different actors are approaching for regulatory corrections, from microfinance institutions themselves (MFIs), to international development agencies, to government officials who want to constitutionalize finance or guard against anticipated risks for the financial system. These actors have significantly diverged interests and objectives. Tough technical and practical issues are involved. Regulated microfinance is not much old—most of the countries with microfinance regulations have only a few years of experience with implementing them. And country-specific circumstances loom large, so there can be no standard model for microfinance regulation.

Nevertheless, among researcher working in this area there are surprisingly wide areas of agreement on some general values that should bear on regulatory design for microfinance. Therefore, this paper is attempted to cover the issue of microfinance regulation and will cover “prudential” and “non-prudential” regulations. The discussion will begin with an important definitional distinction between “prudential” and “non-prudential” regulations. Non-prudential regulation will be discussed in the third section, prudential regulation in the fourth, and the challenges of prudential supervision in the fifth. The sixth section concludes the paper.