Library

A framework for regulating microfinance institutions: the experience in Ghana and the Philippines

An earlier Policy Research Working Paper (Hennie van Greuning, Joselito Gallardo, and Bikki Randhawa, ” A Framework for Regulating Microfinance Institutions, ” WPS 2061, February 1999) presented a regulatory framework that identifies thresholds in financial intermediation activities that trigger a requirement for a microfinance institution to satisfy external or mandatory guidelines, thus creating a tiered approach to regulation and prudential supervision. The model focuses on the risk-taking activities of microfinance institutions that must be managed and prudentially regulated. This paper reports on the results of field testing the tiered approach in Ghana and the Philippines.

The two countries both have a wide range of informal, semi-formal and formal institutions providing financial services to the poor, but differ in how they regulate financial intermediation activities by microfinance providers. In this assessment and comparative analysis, the author focuses on the key issues in the regulatory and supervisory environment for microfinance, and in the legal system and judicial processes, that are being addressed by government authorities and microfinance stakeholders in both countries. He gives particular attention to the thresholds at which intermediation activities become subject to prudential regulation and regulatory standards for capitalization and capital adequacy, asset quality and provisioning for nonperforming loans, and liquidity management.

The paper seeks to identify the key elements and characteristics of the microfinance regulatory experience in Ghana and the Philippines and to identify lessons that may be useful for other countries interested in establishing a regulatory environment conducive to the development of sustainable microfinance institutions. One principal lesson is that a transparent, inclusive regulatory framework is indispensable for enabling microfinance institutions to maintain market specialization and to pursue institutional development that leads to sustainability. Clear pathways for institutional transformation facilitate the integration of microfinance institutions into the formal financial system.

Related Resources