The Ultimate Balancing Act: Investor Confidence and Regulatory Considerations for Microfinance

This paper states that behind the scenes of every investment transaction, investors, MFIs, local lawyers, and consultants navigate a sea of permits, restrictions, approvals, and potential obstacles in the local and regulatory environment. It asks – At what point do these hurdles become too costly to bear and actually deter commercial investment in microfinance? What regulatory practices promote investor confidence and provide impetus to increased private investment in microfinance? The paper seeks to answer these questions using fieldwork conducted in Uganda, Peru, and the Philippines, as well as international experience gained through desk research and interviews with leading experts.

The report notes that whilst it is rare that no regulatory oversight exists, the two ends of the spectrum can be classified by “light” regulatory oversight and “heavy” regulatory oversight. At the light end of the spectrum the paper points to:

  • No or nuclear legal status
  • Low level of oversight/monitoring
  • Secured lending: ability to pledge intangible assets
  • Lack of protection of minority investor rights

At the other end of the spectrum the paper highlights:

  • Restrictions due to legal status
  • Forms of capital allowed
  • Limit on loan size or term
  • Interest rates
  • Capital and reserve requirements
  • Cost of regulatory requirements
  • Restrictions on ownership
  • Tax burdens

The paper explores the specifics of the spectrum. It begins with an introduction to the Transitions to Private Capital project before turning to discussing the characteristics of regulatory practices along this spectrum. Topics such as MFI legal status, secured transactions law, investor protection, and tax considerations are discussed to show how an overall regulatory environment affects investor confidence. The paper ends with an examination of the lessons learned about balancing the two extremes and the process required to achieve this balance.

The paper concludes with the view that as external factors evolve (such as a change in government, economy, MFI market environment, investor interest, etc.), regulators and stakeholders must continually re-evaluate the balance required to promote investor confidence. The lessons noted in the paper are:

  • Transparent regulation of financial institutions provides security for both institutions and investors
  • Government attitude towards microfinance and investment is very important, particularly in creating a solid enabling environment
  • Clear communication about requirements is helpful for both MFIs and potential investors. Developing a consultative process when reappraising the regulatory environment results in increased investor confidence and better informed MFIs

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