International Conference Microfinance Regulations: Who benefits? Organized by: Microcredit Regulatory Authority (MRA), Bangladesh 15 – 17th March 2010 Venue: Pan Pacific Sonargaon Hotel, Dhaka, Bangladesh

Microcredit Regulatory Authority (MRA): Microcredit Regulatory Authority (MRA) is a statutory government body, created in 2006 by an Act of Parliament to monitor and supervise microfinance operations of non-government organizations. MRA is the licensing, monitoring and supervising authority of all non-government organizations (NGO-MFIs) engaged in microfinance activities in Bangladesh. Objective of the conference: The three-day meet has been organized by Microcredit Regulatory Authority (MRA) Bangladesh with a view of sharing experience in the area of Microfinance (MF) regulations and related issues that impinge on the effectiveness of microfinance sector at global, regional and national levels. Areas of discussions are Global Practices in Microfinance Regulations; Resource Mobilization and Legal Issues; Rating and Supervision Issues of Microfinance Institutions; Ownership and Governance of Microfinance Institutions; and Regulatory Impact Assessment. The program was divided by six business session along with inaugural and closing session. Inaugural ceremony: The session was started at 10 am with a welcome addressed by Mr. Khandaker Muzharul Haque, Executive Vice Chairman of MRA Bangladesh. Mr. Abul Maal Abdul Muhit, MP and the Honourable Finance Ministers were present as the chief guest, formally declared the conference open. Dr. Atiur Rahman, Chairman MRA and Governor, Bangladesh Bank, chaired the session. Dr. Quzi Kholiquzzaman Ahmed, Chairman, PKSF Board and Mr.Chris Austin, Country Representative, DFID, Bangladesh was present as special guests besides a host of other dignitaries and participants from home (139) and abroad (49).

Business session : 1(Why Regulation and Supervision?): In the first business session Dr. Gianfranco A.Vento of the European Business School, London, UK presented his paper about the recent trends in Microfinance (MF) industry and covering the regulations, supervisions and the principles of the Basel Committee. The recent trends witness a change in the industry due to several factors such as a shift from localized micro lending to institutional lending, involvement of a large number of global financial intermediaries, use of new technologies and especially web based platforms for channelling funds directly from households to microfinance institutions and borrowers. These changes could lead to a very significant growth in MF business worldwide. Such important progress of the industry have made the role of regulators and supervisors more crucial and it has become urgent to highlight the key criteria that a country has to follow in order to design an efficient and

effective regulatory framework. The recent attention on MF industry is also demonstrated by the interest towards this segment of financial market of the Basel Committee on Banking Supervision, which in February 2010 published a consultative document on MF activities and the Core Principles for effective banking supervision. The Panellists included Dr. Baque Khalily, Proffeser, Finance Dept, Dhaka University, Ms Justine Bagyenda, Executive Director, Central Bank og Uganda and D S K Rao, Regional Organiser for Asia-Pacific, Microcredit Summit Campaign. Dr. Salehuddin Ahmed, former Governor of Bangladesh Bank moderated the session. Business session – 2 (MF Regulation around the world - Asia) :The session was moderated by Khondoker Ibrahim Khalid, former Deputy Governor of B. Bank and Chairman Bangladesh Krishi Bank. Paper presenter was Mr. Kim Vada, Deputy Director General, National Bank of Combodia, Mr. B B Mohanty, Chief General Manager, National Bank of Agricultural and Development (NABARD) India, Ms Lila Rashid, Director, MRA, Bangladesh and panellists was Mr. W M Karunaratne, Assistent Governor, Central of Srilanka and Mr.Gregory Chen, Regional Representative for South Asia, CGAP. Mr. Voda in his paper on ‘Combodia Microcredit : Development and Challenges’ gave a brief background of the evolution of the banking system in Combodia. The Royel Goverment of Combodia adopted a series of policy measures that included introduction of a framework in the banking law to enable NGOs and other rural finance providers to become regulated MFIs, creation of a unit in the National Bank of Combodia (NBC) to supervise and monitor MFIs and establishment of an apex institution to provide financing for MFIs. In 2000 NBC issued regulations on the classification of MFIs into three categories according to the level of their operations and created criteria for licensing and registration. So that the regulation is very similar to commercial banks except that the capital requirment is substantially lower. The Financial Sector Development Strategy, Role of the NBC in promotion of MF regulation, supervision, capacity building, public awareness and lastly MF performance and challenges. Mr. B B Mohanty presented his paper titled ‘ Microfinance Sector in India – Developing a supportive policy and regularity framework and environment – Position and Perspectives.’ He narrated the background of Indian Govt. policies that helped the growth of the MFIs in India, which included nationalization of commercial banking sector, setting up of Regional Rural Banks (RRBs), reforms of financial sector, implementation of pro-poor schemes etc. NABARD was set up by an Act of Parliament. It initiated search for alternative policy, systems, procedures, savings and loan products, other complementary services and new delivery mechanism that would fulfil the requirements of the poor and disadvantaged. Self help groups have grown spectacularly with bank linkage program which was conceptualized by NABARD. Developing a new regulatory regime for MF takes a great deal of analysis, consultation and negotiation. At the end he advocated that the regulatory and supervisory framework envisaged will eliminate restrictions on orderly growth of the sector and lead to evolution of market-oriented financial and credit policies. He opined that the institutions already empowered with regulatory and supervisory powers in MF sector could be the torch bearers for the rest of the countries where regulatory and supervisory framework is yet to be set-up. Ms Lila Rashid, the third paper presenter of the session, discussed on ‘Microfinance Regulations in Bangladesh: Development and Experiences’ which detailed the experiences of Microcredit Regulatory Authority (MRA) in Bangladesh. MFIs are now a new dimension of monetary policy transmission mechanism. MF sector is growing fast in terms of its client outreach, coverage, amounts of microcredit and microsavings. Alongside, liquidity and credit risks are growing. Domination of market by a few giant MFIs has posed a systemic risk. This has also put legal obligations to safeguard people’s deposits. MRA was established by the Govt. in August 2006 with a view to creating an enabling environment for NGO-MFIs to work, promote and foster sustainable development of MF institutions in Bangladesh. The experience of MRA indicates that there are other important issues which need to be addressed with caution. Among them

are issues of service charge, sustainability of the sector, problem of overlapping borrowers, establishing effective supervisory tool to monitor, new issues like foreign investment and securitization etc. Business session – 3 (MF Regulation around the world – Latin America): The second day of the conference started with a session on ‘MF Regulation around the world – Latin America.’ Paper presentations were made by Mr. Eduardo Gutierrez Escobar, former Financial System Manager, Bolivian Central Bank and Mr. Juan Ramos Diaz, Economist, Banking Commission, Govt. of Mexico (CNBV). The session was moderated by Mr. Gianfranco A. Vento of the European Business School, London, UK and panellist was Mr. Ashraf Khan, Executive Director, State Bank of Pakistan, Dr. Kazi Mesbahuddin Ahmed, Managing Director, PKSF and Dr. Maribel Munoz, Directora, de Merados, Precursores, Mexico. Mr. Eduardo Gutierrez Escobar presented his paper on ‘Microfinance Regulations in Bolivia.’ NGOs began offering microcredit in the 80s. In the same period microcredit was incorporated into the Banking Law and regulation requirements for microfinance institutions were set. In the field of microcredit technology, financial and non financial services improved but the Development Finance Institutions (DFIs) grew noticeably less than regulated MFIs. In 2008 the Finance Supervision Authority (FSA) made regulation possible for DFIs, but the challenges faced are supervision procedures and the highly volatile nature of the business and little formality in client information. The regulation costs DFIs are high. DFIs have to develop information system, training and infrastructure all of which can affect interest rates negatively for the client. Finally, the current process of regulating DFIs has to be up to the challenge of preserving their original mission that is to reduce poverty and exclusion from financial services. Yet, DFIs must base their long-term financial viability on efficient management.

Mr. Juan Ramos Diaz presented his paper on ‘Mexican Popular Financial Sector Regulatory Framework.’ Due to the costs and incentives in the financial markets traditional commercial banks have shown little interests in the microfinance. MFIs in Mexico are financial entities that provide limited financial services to low income people and do not provide large loans limiting the amount between 390 to 1950 USD. In most cases MFIs start granting loans of small amounts and gradually increase the loan amounts. This methodology supports members to establish a credit history which could later be used to obtain other financial services. Business session – 4 (MF Regulation around the world – Africa) :The session was moderated by Mr. Eduardo Gutierrez Escobar and panellist included Mr. Vishnu Nepal, Executive Director, Central Bank of Nepal and Mr. Mr. B B Mohanty, Chief General Manager, National Bank of Agricultural and Development (NABARD) India. Paper presentations were done by Ms. Justine Bagyenda, Executive Director, Central

Bank of Uganda, Dr. Chiarra Chiumya, Assistant Director, Bank of Zambia and Mr. Yigrem Kassa, Director of Microfinance Institutions Supervision Directorate, National Bank of Ethiopia. Ms. Justine Bagyenda presented the first paper titled ‘Uganda’s Experience in Regulating Microfinance Deposit – taking Institutions.’ Starting off as a subsidized NGO dominated service to the poor, MF in Uganda has undergone many changes over the last two decades. In 2005 Bank of Uganda (BoU) licensed and started supervising four Microfinance Deposit taking Institutions (MDIs) under the MDI Act 2003. Since 2005, BoU has seen substantial improvment in the financial performance of the licensed MDIs, the range of services they offer as well as capacity to transform into fully fledged comarcial banks. She shared the experience in benifits that have accrued to MDIs, their clients, goerment policy making efforts as well as improvements in BoUs approaches to supervising MF business alongside conventional banking business and highlighted if the benefits of MF regulation are to reach more people and sectors. Dr. Chiara Chiumya in her paper on ‘The Regulation of Microfinance in Zambia’ informed that the process of developing the regulations in Zambia started in 1999, culminating in the passing of the Banking and Financial Services (Microfinance) Regulations (MFRs) which became law on 30 January 2006. Bank of Zambia (BoZ) works as central bank and supervisory authority for Zambia’s microcredit sector. The need to regulate and supervise the MF sector came from Govt. desire to create an enabling environment for microfinance institutions () to reach significant outreach on a sustainable basis in order to increase access to financial services by low income households and reduce poverty levels Zambia. The paper evaluated the extent to which the objectives of the regulations were met, the impact of MFR on the development of the MF sector and explored the reasons for non attainment of some of the objectives set. It also highlighted the challenges that have been experienced by BoZ in implementing the regulations and made recommendations for changes needed to the current regulatory and supervisory framework in the light of te experience gained so far. Mr. Yigrem Kassa presented the paper ‘Regulation and Supervision of Microfinance sector in Ethiopia: Achievements, Challenges and Prospects.’ A regulatory framework for Licensing and Supervision of MFIs was introduced after 1996 which resulted in most of the donor funded microcredit programs that were carried out by NGOs were transformed to be regulated institutions. The regulatory framework created a helpful environment that promoted standardization and transparency in the sector. But it also has its own constraints and challenges and problems have been addressed by the new licensing and proclamation of MF business issued in 2009. But the new proclamation and the existing supervisory practice still have some constraints. This paper also made comparative assessment of regulatory and supervisory framework of Ethiopia with Tanzania and Uganda. Business session – 5 (Issue of Ownership & Governance of MFIs) : Professor M.M. Akash Economic Determent, University Of Dhaka presented his paper in the post lunch session of day two of the Conference covering the ‘Issue of ownership and Governance of Microfinance Institutions’. In the Paper he dealt with the emergency of the Micro-credit ownership models of the MFIs, Importance of its sustainability and brooder outreach, need for regulation, and governance issues. He recommended that to ensure governance the MRA should concentrate on issues like composition of the board members, the power chemistry between the CEO, Chairman and the board of the directors, the mode of control between the MFIs and their sister organizations and the mode of use of the surplus of these commercial sister organizations. For financial sustainability issues like savings portfolio, use of savings, interest spread of the MFIs, administrative cost of micro credit and self sufficiency should also be analyzed by the regulators. A mechanism to analyze the average loan size and proportion of loonies from the poor, coverage of the desirable sectors and complaint received from the borrowers and employees. He strongly suggests that the MRA should open a communication channel with the grass-root borrowers and with the middle and lower management of MFI, especially field officers, to ensure more transparency.

The Panelist were Dr.Cotherine S.M. Duggan, Assistant Professor Harvard Business School, DR, MAK. Khan, Team Leader PROSPER (PCU) DFID and Mr,Shankar Man Shrestha CEO, RMDC, Nepal. The session was moderated by Dr, Qazi, Kholiquzzaman Ahmad Chairman PKSF, Bangladesh. Business session – 6 (Resource Mobilization and the issue of Sustainability) : Professor Salauddin Ahmed Khan of the Finance Department, University of Dhaka, presented his paper in the last session on ‘Resource Mobilization and the Issue of Sustainability’. The panelists were Mr. Butardo, Acting Deputy Director, Central Bank of Philippines, Dr. Chiarra Chiumaya, Assistant Director, Bank of Zambia and Mr. Edward Mallorie, IFAD consultant. The session was moderated by Dr. Mahabub Hossain, Development Economist and Executive Director, BRAC, Bangladesh. The Microfinance industry in Bangladesh has gradually moved away from compulsory savings and introduced flexible savings. The MFIs have significant volume ‘Quasi Equity’ accumulated from retained income, capital funds from the past, and other designated reserves. The quasi equity for these MFIs stands as one of the significant source of loanable funds for all the MFIs irrespective of sizes. In 1990 the government established Palli Karma Sahayak Foundation (PKSF) as an autonomous wholesale lending agency for the MFIs which eventually became an important source of funds for a large number of NGOs. PKSF mainly accumulated its fund from government of Bangladesh and from overseas official grants, and loans from multilateral lending or donor agencies. Other than internal funds, the MFIs are also dependent on external sources of funds. Recently some commercial banks have also made arrangements for some structured funds for the MFIs. Loans from commercial banks have already become the lead source for the MFIs in Bangladesh. However, domestic capital market instruments are not yet created in Bangladesh. Closing session, 17th March:The three day meet was closed by concluding session. There were two part of the clossing session. 1st part was chaired by Prof. Rehman Sobhan. The panellist was Mrs. Justine Bagyenda, Uganda, Dr. Salehuddin Ahmed, Mr. Ashraf Khan, Pakistan, Dr. Rushidin I. Rahman, Mr. Juan Ramos Diaz, Mexico, Mr. Shafiqul Haque Chowdhury.

2nd part was chaired by Dr. Atiur Rahman, Governor, Bangladesh. The Chief Guest was Dr. Mashiur Rahman, Advisor to Prime Minister on Economic Affairs, Govt. of the People’s Republic of Bangladesh. The Special Guest was Prof. Muhammad Yunus, MD, Grameen Bank and Sir Fazle Hasan Abed, Chairman, BRAC, Bangladesh. Major discussions:

• Regulation (MRA) should be prudential regulation not as control. • MRA should have different policy for different areas (like Urban, Rural, Coastal, Chars etc). • MRA should be friendly for the MFIs. • MRA should support to capacity building for MFIs.

• MRA should make credit retting of the MFIs • Technology using (like mobile banking, web based software). • Credit plus activity (health, education etc.) • Micro Insurance (life, health etc.) • Interest rate should be settled by MRA • Savings mobilization (compulsory and voluntary) • Transparency of MFIs to the borrowers. • Create more wholesale lending agency for MFIs. • MFIs should make profit for social mobilization • Sustainability of MFIs. • NGO governance

Learning’s:

• Orient borrowers to their Savings and Credit balance. • Orient borrowers about rate of interest on loan (before getting the loan). • Savings interest should pay regularly. • Use mobile or web based MF software. • Increase credit plus activity (like education, scholarship) • Include micro insurance for the group member. • Increase productivity for making more surplus and sustainability of the organization.

Prepared by Tarik Sayed Harun Head – Core Operation & Participant of the Conference