regulation frame work

8/8/2019 Regulation Frame Work

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The regulation of microfinance:

Regulatory frameworksIDLO TW-372E

Microfinance: Building Inclusive Financial Sectors & Supportive Legal andRegulatory Frameworks (as a Tool to Achieve Poverty Reduction) in

East Africa

Simone di CastriIDLO Microfinance Project Research Coordinator

November 2008


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Todays goals

To introduce to each other To get information about workshop development, supports and

following activities To know IDLO MF Project

To agree on basic key concepts for further discussion To discuss prudential and non-prudential regulation of MF

To exchange knowledge of countries frameworks

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Introductions

IDLO staff

Participants Instructors Observers Schedule Handbook Google Group IDLO MF web site Publications VC Policy Dialogues Rome summary conference

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Introduce your-self

Name and nickname

Background

Affiliation

Description of your duties

ExpectationsIdea for follow-up publication


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When we take savings in India, it is actually in violation of the law. I have a structure witheight entities in order to sidestep enough of the law that it stays below the radar.

Vikram Akula - McKinsey Consultant and Founder and Chair of SKS India

Think of the financial sector as a three-legged stool; if the law is the seat of a three-leggedstool, regulations are the legs. One leg is safety and soundness. One is profitability andinnovation, and one is consumer protection. All these virtual legs are equally strong andsupportive and each is essential to maintaining balance. It is through effective andbalanced regulations and rules that the system has retained its integrity, its edge and its

ability to deliver capital where it is needed. Regulations should allow this more risky activityto be profitable.

Diana Taylor - New York State Banking Superintendent

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Financial regulation around the world wasdesigned to prevent fraud and to insurestability of the financial system, how did it evolve into an instrument that preventsinnovation in financial services and broad access to credit? Unfortunately, it is no

accident. Many intermediaries benefit from restrictions to competition and may seeuniversal access as a threat. For this reason, the struggle to reform regulation in favor ofmicrofinance is not an easy one.

Luigi Zingales - Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago

Governments, including central banks, must balance the responsibilities they have beengiven related to their banking and financial systems. We have the responsibility to

prevent major financial market disruptions through development and enforcement of

prudent regulatory standards and, if necessary, in rare circumstances, through direct

interventions in market events. But we also have the responsibility to ensure that the

regulatory framework permits private sector institutions to take prudent andappropriate risks, even though such risks will sometimes result in unanticipated bank

losses or even bank failures.Alan Greenspan - former Chairman of the Federal Reserve of the United States

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Terminological confusion Different countries use same terms differently Different countries use different terms to mean the same thing Non-lawyers use terms differently from lawyers and regulators MFI and microfinance

are not regulatory terms, except in a small number of countries where theyhave been added recently andcould mean many different things, depending on the country

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What is your definition of microfinance?

Microfinance is the provision of a broad range of financial services suchas deposits, loans, payment services, money transfers and insurance

products to the poor and low-income households and theirmicroenterprises.

By definition, microfinance is not subsidized credit, not a dole-out, not salary orconsumption loans, and a cure-all for poverty.

Bangko Sentral ng Pilipinas (BSP)


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Basic conceptsFrameworks:

Institutional

and Policy Legal

and Regulatory

Not only financial/banking regulation, but a multitude of laws andregulations affects financial inclusion, the provision of microfinance

services and the access!

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Regulation: Set of rules adopted by a legislative body (laws) or anexecutive body (regulations)Supervision: External oversight aimed at determining andenforcing compliance with regulation.

Do not regulate what cannot be supervised!


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Institutional framework 2/2

Governance of the microfinance sector National Strategy of which Micro-Finance is a part Government Policy

-Inflation/deflation policy-Wholescale debt relief initiatives (generally in agricultural loans; ie India)-Requirements regarding investments of state pensions and funds (ie Peru)-Community Development Finance type intiatives (public/private financing partnershipsUSA, UK, Australia with tax incentives and public funding)-Nationalization risk (Bolivia, Ecuador, Russia)

Authority in charge of MFI licensing Authority in charge of MFI supervision Public administration in charge of MFI support Public guarantee fund APEX institution Role of MFIs national/regional network

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Why to regulate?

to reduce the level of risk bank creditors are exposed to (i.e. depositors)? to protect clients, and investigate complaints (i.e. representation of interest rates)? to reduce systemic risk resulting from adverse trading conditions for banks causing

multiple or major bank failures? to avoid misuse of MFIs and banks for criminal purposes (i.e. laundering the proceeds of

crime)? to prosecute cases of market misconduct? to protect banking confidentiality? to direct credit to favored sectors or borrowers? to license providers of financial services? to maintain confidence in the financial system? to attract investments? in general, to reduce the moral hazard of the actors? to increase financial inclusion (i.e. reducing adverse selection)? to promote the development of the sector?

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How to regulate?Prudential regulation (and supervision)function: to protectsolvencyof regulated institutions

the stability of financial sectorthe safety of deposits

Non-prudential regulationfunction: other than preventing insolvency

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for

Should these norms differ from those applied to commercial banksthat offer more typical financial products?

Some rules have both functionsSoft regulation

Self-regulation


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The costs of regulation

Costs of compliance, of supervision, of enforcementDirectIndirect

What to regulate?

Institutions v. ActivitiesDeposit-taking institutionsCredit providers

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Regulatory Framework MFIs 2

Ownership and governance Standards for ownership officers Restriction on foreign ownership Other restrictions on ownership Standards for managers Possibility to create stock-options or other incentive tools for

management by the shareholders Restrictions on managers Other governance standards and restriction Prohibited sources of funds

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Accounting, auditing and reporting, and operational concerns

Accounting norms Estimated cost of auditing requirements Estimated cost of reporting requirements Loan contract registration Collateral registration Loan recovering enforcement legal tools Connected/insider business Involuntary and voluntary liquidation procedures Corrective action powers

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Fiscal concerns Tax breaks Taxes on Income Taxes on Transactions Taxes on Payroll Double taxation treaty Others

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Financial intermediation activity

Lending Mobilizing deposits Mobilizing savings Borrowing in foreign currency Type of investments MFIs are allowed to make Type of transactions MFIs are allowed to enter into Insurance services Remittances transfers Restrictions on geographical oprations Interest rate caps

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Credit-only Microfinance Institutions

Registration with authorities Tax benefits Annual financial statements/audits (perhaps only relevant if

MFI is borrowing from commercial banks)

Limited reporting of activities/business for statistical purposes KYC (Know your customer) Anti-money laundering/combat financing of terrorists (AML/CFT)

Consumer protection Interest rate regulation/usury Consider possible abuses:

-across variety of products (not just credit);-over life cycle of product (marketing, delivery, collection)

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Interest rates

CGAP 2004: IRs caps in 40 developing countries

20 interest rates control 13 usury limits 7 de facto controls

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Interest rates 2/2

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Regulatory framework for foreign financing

Equality of treatment of foreign investors with local investors in caseof crisis

Relevant procedure of conflict resolution in case of commercialdisagreements with the public, private local and private foreignpartners.

Possibility to cash dividend from equity investments Tax treatment of foreign investment Foreign ownership restrictions and governance matters Availability of hedging instruments and cost of hedging Sequestering foreign direct investments for long periods of time

(Argentina, Brazil and Venzuela) (in)Ability to repatriate profits

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Some issues donors and investors may consider before they invest in your country

and more (AMT/CFT, US/EU regulation, etc.)


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References CGAP, Guiding principles on regulation and supervision of microfinance UN, Building Inclusive Financial Sectors for Development, also known as the

"Blue Book GTZ, USAID, ADB

Database:

Microfinance Gateway IDLO CGAP/CAPAF Worldbank DoingBusiness.org for property rights and contract enforcement and

steps to register/license a business, taxation

Transparency Intl. Corruption index IFAD Womens rights to own/inherit/control property

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regulation frame work

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