What Is the Role of Regulation and Supervision in Microfinance?
Banks are regulated to protect their depositors and to prevent risks to the financial system. Credit-only MFIs do not take deposits from the public and are too small to pose much risk for the financial system. Regulation by the financial authorities is needed for MFIs that do take deposits—for instance, savings-based financial cooperatives or credit-based MFIs that want to start taking deposits to finance their growth. In many countries, various factions are pushing for new laws to create a special, new type of financial license that is tailor-made for deposit-taking MFIs. Such laws need to be approached with care. New licensing windows for MFIs have been most successful in countries where a critical mass of profitable credit-only MFIs existed before the opening of the window. Drafters of new legislation typically fail to give enough attention to the practical feasibility of supervising compliance with the new regulations. MFIs that do not take deposits do not need intensive regulation
