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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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Regulatory Framework MFIs 3
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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Regulatory Framework MFIs 4
Fiscal concerns Tax breaks Taxes on Income Taxes on Transactions Taxes on Payroll Double taxation treaty Others
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Regulatory Framework MFIs 5
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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