What should regulators do?

There’s not enough academic research on the regulation of financial inclusion. Many of the questions might seem too applied for some researchminded economists, but that leaves regulators with few guideposts. It also seems short-sighted.

Regulation is always a question of trade-offs between competing goals. Within microfinance, for example, there is evidence that the supervision and monitoring that is part of prudential regulation increases costs substantially for microfinance institutions. That, in turn, appears to push institutions to reduce outreach to their poorer customers and women (Cull, Demirgüç-Kunt, Morduch 2011). The alternative—less regulation in order to increase outreach—carries plenty of dangers. Those are difficult trade-offs to make and there is as yet not enough empirical evidence to describe optimal regulatory schemes for microfinance.

Add to this uncertainty the largely uncharted roles of large non-profit institutions. Regulatory schemes are generally designed around reining
in the reckless behavior of profit-seeking banks. But non-profits react to regulation differently. Should they, therefore, be regulated by different agencies, those more familiar with the unique behavior of non-profits? Or should they be regulated by finance ministries and central banks like others that provide financial services? Moreover, how do profitable nonprofit institutions affect competitive markets?

Answering these kinds of questions will require taking a corporate finance lens and an industrial organization lens to the new, inclusive financial landscapes. Looking forward, these directions will likely yield the most intellectually interesting inquiries of all.


The series has been compiled as a framing note on the FAI site now and will later appear as part of a collection of studies to be published in a forthcoming book.