What can regulators do to balance protection & inclusion?
The microcredit movement has successfully highlighted the entrepreneurial capacity of poor households.
For much of history, the discussion of access to credit instead painted low-income households as victims—of greedy lenders as much as of their own lack of self-control. Microcredit turned this way of thinking around by emphasizing the agency of borrowers and offering loans as the antidote to usurious moneylenders and as an escape from poverty through enterprise. Regulators have tended to accept this proposition and provided accommodating regulatory environments for microcredit providers.
Read More...Costly But Necessary
Macro- and regional financial crises have shown that regulation is necessary to protect consumers and maintain the stability of the financial system. Regulation imposes its own costs, as institutions must enact new processes to comply with supervisory requirements. These costs are not trivial and may have important effects on the borrowers who microcredit lenders are able to serve. Cross-country evidence on prudential regulations shows that regulation decreases outreach as institutions fulfilling the costs of compliance compensate by lending larger sums (which may be riskier for borrowers) and targeting wealthier clients. The increased costs of compliance can also raise barriers to entry, limiting the entrance of new providers.
Self-Regulation
Many in the microfinance industry have pushed for institutions to adopt measures for self-regulation. The Smart Campaign, for example, promotes Client Protection Principles that include avoidance of over-indebtedness, transparent and responsible pricing, appropriate collections practices, ethical staff behavior, mechanisms for grievances, and privacy of client data. The Alliance for Financial Inclusion (AFI) has a Financial Integrity Working Group, a platform where practitioners can share country-specific information on promoting financial integrity and inclusion. In the area of government regulation, the Consultative Group to Assist the Poor (CGAP) developed the Microfinance Consensus Guidelines, which outline areas of general industry and expert agreement on best practices in microfinance regulation. These principles will be a success if their implementation is as good in practice as the words are on paper.
Regulation that does not directly target microfinance also plays an important role in addressing fair protection issues that affect financial access. Laws that prevent women from owning property, require a spousal co-signature for borrowing, or make the acquisition of a birth certificate or identity card difficult and expensive inhibit access to credit even though they do not regulate the industry itself.
Key questions for the sector to consider include: What types of regulation and supervision best balance protection and inclusion, and in what contexts? What roles do market discipline and supervision by investors play?
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Jan 2012
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FAI
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High quality evidence on the state of financial access around the world is advancing rapidly, as the chapters of this book illustrate. A happy consequence of increasing knowledge is the ability to better recognize what we don’t yet know. Here are ten questions, some micro, some macro, that need answers if we are to make informed decisions on how to improve financial access. |
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Expert
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Themes
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May 2013
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Commercialization, Corruption, Credit, Technology Adoption
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Mar 2013
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Big Picture, Credit, Interest Rates, Overindebtedness, Regulation, Social Finance
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Feb 2013
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Credit, Customer Protection, Overindebtedness, Poverty, Regulation
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Nov 2012
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Commercialization, Credit, Interest Rates
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Oct 2012
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Agriculture, Behavioral Economics, Commitment Devices, Credit, Customers, Impact Evaluation, Information and Communication Techonology, Poverty, Randomized Control Trials (RCTs), Rural, Technology Adoption
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Sep 2012
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Commercialization, Credit, Customer Protection, Interest Rates, Operations, Regulation, Social Finance, Subsidy, Women
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Jul 2012
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Big Picture, Credit, Customer Protection
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Jan 2012
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Credit, Overindebtedness, Regulation
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Jan 2012
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Big Picture, Credit, Overindebtedness
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Jun 2011
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Credit, Customer Protection
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Pages
There are currently no quick links for this question.
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Jan 2012
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FAI
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High quality evidence on the state of financial access around the world is advancing rapidly, as the chapters of this book illustrate. A happy consequence of increasing knowledge is the ability to better recognize what we don’t yet know. Here are ten questions, some micro, some macro, that need answers if we are to make informed decisions on how to improve financial access. |
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Oct 2010
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FAI
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Brief
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This reading list includes suggested background reading in the areas of dynamic optimization and the neoclassical benchmark; evidence from high-frequency data; returns to capital; credit innovations and microfinance; saving; property rights and land reform: and social enterprise. |
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Jul 2010
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Paper
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This report from USAID and Booz Allen Hamilton contains a detailed analysis of the various risks involved in the different models of mobile financial services, as viewed from each of the key stakeholders involved in these transactions. The analysis produced consists of three parts: 1) the Mobile Financial Services Risk Matrix, 2) transaction flow mapping of some of the key transactions to show where these risks occur, and how these may differ depending on the service model, and 3) an analysis of how various jurisdictions have already responded to these risks, based on analysis provided by CGAP. |
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Oct 2008
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FAI
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Brief
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For microfinance institutions, particularly those aiming to take deposits, an advantage of regulation is that it allows semi-formal institutions to evolve more fully into banks. But complying with regulation and supervision can be costly, creating potential trade-offs. World Bank researchers Robert Cull and Asli Demirgüç-Kunt and FAI managing director Jonathan Morduch examined the balance between the benefits and costs of regulatory supervision, with a focus on institutions’ profitability and outreach to small-scale borrowers and women. The authors analyzed data on 245 of the world’s largest microfinance institutions, with newly-constructed data on their prudential supervision. Regression analysis showed that supervision does not have a significant impact on profitability: microfinance institutions subjected to more rigorous and regular supervision are not less profitable compared to others. However, this type of supervision is associated with larger average loan sizes and less lending to women, suggesting that it does have a significant impact on outreach. |
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Jul 2008
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External
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Book
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Financial markets and institutions exist to mitigate the effects of information asymmetries and transaction costs that prevent the direct pooling and investment of society’s savings. Financial institutions help mobilize savings and provide payments services that facilitate the exchange of goods and services. In addition, they produce and process information about investors and investment projects to enable efficient allocation of funds; to monitor investments and exert corporate governance after those funds are allocated; and to help diversify, transform, and manage risk. When they work well, fi nancial institutions and markets provide opportunities for all market participants to take advantage of the best investments by channeling funds to their most productive uses, hence boosting growth, improving income distribution, and reducing poverty. When they do not work well, opportunities for growth are missed, inequalities persist, and in the extreme cases, costly crises follow. |
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Jan 2006
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External
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Paper
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This paper presents the first public findings on how low-income people view and use m-banking, using results of a survey of 515 low-income individuals in South Africa. Three hundred of those surveyed do not use m-banking, while 215 are customers of WIZZIT, a startup mobile banking provider. WIZZIT targets the 16 million South Africans who lack or have difficulty accessing formal banking services. The study was conducted in South Africa because it is the only country where an m-banking service is targeted at low-income people and where there are enough identifiable low-income customers to construct an adequate sample. |
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Aug 2003
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External
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Paper
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Lack of access to finance is often cited as a key reason why poor people remain poor. This paper uses data on the Indian rural branch expansion program to provide empirial evidence on this issue. Between 1977 and 1990, the Indian Central Bank mandated that a commercial bank can open a branch in a location with one or more bank branches only if it opens four in locations with no bank branches. We show that between 1977 and 1990 this rule caused banks to open relatively more rural branches in Indian states with lower initial financial development. The reverse is true outside this period. We exploit this fact to identify the impact of opening a rural bank on poverty and output. Our estimates suggest that the Indian rural branch expansion program significantly lowered rural poverty, and increased non-agricultural output. |