Realities with MFIs call for overseeing, regulations
Tuesday, 16 March 2010
FE Report
The significant increase in the number of microfinance institutions (MFIs), the need for ensuring appropriate fund utilisation as well as establishing institutional structure and ascertaining financial and operational transparency warrant the creation of a regulatory and supervisory environment, an international expert said Monday.
"MFIs need sound legal basis to get access to different fund sources," said Gianfranco A Vento, a senior lecturer at the London's European Business School.
He was speaking at the first session of the three-day international conference titled 'Microfinance Regulations: Who Benefits?' that began earlier in the day at a city hotel.
Salehuddin Ahmed, former governor of Bangladesh Bank, chaired the session while Baqui Khalily, professor of Finance Department at the University of Dhaka, Justine Bagyenda, executive director of Bank of Uganda and D S K Rao, regional organiser for Asia-Pacific of Microcredit Summit Campaign, spoke as panelists.
Microcredit Regulatory Authority (MRA) is organising the event in association with the UK Department for International Development.
Gianfranco Vento said important progresses in the 'industry' due to an increasing degree of professionalism, a large number of global financial intermediaries and new technologies have made the role of regulators and supervisors more crucial.
"It has become more urgent to highlight the key criteria that a country has to follow in order to design an efficient and effective regulatory framework."
He said the recent focus on microfinance industry is also demonstrated by the interest shown in this segment of financial market by the Basel Committee on Banking Supervision, which in February 2010 published a consultative document on 'Microfinance activities and the Core Principles for Effective Banking Supervision'.
"This document can be adopted and implemented in microfinance business," said Mr Vento while presenting his keynote paper on the topic 'Why regulation and Supervision'.
He said long-term stability, efficiency, competitiveness, conduct of business and transparency are very crucial areas of microfinance activities.
He said the microfinance sector is growing fast in terms of its client outreach, coverage, amounts of microcredit and micro-savings. Alongside, liquidity and credit risks are also growing.
"A regulatory and supervisory environment is needed due to significant increase in microfinance institutions' numbers, the need for ensuring appropriate fund utilisation, establishing institutional structure and ascertaining financial and operational accountability and transparency," he said.
Baqui Khalily said there should be a regulatory framework to control the activities of microfinance, make them sound and protect them from any future disasters.
"The issue of higher interest rate is not only a crucial one for Bangladesh but also for other countries in the world. governance is also an important issue," he observed.
Mr Khalily said the contribution of the MFIs to the economy of the impoverished region, where the conventional banking system has little presence, has to be taken into consideration.
"They do not receive any financial support from the governments as opposed to other financial institutions like banks. So they should not be treated the way commercial banks are being treated," said the professor.
He, however, said that there is scope for reducing their interest rates.
Justine Bagyenda said people in the rural areas have gained access to finance owing to MFIs.
She said there should be someone who would watch the activities of the MFIs. "Large MFIs should be regulated because they are large and pose higher risks. But they must not be over-regulated."
Mr Rao said MFIs - with a vision to improve the livelihood of the people they work with - started their activities in order to empower the cash-starved poor.
"But there are many MFIs whose main agenda is to make profit. Rapid commercialisation of micro-credit activities has created the necessity for regulation."
He said there are allegations that some MFIs are exploiting the poor to maximise their profits.
Mr Rao said high interest rates levied by the MFIs and lack of transparency within them are the two important issues which call for some sort of regulations to protect clients.
Salehuddin Ahmed said all regulations should be country-specific because all of the regulations might not be applicable to every country.
"Regulations should be user-friendly and these should not be imposed. Likewise, the MFIs have to be transparent and accountable as they collect a large amount of deposits from the borrowers."
The former Bangladesh Bank chief said the MFIs should follow some principles or norms to shield themselves from future risks. However, regulations should not be a perverse form of control.
He said: "Self-regulation is also important on top of governance, management and supervision."
Service charges in the form of various names should be transparent and made public, he added.
Over 200 representatives including 50 from 19 countries are taking part in the event.
The significant increase in the number of microfinance institutions (MFIs), the need for ensuring appropriate fund utilisation as well as establishing institutional structure and ascertaining financial and operational transparency warrant the creation of a regulatory and supervisory environment, an international expert said Monday.
"MFIs need sound legal basis to get access to different fund sources," said Gianfranco A Vento, a senior lecturer at the London's European Business School.
He was speaking at the first session of the three-day international conference titled 'Microfinance Regulations: Who Benefits?' that began earlier in the day at a city hotel.
Salehuddin Ahmed, former governor of Bangladesh Bank, chaired the session while Baqui Khalily, professor of Finance Department at the University of Dhaka, Justine Bagyenda, executive director of Bank of Uganda and D S K Rao, regional organiser for Asia-Pacific of Microcredit Summit Campaign, spoke as panelists.
Microcredit Regulatory Authority (MRA) is organising the event in association with the UK Department for International Development.
Gianfranco Vento said important progresses in the 'industry' due to an increasing degree of professionalism, a large number of global financial intermediaries and new technologies have made the role of regulators and supervisors more crucial.
"It has become more urgent to highlight the key criteria that a country has to follow in order to design an efficient and effective regulatory framework."
He said the recent focus on microfinance industry is also demonstrated by the interest shown in this segment of financial market by the Basel Committee on Banking Supervision, which in February 2010 published a consultative document on 'Microfinance activities and the Core Principles for Effective Banking Supervision'.
"This document can be adopted and implemented in microfinance business," said Mr Vento while presenting his keynote paper on the topic 'Why regulation and Supervision'.
He said long-term stability, efficiency, competitiveness, conduct of business and transparency are very crucial areas of microfinance activities.
He said the microfinance sector is growing fast in terms of its client outreach, coverage, amounts of microcredit and micro-savings. Alongside, liquidity and credit risks are also growing.
"A regulatory and supervisory environment is needed due to significant increase in microfinance institutions' numbers, the need for ensuring appropriate fund utilisation, establishing institutional structure and ascertaining financial and operational accountability and transparency," he said.
Baqui Khalily said there should be a regulatory framework to control the activities of microfinance, make them sound and protect them from any future disasters.
"The issue of higher interest rate is not only a crucial one for Bangladesh but also for other countries in the world. governance is also an important issue," he observed.
Mr Khalily said the contribution of the MFIs to the economy of the impoverished region, where the conventional banking system has little presence, has to be taken into consideration.
"They do not receive any financial support from the governments as opposed to other financial institutions like banks. So they should not be treated the way commercial banks are being treated," said the professor.
He, however, said that there is scope for reducing their interest rates.
Justine Bagyenda said people in the rural areas have gained access to finance owing to MFIs.
She said there should be someone who would watch the activities of the MFIs. "Large MFIs should be regulated because they are large and pose higher risks. But they must not be over-regulated."
Mr Rao said MFIs - with a vision to improve the livelihood of the people they work with - started their activities in order to empower the cash-starved poor.
"But there are many MFIs whose main agenda is to make profit. Rapid commercialisation of micro-credit activities has created the necessity for regulation."
He said there are allegations that some MFIs are exploiting the poor to maximise their profits.
Mr Rao said high interest rates levied by the MFIs and lack of transparency within them are the two important issues which call for some sort of regulations to protect clients.
Salehuddin Ahmed said all regulations should be country-specific because all of the regulations might not be applicable to every country.
"Regulations should be user-friendly and these should not be imposed. Likewise, the MFIs have to be transparent and accountable as they collect a large amount of deposits from the borrowers."
The former Bangladesh Bank chief said the MFIs should follow some principles or norms to shield themselves from future risks. However, regulations should not be a perverse form of control.
He said: "Self-regulation is also important on top of governance, management and supervision."
Service charges in the form of various names should be transparent and made public, he added.
Over 200 representatives including 50 from 19 countries are taking part in the event.