Microfinance industry:

Regulation, supervision important

Ramani Kangaraarachchi

Dr A G Karunasena

Developing a proper regulatory and supervision system and effective implementation of it will enable the micro-finance industry to reach its full benefits, the South East Asian Central Banks (SEACEN) Executive Director Dr A G Karunasena said at the inauguration of the SEACEN Course on Regulation and Supervision of Micro-finance Institutions.

He said the number of people benefiting from micro finance is significant and increasing faster in developing countries although the relative share is low in terms of assets compared with the banking sector. Presently, there are enough micro-finance regulatory and supervisory systems with some length of experience to draw lessons and share experience with others.

Dr Karunasena drew attention to two basic issues related to the regulation and supervision of micro-finance activities. Firstly, whether micro-finance institutions should be regulated and supervised and secondly how should it be done if there is a need to do it.

Answer to the first issue will depend on the potential benefits and costs. Highlighting five major benefits based on experience he said that it gives greater access to sources of funds through equity, deposits and borrowings, it provides greater ability to achieve growth and serve more people with improved public confidence. It also enables to provide more professional services by meeting higher standards of regulations and supervision and to offer financial services beyond micro-credit especially savings and transfers.

Finally, it enhances the legitimacy of micro-finance in the financial sector and with the public, he said. Referring to the second issue, how to regulate and supervise micro-finance institutions he said it is not possible and appropriate to apply regulations, prudential requirements and guidelines applicable to traditional banking to micro-finance.

They have to be modified by taking into account specific features in micro-finance activities, products, and customers which requires involving people who have knowledge in micro-finance in developing a supervisory system. He said that the CGAP document in 2002 and BIS paper developed in 2010 have clearly highlighted the necessity of incorporating some flexibility when designing regulatory and supervisory systems for micro-finance activities for countries.

The SEACEN course on Regulation and Supervision of Micro-finance Institutions will be hosted by the Central Bank of Sri Lanka from November 30 to December 4 at Cinnamon Grand Hotel Colombo for 31 participants from eight countries in the region.