An Analysis of the Legal Requirements for Microfinance · 2019-06-21 · An Analysis of the Legal...

An Analysis of the Legal Requirements for Microfinance

Based on A Recent GTZ

Study of 11 Countries

Worldwide

Stefan Staschen, June 2003

June 27, 2003 Stefan Staschen, London School of Economics 2

Overview

Methodology and scope of study

Regulatory approaches: Who is regulated and by

whom and under which legal body? Who supervises?

How to draw the line between microfinance and

traditional banking?

Major regulatory instruments: Capital and provisioning

requirements, risk concentration, reserve and liquidity

requirements, ownership concentration, and sanctions

Outlook


Methodology and Scope of Study

Focus on legal frameworks either specifically catering

for microfinance institutions (MFIs) or being used by

institutions providing microfinance services

Co-operatives in most cases not included

Desk study nothing on enforcement, supervisory

practice, capacity issues

No claim to be representative, no bias in favour of

introducing a separate legal framework for

microfinance

List of Countries and Names of Institutional Types

Country Name of Institut. Country Name

Bolivia Private Financial Fund /

Open Savings and Loan

Cooperative

Kyrgyz Republic Microfinance Company /

Microcredit Company /

Microcredit Agency

Bosnia and

Herzegovina

Microcredit Organisation /

Bank Nepal Cooperative Society /

Development Bank /

Financial Intermediary

Society

Ethiopia Micro Financing Institution Pakistan Microfinance Institution /

Microfinance Bank

Ghana NBFI / Rural Bank South Africa Institution Conducting

Money-Lending

Transactions

Honduras Financial Private

Development Organisation Uganda Micro Deposit-Taking

Institution / Credit

Institution / Bank

Indonesia BPR (People‘s Credit Bank)


Who is regulated?

Prudential Regulation of deposit-taking MFIs

(Uganda, Kyrgyz Republic, Bolivia, Ghana,

Indonesia, Pakistan)

Prudential Regulation of all MFIs (Ethiopia,

Nepal)

Performance Monitoring of credit-only MFIs,

some of them non-profit (BiH, South Africa,

Kyrgyz Republic)


Different Levels of Rule-Making

Primary Legislation:

– Laws / Acts / Proclamation (Ethiopia) / Ordinance (Pakistan)

– Define „standards“ (broad framework), give general guidance

– Passed by Parliament or other legislative body

Secondary Legislation:

– Rules / Directives / (Prudential/Statutory) Regulations /

Resolutions / Decrees / Normative Acts (Kyrgyz Republic)

– Define „rules“ (e.g. benchmarks, concrete procedures)

– In most cases delegated to a third party (supervisory authority /

Ministry)


Where to Stipulate Microfinance- Specific Regulatory Requirements

Separate law for MFIs (Ethiopia, Uganda,

Honduras, Kyrgyz Republic, Pakistan)

Several legal windows allowing for

microfinance services provision (Nepal,

Ghana)

Microfinance-specific statutory regulations

under general banking law (Bolivia,

Indonesia)


Who regulates and supervises?

In majority of cases: The Central Bank – In some cases, statutory regulations must be approved by the

government (Pakistan / Nepal)

International trend: Introduce separate Supervisory Authority (Bolivia, Honduras: Superintendencia)

– In Bolivia, tasks of rule-making and supervision are separated

Other option: Delegate microfinance supervision to specialised agency (South Africa, planned for Rural Banks in Ghana)

– Statutory regulations to be approved by government body


Criteria for Choice of Regulatory Approach

Separate law or use of existing legal window: – Danger of fragmentation of legal framework

– Availability of 'lower tiers‘

– Possibility to introduce microfinance-specific regulatory requirements

– Size and maturity of microfinance industry

Delegation of rule-making power: – Accountability vs. independence and flexibility

– Expertise and capacity


Criteria for 'Line-Drawing'

Definition of permissible and prohibited businesses

Commercial vs. non-profit institutions (Kyrgyz

Republic, BiH, Honduras)

Restricting product charactistics

– Type of deposit facilities

– Duration of savings and time deposits

– Maximum loan size

Definition of target group


Limits for Credit Amounts Country Maximum loan amount as

percentage of capital

Maximum loan

amount in USD*

Maximum loan amount as a

multiple of GNI per capital

Bolivia 1 % for CACs category 1 to 4 (unsec.

credits) 2,050 – 76,000 2.2 - 81

Ethiopia Fixed amount 600 6.0

Ghana

10% for Rural Banks (for unsecured credits)

10% for deposit-taking NBFIs (unsec. credits)

6,200 190,000

21.4 655

Honduras 2 % - 5% depending on kind of security 1,200 – 3,000 1.3 – 3.3

Indonesia BPRs: 10 % (proposal) 5,500 – 22,000

(depending on area) 8.1 – 32.4

Nepal Cooperatives with limited banking license:

5%, 10% and 20% for first, second and following credits, respectively

650 – 2,600 (rural coop.)

6,500 – 26,000 (urban cooperative)

2.6 – 10.4 26 – 104

Pakistan Fixed amount 1,725 4.1

Uganda 1 % and 5 % for individual creditsand

group credits, respectively 2,700 and 13,500 9.6 – 48.2


Importance of 'Line-Drawing'

Regulatory arbitrage, i.e. financial institutions taking advantage of lower requirements

Regulatory ambiguity Uncertainty and dependence on interpretation by executive authority or courts

Regulatory overlap applicability of law unclear


Major Regulatory Instruments

Selection of regulatory instruments for MFIs not much different from that of banks:

– Entry requirements, ongoing regulations and exit

– Using combination of quantitative and qualitative indicators

Yet specification for MFIs are different – some tighter, some more relaxed


Minimum Capital Requirements

Range for deposit-taking MFIs from USD 24,000 (Ethiopia) to USD 8.6m (Pakistan)

In some countries, different amounts according to: – Area of operation (Pakistan, Indonesia)

– Range of financial products offered (CACs Bolivia)

– Retail vs. wholesale financial institution (Honduras)

For appraisal of requirements, it would be necessary to look at actual figures, ownership structure, maturity of industry, enforcement (only 1 out of 8 S&Ls comply in Ghana)


Ghana: Real/External Value of Minimum Capital Requirement

Figure 1: Minimum Capital Requirements for Deposit-Taking NBFIs in Ghana

0

1

10

100

1000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Real value Nominal value External value in US$ (1993=1, logarithmic scale)


Capital Adequacy Requirements

Between 6% (Rural Bank, Ghana) and 20% (MDI,

Uganda) risk-weighted CAR

Important to look at

– exact definition of capital (core / total / supplementary

capital, etc.)

– Weights (Basel 1988 most common, but sometimes only 2

weights – 0% and 100%)

High CAR reduces return on equity (leverage

effect)


Provisioning Requirements

Wide range, e.g. 100% provisioning after 90 days in Uganda, after 360 days in Ethiopia, Pakistan, Nepal

Ghana: Allows provisioning on a basket basis instead of an individual loan basis

Uganda: Stricter provisioning for restructured loans

Indonesia (proposal): Provisioning based on number of instalments missed instead of number of days payments overdue


Provisioning Schedules

Days overdue 1 30 60 90 120 150 180 360

Ethiopia: Re-registered

Micro Financing Institutions

0% 0% 0% 25% 25% 25% 50% 100%

Pakistan: Microfinance

Institutions and

Microfinance Banks

2% 2% 2% 20% 20% 20% 50% 100%

Nepal: Co-operatives with a

Limited Banking

Transaction License

1% 1% 1% 25% 25% 25% 50% 100%

Indonesia: Bank

Perkreditan Rakyat

2.5% 25% 25% 50% 50% 50% 100% 100%

Ghana: Deposit-Taking

NBFIs

5% 20% 40% 60% 80% 100% 100% 100%

Uganda: Micro Deposit-

Taking Institutions

1% 25% 50% 100% 100% 100% 100% 100%


Provisions Against Risk Concentration

Risk-weighted capital adequacy requirement

Exposure limits:

– Maximum credit amounts to single borrowers

– Limits for aggregate outstanding loan portfolio

– Restricting investments in certain enterprises, usually defined as percentage of capital (individual firm/aggregate amount)


Reserve and Liquidity Requirements

Min. liquid assets as percentage of deposits

– Rural Banks in Ghana: Percentage rate depends on loan recovery rate (data availability is a problem)

– Less liquidity to be held against term deposits

– Definition of liquid assets crucial

Accumulating reserve fund from profits

Minimum reserves with the Central Bank


Ownership Concentration

Maximum shareholding

– General restriction (sometimes with exemption approved by Central Bank)

– Restrictions only for Executive Directors (except CEO, Pakistan)

– As a percentage of voting shares

– Distinguishing physical and legal entities

Transfer of shares subject to approval


Sanctions and Corrective Actions

Fines:

– Maximum nominal amount, sometimes

depending on certain indicators (# of days for

reporting, deficiency level for liquidity), or as

percentage of total assets (planned in

Indonesia)

Imprisonment

Suspension/removal of directors


Sanctions and Corrective Actions (Contd.)

Issuing warnings and policy directives

Management take-over

Putting MFI under receivership

Revoking the license

Liquidate MFI

UG/IN: Prompt corrective actions to preclude regulatory forbearance


Outlook

Use of study: Guideline, list of options,

indication of interesting cases – not more!

Issues to Study:

– Capacity

– Incentives

– Autonomy vs. accountability

Annex 2 of publication as summary

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