Micro Finance Eng

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Transcript of Micro Finance Eng

  • 8/6/2019 Micro Finance Eng


    Microfinance: an analysis of experiences and

    alternative regulations

    Miguel Delfiner, Cristina Pailh y Silvana Pern*

    April, 2006


    In recent years, the interest for the study of microfinance has increased, in relation with the growingdevelopment that the activity has experienced in different parts of the world. This brought about therise to the birth of a whole branch of literature dedicated to the different aspects of this topicincluding the regulatory and supervisory approach that would correspond to apply to the activity.

    This work is centered on the analysis of microfinancial institutions (MFIs), at international and locallevel, as well the different regulatory approaches that are suggested for microfinance. The ultimate

    purpose is to obtain conclusions of regulatory policy. First, we need to clarify what is meant bymicrofinance in order to understand what is an MFI and what is not an MFI; second, understandhow MFIs operate and their importance at the international and local levels; third, deepen thediscussion of the regulatory aspects of the MFIs, for finally, and according to the analysis carriedout, obtain relevant policy conclusions for the local scope.

    * Miguel Delfiner (mdelfiner@bcra.gov.ar) is Chief Analyst; Cristina Pailh (cpailhe@bcra.gov.ar) is Manager andSilvana Pern (speron@bcra.gov.ar) is a Senior Analyst; all members of the Gerencia de Investigacion yPlanificacion Normativa; Subgerencia General de Normas, BCRA. The views expressed in this paper are the

    opinions of the authors and do not express the official position of the BCRA. The views expressed in this paper arethe opinions of the authors and in no way express an official position of BCRA. The authors are grateful to JoseRutman, particularly for the support provided for this work and the exchange of ideas; and they also appreciate allthe comments received and the valuable discussions in various fields, which contributed significantly to understanding the topic and the quality of work. The remaining errors are the sole responsibility of the authors.

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    1. Introduction

    2. Conceptual Framework: what is microfinance?

    3. International experience of microfinance

    3.1. Importance of the MFIs in different countries3.2. Active institutions in microfinance3.3. Indicators of the microfinance industry3.4. The Grameen Bank3.5. The Bolivian experience

    4. Credit methodologies of the MFIs

    5. Regulatory aspects of microfinance

    5.1. World Bank5.2. Interamerican Bank of Development5.3. USAID5.4. Consultant Group to assist the Poor (CGAP)5.5. International Monetary Fund

    6. Microfinance in the local environment

    6.1. Current situation: active institutions in the area of microfinance and microcredits6.2. Local regulation of financial entities and microfinance

    7. Conclusions

    Appendix of complementary data

    Bibliographical Index

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    1. Introduction1

    In recent years, the discussion about microfinance has grown remarkably at local andinternational levels. The declaration of 2005 as the "International Year of Microcredit" by theUnited Nations, aimed to promote discussion recognizing ...that microcredit programs have

    successfully helped in rescuing people out of poverty in several countries around the world".


    The phenomenon of microfinance and the experience ofmicrofinance institutions (MFIs) arerelatively new. Thus, compared to other fields of study, microfinance can be considered as anarea of analysis still hardly explored. While there is an increasing number of publications andresearch on the subject, still there is no unanimous consensus on many aspects of itsfunctioning. From a macroeconomic point of view, there is agreement that the MFIssuccessful experiences have helped reduce poverty in the demographic groups covered. Froma microeconomic perspective, there is a rich discussion about how MFIs operate; itsdistinctive characteristics with respect to other financial institutions; regulations that theyshould be subject to, among other aspects.

    This work focuses on the analysis of the functioning of the MFIs, without studying themacroeconomic effects. The ultimate goal is to obtain regulatory policy conclusions. This is,first, to clarify what is meant by microfinance in order to understand what is it an MFIandwhat is it not an MFI; second, to understand how MFIs operate and its importance atinternational and local level; third, to deepen the discussion of the regulatory aspects of theMFIs and; finally, according to the analysis, to obtain relevant policy conclusions at the locallevel.

    Section 2 contains a conceptual discussion on what is meant by microfinance and thecharacteristics that differentiate it from traditional finance. Section 3 deals with the MFIsinternational experience of undertaking a study by country, by institutions and, at theaggregate level of the microfinance industry, indicators that illustrate the MFIsperformanceare analyzed. In addition, two very well-known experiences are described in detail: theGrameen Bankin Bangladesh and, the case of Bolivia, especially represented by BancoSol.Section 4 contains a description of some of the more used credit methodologies by MFIs.

    In Section 5, begins the discussion of the regulatory aspects, exposing a compilation ofapproaches of various international bodies regarding the regulatory policies applicable to theMFIs. Section 6 focuses on the analysis of microfinance at local level. First, experiences ofinstitutions engaged in activities relating to granting microcredit are described. Second, ananalysis of the local laws and regulations and how they envisage the microfinance is carriedout. Section 7 presents the conclusions.

    1 This work had an earlier version of the year 2001 developed in the Gerencia de Investigacion yPlanificacion Normativa, in the context of the analysis of a preliminary law design for the creation of theBanca Solidaria , what gave origin to a first investigation and a documental summary of the internationalbackground.2 United nations, Resolution 1998/28

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    2. Conceptual Framework: what is microfinance?

    The term microfinance refers to the provision of financial services to people of low income,especially to the poor. The entities that carry out those activities are denominatedmicrofinance institutions (MFIs), which can be defined as " any organization - credit union,

    small commercial bank, financial non-government organization, or credit cooperative - that provides financial services to the poor". 3 Such services include financing, saving andpayment instruments, among others.

    On numerous opportunities, the term microfinance is used in a much more limited sense,referring only to the provision of micro-credit for small informal businesses of micro-enterprises. However, the MFIs clients are not only micro-entrepreneurs seeking funding fortheir business. The range of financial services provided by the MFIs has grown beyond andcovers an extensive menu that includes attracting savings, money transfers and insurance. Inrecent years, attracting deposits has been amplified due to a growing demand of the poorest people and since it is a source of natural funding for MFIs. Micro insurances are stillemerging, being life insurance the segment more developed. Moreover, microcredits are

    provided in conjunction with a range of non-financial services, such as technical assistancefor business development and training.4

    The microfinance activity started in 1974 with the Bengali economist Muhammad Yunus5,who began a new experience thus far: lend money for micro-enterprises to poor people, withhis own funds, without requiring any of the usual guarantees. What started as an attempt tohelp some families, grew into the current Grameen Bank (Bank of the Poor), a financialinstitution that addresses the provision of microfinance services.6

    It is important to look at how MFIs have developed in order to clarify the latter discussion.Most MFIs, that are currently recognized at international level for being pioneers in the fieldand have achieved a significant volume and diversification of operations, began as nonprofitinstitutions, financially supported by Non-Governmental Organizations (NGOs),governments, private contributions and charitable organizations with the aim of grantingmicro-creditto poor people. As they developed, they enlarged the range of services provided,financial and non-financial. As a trend, it is observed that once MFIs reach a certain level ofdevelopment, they begin to broaden their sources of funding, including the collection ofdeposits from the public. When this happens, MFIs are in a new stage, since their role ismuch more similar to a traditional financial institution, in the sense that issues paymentinstruments and savings. It is at this point, when they usually begin to be under the scope of

    3 According to the definition of CGAP (2003), Consultative Group to Assist the Poor, consortium of 28public and private development agencies that work together to expand the access to the financial services ofthe poorest. With headquarters in the offices of the World Bank, it assists charity entities, MFIs and marketparticipants, providing technical attendance, training, investigation and development, dissemination ofinformation and funds for innovations.4 FMI (2005)5 Yunus, Muhammad Towards a world without poverty.6 Later on, in this work it is presented a detailed description of the history and current operations of theGrameen Bank.

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    prudential regulation, given that the mandate of the regulators