United Nations Capital Development Fund

1
Panel Discussion on Regulation of Microfinance
Initiatives Supporting the Development of
Regulatory Frameworks for Microfinance Financing
for Development Office, UNDESA New York City 10
April 2007
United Nations Capital Development Fund
2
Presentation Overview

• UNCDF Investing in the LDCs.
• UN Advisors Group on Inclusive Financial Sectors.
• Brief Survey of Initiatives Supporting Regulatory
  Frameworks for Microfinance.
• UNCDF.
• GTZ.
• USAID.
• ADB.
• Microfinance Networks.
• Microfinance Consensus Guidelines Guiding
  Principles on Regulation and Supervision.
• Financial Access Initiative.

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UNCDF Investing in the LDCs

• UNCDF makes investments in the Least Developed
  Countries (LDCs)
• Currently working in 28 Least Developed
  Countries.
• Total population approximately 625 million.
• Average GDP approximately US 317 per person per
  year.
• Current investment portfolio about 125 million.
• Our Mission Reduce poverty in these countries
  and help them achieve the Millennium Development
  Goals (MDGs).
• Our Method Investing in human and institutional
  capacity at the local and national levels and
  funding and supporting Local Development
  Programmes and Microfinance Institutions (MFIs).
• Our Approach Long-term outlook seeking local
  and national capital formation and human
  development.
• Our Capital Flexible, high risk and innovative.

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UNCDF Methodology
UNCDFs Sector Development Approach for building
inclusive financial sectors

• 1. Conduct Financial Sector Assessment.
• Gather data on access to financial services to
  establish a baseline and measure results.
• Evaluate legal, regulatory, and policy
  frameworks, and financial services infrastructure
  requirements.
• Evaluate human and institutional capacity and
  constraints.
• 2. Develop Nationally Owned Policy, Strategy and
  Action Plan.
• Legal, regulatory, and policy environments.
• Financial Service Providers (FSPs) required to
  provide products and services and to strengthen
  financial sector.
• Financial services infrastructure requirements.
• FSP investment requirements.
• Coordinating, implementing, and monitoring
  requirements.

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UNCDF Methodology
continued

• 3. Execute National Action Plan.
• Establish Investment Committees.
• Composed of government representatives,
  development partners and other financial industry
  participants.
• Solicits investment proposals for broad range of
  MFIs, FSPs and other industry participants.
• Review process is competitive and transparent.
• Make investments in microfinance institutions
  (MFIs), FSPs, financial services infrastructure
  providers, and other industry participants.
• Investments may be grants, loans, or equity.
• Human and institutional strengthening and
  capacity building emphasized.

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UN Advisors Group on Inclusive Financial Sectors

• UNCDF also hosts the Secretariat of the UN
  Advisors Group on Inclusive Financial Sectors.
• Established in June 2006 for a term of 2 years.
• Seeks to increase global access of poor and low
  income households and micro and small enterprises
  to a broad range of financial products and
  services on a sustainable basis.
• Consists of 25 representatives from the UN, World
  Bank, IMF, CGAP, African Development Bank,
  Central Bank of West Africa, Government Savings
  Bank of Thailand, World Council of Credit Unions,
  Accion International, Goldman Sachs, ABN-Amro,
  Deutsche Bank, Visa International, among other
  institutions.
• Significant opportunity to raise global public
  awareness regarding financial inclusion and to
  place inclusive finance on the global development
  agenda.

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UN Advisors Group on Inclusive Financial Sectors
continued

• UN Advisors Group on Inclusive Financial Sectors
  and Regulation.
• Of the four Working Groups established, one is
  focused exclusively on the issues of Regulation
  and Supervision.
• Institutions represented in the Regulation
  Supervision Working Group include CGAP (Chair),
  IMF, World Bank, UN DESA, Central Bank of West
  African Banks (BCEAO), Visa International, Aga
  Khan Agency for Microfinance, Central Bank of
  Malaysia, World Council of Credit Unions, Foreign
  Ministry of Affairs of Luxembourg, and World
  Savings Bank Institute.
• The Regulation and Supervision Working Group is
  currently preparing to conduct a Regional
  Conference on Regulation to be held in early 2008.

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UN Advisors Group on Inclusive Financial Sectors
continued
At the UN Advisors Group meeting in Amsterdam,
CGAP, as the Chair of the Regulation Working
Group, defined the different components of
Regulatory and Supervisory reform work
Diagram Source CGAP
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UN Advisors Group on Inclusive Financial Sectors
continued
The Regulation Working Group also noted that
there are multiple actors involved in one or more
of these components.
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UN Advisors Group on Inclusive Financial Sectors
continued

• The major conclusions of the Regulation Working
  Group were
• This is a very crowded space with multiple
  actors and institutions.
• Donor coordination is a huge challenge.
• to avoid undercutting each other.
• to avoid inconsistent advice.
• All actors need to think carefully about their
  comparative advantage.
• specialized expertise is needed but in short
  supply.
• practitioners have vital role to play, but not
  always seen as neutral.
• different actors have different influence on
  decisions makers (varies by country).

Source CGAP
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UN Advisors Group on Inclusive Financial Sectors
continued

• Within this context, the Regulation Working Group
  concluded that its overall objectives should be
  to
• Raise public awareness about the importance of
  inclusive finance among policymakers, central
  bankers, and government officials.
• Advocate for appropriate regulatory and
  supervisory policies that encourage and support
  inclusive financial sectors.
• Identify new areas where further discussions are
  needed with governments, regulators and
  supervisors.
• Focus on particular regulatory and supervisory
  risks which potentially constrain access to
  financial services and products.
• Recently provided input to "Five Key Messages for
  Four Key Audiences statements of best practices
  for expanding access to finance for the poor
  targeted at regulators, governments, development
  partners and the private sector.

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UN Advisors Group on Inclusive Financial Sectors
continued

• The Key Messages to Regulators include
• Financial inclusion should be a major objective
  of financial regulation. The role of regulators
  is to establish environments that allow a diverse
  range of institutions to provide a wide variety
  of financial products and services.
• Regulators must be flexible in their approach
  they must mitigate risks, without limiting access
  to financial services.
• Regulators must assure appropriate supervision
  of both financial service providers and their
  supporting industries, such as telecommunications.
  
• Regulators must exercise caution that anti-money
  laundering and related regulations do not block
  access to financial transfers that are critical
  for poor people.
• Broad-based access to financial services
  requires an enabling regulatory environment for
  telecommunications and technology infrastructure.

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Brief Survey of Initiatives Supporting Regulatory
Frameworks for Microfinance.
14
Country-level Diagnostic Work
continued

• UNCDF
• UNCDFs microfinance sector development approach
  is built upon the premise that microfinance
  institutions and other financial service
  providers (FSPs) serving the poor should over
  time become an integrated part of the formal
  financial sector.
• Sector development programmes are designed to
  identify and respond to new opportunities, and
  address constraints that keep a financial sector
  exclusive.
• One component of the sector development approach
  is the evaluation of a countrys legal,
  regulatory and policy frameworks, as well as
  financial services infrastructure requirements.
• Since early 2003, sector assessments have been
  carried out in Nepal, Sierra Leone, Senegal,
  Madagascar, Democratic Republic of Congo, Malawi,
  Angola, and Liberia.

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Country-level Diagnostic Work
continued

• UNCDF
• Nepal Country Case Study
• A 2006 financial sector assessment of Nepal
  conducted by UNCDF showed no immediate regulatory
  constraints to building an inclusive financial
  sector.
• But Nepals Central Bank requested guidance on
  regulating the growing microfinance sector. Thus
  within the context of a 30 million programme to
  build an inclusive financial sector in Nepal,
  capacity building of the regulator is an integral
  component.
• Assistance will be provided to help the
  government develop an appropriate policy/strategy
  and to the Central Bank to develop criteria for
  determining which institutions should be licensed
  and regulated and which institutions might only
  have a reduced reporting requirement.
• This project will be launched in 2007 and
  co-funded by UNCDF, UNDP and the World Bank.

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Country-level Diagnostic Work
continued

• UNCDF
• Liberia Country Case Study
• One of the findings of a 2004 financial sector
  assessment was that the present legal and
  regulatory environment creates several
  constraints for the development of the
  microfinance sector
• Low ceiling on interest rates (18 effective)
  made it unlikely that any commercial bank would
  enter the lending side of the microfinance
  market.
• High reserve requirements of 50 and 18 for LD
  and USD discouraged domestic resource (savings)
  mobilization.
• Unclear guidance on the percentage of portfolios
  permissible for cash collateral was being
  provided by Liberias Central Bank.
• Since the financial sector assessment was
  conducted, the government has taken positive
  steps towards liberalizing the financial sector.

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Country-level Diagnostic Work
continued

• UNCDF
• Microfinance Regulation and Supervision Project
  In the West African Monetary Union (BCEAO)
• The Central Bank of West African States (BCEAO)
  is the common central bank for 8 countries
  (Benin, Burkina Faso, Côte dIvoire, Guinea
  Bissau, Mali, Niger, Senegal, and Togo).
• The 2.3 million project is being financed by a
  consortium of donors including UNCDF, CGAP, and
  SIDA. Project goals include
• Improving the regulatory framework to strengthen
  MFI governance and management and refine the
  regions approach to supervision.
• Strengthening the effectiveness of supervision,
  including licensing new entrants, supervising
  ongoing operations, and imposing sanctions.
• Improving understanding of the financial sector,
  institutional risks, and overall performance of
  MFIs in the region.

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Country-level Diagnostic Work
continued

• GTZ
• GTZ supports microfinance operations in more than
  40 countries, combining technical assistance to
  MFIs with financial sector reform that affects
  the institutional environment of MFIs.
• GTZ advises central banks and banking supervisory
  agencies, and (in some countries) the ministries
  responsible for supervising MFIs.
• Some of these projects include
• Uganda Financial Systems Development Project -
  developed and implemented a regulatory and
  supervisory framework for MFIs.
• Honduras Financial Sector Development Project -
  assisted supervisory authorities in tailoring
  regulation and supervision to MFIs.
• Kyrgyzstan Strengthening and Development of
  Rural Financial Market - developed a legal
  framework for the co-operative sector.

Source GTZ website
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Country-level Diagnostic Work
continued

• USAID
• A variety of USAID projects have supported
  regulatory reform for microfinance.
• These projects are usually in conjunction with
  implementing partners such as Development
  Alternatives International (DAI) or IRIS.
• Some of the countries in which USAID has helped
  to support projects regarding microfinance
  regulatory reform are Armenia, Bolivia, Ecuador,
  Georgia, Jordan, Malawi, Mexico, Nepal, Nigeria,
  Philippines, and Zambia.

Source USAID website
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Country-level Diagnostic Work
continued

• Asian Development Bank (ADB)
• Provides assistance in the form of loans and
  technical assistance to member developing
  countries.
• Some of ADBs microfinance regulatory/supervisory
  activities include
• Uzbekistan Financial Services for the Poor
  Project aims to develop an enabling policy,
  legal and regulatory supervisory framework for
  savings and credit unions.
• Azerbaijan Microfinance Sector Development
  Project seeks to develop microfinance
  regulations and collateral framework.
• Laos PDR, Mongolia, Nepal, and Sri Lanka Rural
  Finance Sector Development Programme - supports
  the creation of an enabling policy for a
  regulatory and supervisory framework for rural
  microfinance.
• Published 2000 study The Role of Central Banks
  in Microfinance in Asia and the Pacific that
  examined the role and operations of central banks
  in microfinance development in Bangladesh, China,
  India, Indonesia, Kyrgyz Republic, Nepal,
  Pakistan, Papua New Guinea, Philippines, Sri
  Lanka, Vanuatu, and Vietnam.

Source ADB website
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Advocacy and Awareness Building

• Microfinance Networks
• Microfinance Centre for Central Eastern Europe
  and the New Independent States (MFC)
• International, grass-root network of 90 MFIs from
  the region.
• Along with other Regulation initiatives, it
  conducts an annual "Policy Forum on Microfinance
  Law and Regulation.
• The main purposes of the annual Policy Forum are
  to benchmark the progress of the countries in
  which initiatives to create favorable environment
  for microfinance are taking place or that took
  place during the previous year and to increase
  the awareness of policy makers from countries not
  yet selected for MFC Initiatives.

Source MFC website
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Policy Analysis Standard Setting

• Microfinance Consensus Guidelines Guiding
  Principles on Regulation
• and Supervision.
• Published by CGAP.
• Captures a broad consensus on best practices in
  regulation and supervision of microfinance. The
  guidelines summarize these principles for
  government regulators and others engaged in
  moving microfinance into the formal financial
  sector.
• Some major principles that have been agreed
  include
• Problems that do not require the government to
  oversee and judge the financial soundness of
  regulated institutions should not be dealt with
  through prudential regulation.
• In some countries, legal changes are needed to
  make it clear that NGOs and other private bodies
  may conduct a lending-only business without
  having to be prudentially licensed and regulated.
• Depending on practical costs and benefits,
  prudential regulation in some cases may not be
  necessary for MFIs that take cash collateral.

Source CGAP
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Policy Analysis Standard Setting
continued

• Financial Access Initiative
• A joint project of Yale University, Harvard
  University, New York University, and Innovations
  for Poverty Action (IPA).
• Formed in 2006 as a research consortium focused
  on improving access to financial services for the
  worlds poor through research on innovation,
  regulation, and financial policy.
• Of the three main activities that will be
  conducted, one focuses on policy around
  regulation.
• Aims to describe policy options for central
  bankers and regulators in a high-level but
  accessible format.
• Focus will be on recent experiences across
  countries, regulatory constraints, and
  possibilities.
• Outputs will be independent, rigorous guides for
  regulatory policy with an emphasis on direct
  effects and trade-offs of policy choices.

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Panel Discussion on Regulation of Microfinance
Initiatives Supporting the Development of
Regulatory Frameworks for Microfinance Financing
for Development Office, UN DESA New York City 10
April 2007
United Nations Capital Development Fund