New guidelines set standards for the effective integration of microfinance operations into mainstream financial sector
Latin American and Caribbean regulators must foster transparency, improve client protection rules and properly supervise microfinance operations, according to a guide for effective regulation and supervision of microfinance operations published by the Inter-AmericanDevelopment Bank (IDB) and the Association of Supervisors of Banks of the Americas (ASBA), with support from the Swiss Technical Cooperation Trust Fund.
The guidelines recommend that microfinance institutions disclose credit costs and other terms of credit agreements to clients and provide them with inputs to make their decisions. Moreover, it recommends regulators conduct evaluations of the clauses of credit contracts to prevent and punish abusive practices.
“Reasonable regulation and proper prudential supervision can foster greater transparency, improve services to client and prevent microfinance institutions from taking excessive risk,” said Julie T. Katzman, the IDB’s Executive Vice President and the interim manager of the IDB’s Multilateral Investment Fund (MIF).
“Appropriate regulatory standards are fundamental to fostering a solid and competitive microfinance sector,” said Rudy V. Araujo, ASBA’s Executive Secretary, “Latin America has significant experience with regulation and it is very important to share this knowledge and the lessons learned with other regions of the world”.
The report “Guidelines of Principles for Effective Regulation and Supervision of Microfinance Operation” offers a set of best regulatory practices of microfinance in Latin America and the Caribbean, an industry that has grown very rapidly in the last decade reaching 10.5 million customers in 2009 from just 1.8 million in 2001.
The report recommends that guidelines should also be applied to non-supervised credit institutions that operate in microfinance because they detail sound practices that seek to minimize the risks these institutions are exposed to. The report calls for governments to boost efforts to establish an environment of sound and ethical practices that would allow access to quality financial services to all segments of the population.
Developed between March 2008 and March 2010, the report was prepared by a Microfinance Working Group of Banking Supervisors and supported by consultants that combined the experience of financial institution regulators and supervisors, as well as managers of microfinance institutions. The MIF and ASBA,with support from the Swiss Technical Trust Fund, commissioned the report.