Existing regulations for the formal financial sector cannot be successfully applied to the microfinance industry. Microfinance is different from traditional financial institutions in at least six ways, in term of its : Client base (poor/low Income) Lending methodology (no collateral/peer pressure) Labor intensive nature Portfolio (small, short-term loans) Institutional structure and governance Ideology (culture of compassion)

The rationale for regulating MFIs is similar in many ways to that of the traditional financial sector. It is necessary to protect the finances of the poor against the potential risks associated with bank failure, fraud or the opportunistic behaviour by management. Without a supportive regulatory framework, it is, difficult for MFIs to scale up and reach large numbers of the poor sustainably. Lack of it had slowed growth of microfinance in many countries.

Grameen Foundation USA has presented its recommendations for the creation of a pro-microcredit regulatory framework at the recently concluded Grameen MicroFinance Forum held in Manila. Dr. Mike Getubig, Program Manager of Grameen Foundation USA, delivered the proposals. It has about 7 recommendations, regarding formulation of policy statement, establishing an independent Microfinance Commission that has a broad mandate from the Government, allowing the NGO/MFls to conduct limited banking activities like giving loans and collecting savings form clients, direct the commission to initially prioritise key issues such as interest rates, savings mobilization, capital requirements standardization and the general principles, are among others.

During discussion at the Forum, Mila Bunker, President of Ahon Sa Hirap Inc. a pioneer Grameen Banking Approach Replicator (GBAR) in the Philippines, commented that for borrower savers a regulation would mean protection for his or her savings. While, for the institution, regulations will flush out "fly by night" operators and ensure that sincere MFIs stay in the market. Cautioning, however, that regulation must have a human face, that it must not force MFIs to be converted into a banking structure, because such move would tend to redirect the MFls vision from its original mandate, which also appears to be the reason for the current tension in the microfinance community.

In reply to Ms. Bunker's concern regarding forcing an NGO to become a bank, Melito Salazar, Member of the Monetary Board of Bangko Sentral Ng. Pilipines, said that current policies are to the contrary. In fact, he said the Monetary Board would be more worried if all NGOs became banks. A Citibanker commented that why should NGOs aspire to be like them, when he said that the core competency of NGOs is something that traditional bankers do not have. Professor Muhammad Yunus, founder of Grameen Bank, desired that circumstances often forced MFls to become banks. He said that when he failed to convince bankers to recognize him, he asked himself why does not he create his own bank. Then, he proceeded to ask for a separate law to allow the creation of Grameen Bank.

In the same occasion, Noel Alcaide, President of APPEND, suggested that NGOs in the field must move towards self-regulation to get away with situations like unscrupulous individuals setting up an NGO just to take advantage and run away with the people's money. He even raised the idea that the sector might consider sending a representative to the Congress. He also endorsed the need for providing incentives and appropriate motivation to encourage commercial banks to get into microfinance.

Melito Salazar, as a regulator, acknowledged that there was indeed a need for funds for the microfinance industry, adding that the Central Bank has great concern and commitment into helping MFIs. He further assured the audience that the policy makers saw the provision of funds to MFIs as a social concern. On the question of funding, the Central Bank has been looking at several approaches in providing these funds, among which they considered floating bonds whose proceeds will benefit MFls. Moreover, they were also looking at existing banks to perform microfinance functions. According to Mr. Salazar, a number of commercial banks were in fact interested in spinning off subsidiaries to focus on microenterprise lending. "Rural banks have led the way because a large number have gone into microfinance".

Source : Out of Poverty, July 2001.