The Role of Governments in Microfinance during and beyond the Crisis Common Understanding and three Issues to discuss

1
The Role of Governments in Microfinance
during and beyond the Crisis Common
Understanding and three Issues to discuss
Wolfgang Bücker GTZ Financial Systems
Development Luxemburg, 25.11.2009
2
Role of Governments in Micro Finance Promote and
protect the sector within a conductive policy and
legal framework

• A favorable policy environment and appropriate
  legal framework is essential for the development
  of viable and sound financial institutions
  operating in an effective financial system
  that serves the demand of unbanked people.
• The crisis led to a higher awareness of
  Governments to better achieve a sound and stabile
  financial sector including the microfinance
  industry.
• Key policy and regulatory issues need to be
  clarified and agreed upon among major
  stakeholders, including Governments, Central
  Banks and other supervisory bodies,
  practitioners, investors and international donors
  contributing to the sector.
• HOW the regulatory framework the set of
  legislation, regulation and guidelines
  should be designed, depends on various country
  and sector specific factors.

Example Ukraine and Kyrgyz Republic
3
Ukraine/Kyrgyz Republic Development of a viable
rural micro finance sector through Savings and
Loan Co-operatives (SLC)

• Intervention Levels to Improve the Regulatory
  Framework and Supervision

Government/Legislation

• Enacting/Adjustments of Law on Financial
  Services for the microfinance sector (Non-Banks)
• Minimum requirements for management and
  governance structure
• Law for the SLC sector (member-based
  institutions) defining e.g. the scope of business

Supervisory Body

• Standardization/application of supervision
  guidelines, e.g. balance sheet requirements
• Capacity development Risk management, reporting
  systems, registration of branches
• Prudential supervision of SLC and sector-related
  institutions, e.g. deposit insurance scheme

Association of SLC

• Build up/strengthen the Association Providing a
  wide-range of services (legal advice, reporting,
  IT)
• Implementation/capacity development Internal
  audit, controlling systems (self-regulation)
• Support savings mobilization and establishing a
  Deposit Guarantee Fund

The interaction of Government regulation and a
SLC sector-own control and security system is an
ongoing challenge
4
1. In the light of the crises, the strengthening
of local financial systems and savings
mobilization remains important

• With regard to the crisis and risk exposures of
  financial institutions (liquidity, FX),
  mobiliza-tion of local savings as a stable source
  of refinancing should be fostered.
• Savings mobilization is attractive for MFI for
  the following reasons
• long-term viability by providing a stable,
  relatively low-cost funds
• large-scale outreach by broadening both the
  product array and the client base.
• But, when MFIs take deposits/savings from the
  public, new risks are introduced and need to be
  managed thoroughly e.g. liquidity, solvency and
  interest risk.

Lessons Learned
Only stronger MFI which fulfill defined minimum
requirements should be licensed for taking
deposits/savings. An appropriate prudential
regulation, i.e. a set of clear and fair rules
governing the intermediation of financial
resources is required Protection of depositors
through the safety and soundness of MFI
5
2. Customer protection and financial literacy
gained momentum during the crises - positive
impact e.g. in Ghana and Uganda
Three Pillars of Customer Protection
Government - Laws and regulations to protect
consumers and clients - Ensures right to file an
appeal - Financial education in school curricula
Industry - Sets voluntary codes of conducts -
Enforces the codes of conduct themselves
(Responsible Finance) - Provides ombudsman system

• Individual
• Financially literate, i.e. able to take
  appropriate financial decisions.
• Financially capable, i.e. makes right decisions
• Social Marketing initiatives. Examples
  Financial Literacy campaigns in Ghana Road
  shows, theatre, video

Setup
Setup
Credit Reference Bureau (CRB)
The three pillars should be addressed
simultaneously to be successful. CRBs are a
concrete measures within this comprehensive
approach.
6
3. The G-20 committed themselves to support
financial inclusion and foster financial sector
stability
Access to Financial Services
Financial Sector Stability

• Pittsburgh Declaration 09/2009 (Art. 41)

• G-20 Reform Agenda
• Increase financial sector stability through (new)
  regulation and improved supervision
• New International regulatory standard(s) e.g. in
  the field of risk management, capital
  requirements/cushions (Reform Basel II)
• Adaptation for developing countries?
• Representation of non-G20 countries?
• Effects on financial institution active in Micro
  Finance?
• Regulation and Supervision should support the
  microfinance industry

We will promote successful regulatory and
policy approaches and elaborate standards on
financial access, financial literacy, and
consumer protection.

• Financial Access and Financial Stability need to
  be balanced carefully
• Further monitoring of the G-20 Debate and
  its effects on the MF sector