19.04.23 Seite 1

The Role of Governments in Microfinance during and beyond the Crisis

Common Understanding and three Issues to discuss

Wolfgang BückerGTZ Financial Systems Development

Luxemburg, 25.11.2009

19.04.23 Seite 2Seite 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

19.04.23 Seite 3Seite 3

Intervention Levels to Improve the Regulatory Framework and Supervision:

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

Government/Legislation

Supervisory Body

Association of SLC

• 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

• 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

• 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

19.04.23 Seite 4Seite 4

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.

1. In the light of the crises, the strengthening of local financial systems and savings mobilization remains important

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

19.04.23 Seite 5Seite 5

2. Customer protection and financial literacy gained momentum during the crises - positive impact e.g. in Ghana and Uganda

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

Credit Reference Bureau (CRB)

Three Pillars of Customer Protection

Setup

The three pillars should be addressed simultaneously to be successful. CRBs are a concrete measures within this comprehensive approach.

19.04.23 Seite 6Seite 6

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

3. The G-20 committed themselves to support financial inclusion and foster financial sector stability

Access to Financial Services

Financial Access and Financial Stability need to be balanced carefully

Further monitoring of the G-20 Debate and it‘s effects on the MF sector

Financial Sector Stability

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