Table Of ContentREGULATION AND SUPERVISION
OF
MICROFINANCE INSTITUTIONS
Case Studies
Edited by
Craig Churchill
The MicroFinance Network
Occasional Paper No. 2
Regulation and Supervision Case Studies
TABLE OF CONTENTS
TABLE OF CONTENTS ........................................................................................................................ i
TABLE OF TABLES ............................................................................................................................ iii
CONTRIBUTORS................................................................................................................................. iv
ACKNOWLEDGMENTS ..................................................................................................................... vi
LIST OF ACRONYMS ........................................................................................................................ vii
INTRODUCTION .................................................................................................................................. 1
PROJECT PURPOSE................................................................................................................................. 1
BACKGROUND....................................................................................................................................... 2
INDONESIA........................................................................................................................................... 5
Shari Berenbach
BACKGROUND....................................................................................................................................... 5
BANK RAKYAT INDONESIA UNIT DESA ................................................................................................... 8
SUPERVISION OF MFIS IN INDONESIA.................................................................................................... 10
BANGLADESH.................................................................................................................................... 15
Janney Carpenter
CONTEXT: THE FORMAL AND SEMI-FORMAL FINANCIAL SECTORS........................................................ 16
EXISTING REGULATION: THE GRAMEEN BANK CHARTER ...................................................................... 21
THE REGULATION DILEMMA: HOW MUCH AND HOW TO DO IT WELL? .................................................. 25
OBSERVATIONS AND CONCLUSIONS...................................................................................................... 31
PHILIPPINES ...................................................................................................................................... 35
Eduardo C. Luang and Malena Vasquez
MAJOR LEGISLATIVE INITIATIVES FOR FINANCIAL SECTOR REFORM....................................................... 35
ROLES AND RESPONSIBILITIES OF REGULATORS .................................................................................... 38
MICROFINANCE STANDARDS INITIATIVE............................................................................................... 39
BOLIVIA.............................................................................................................................................. 43
Rachel Rock
BOLIVIAN REGULATORY FRAMEWORK.................................................................................................. 43
CREATION OF BANCOSOL .................................................................................................................... 49
LOS ANDES: THE FIRST BOLIVIAN PRIVATE FINANCIAL FUND ............................................................... 55
COLOMBIA......................................................................................................................................... 59
Shari Berenbach
FINANCIAL SECTOR IN COLOMBIA ........................................................................................................ 59
FINANSOL ........................................................................................................................................... 61
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MicroFinance Network
PERU.....................................................................................................................................................69
Rachel Rock
ECONOMIC CONTEXT ...........................................................................................................................69
PERUVIAN FINANCIAL SYSTEM: STRUCTURE AND ACTORS .....................................................................70
CAJAS MUNICIPALES ............................................................................................................................75
CAJAS RURALES...................................................................................................................................82
EDPYMES..........................................................................................................................................82
CONCLUSION .......................................................................................................................................85
KENYA .................................................................................................................................................87
Janney Carpenter, Kimanthi Mutua, and Henry Oloo Oketch
CONTEXT: THE FORMAL AND SEMI-FORMAL FINANCIAL SECTORS IN KENYA.........................................87
K-REP BANK LIMITED..........................................................................................................................89
CONCLUSIONS AND LESSONS ................................................................................................................97
WEST AFRICA ....................................................................................................................................99
Anne-Marie Chidzero and Gilles Galludec
HISTORY OF THE LAW ..........................................................................................................................99
STATUS OF IMPLEMENTATION OF THE LAW..........................................................................................100
FEATURES OF THE LAW AND THE DECREES OF APPLICATION.................................................................101
DEVELOPMENTAL IMPACT ..................................................................................................................104
ISSUES...............................................................................................................................................104
SOUTH AFRICA ................................................................................................................................107
Rudolph Wilhemse and Steven Goldblatt
MICROENTREPRENEURS AND ACCESS TO FINANCE...............................................................................107
FINANCIAL SYSTEM INSTITUTIONS......................................................................................................108
BANKING LAWS AND REGULATIONS....................................................................................................110
SELF-REGULATION FOR MICROFINANCE INSTITUTIONS ........................................................................114
BIBLIOGRAPHY...............................................................................................................................117
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Regulation and Supervision Case Studies
TABLE OF TABLES
Table 1: Microfinance Institutions In Indonesia............................................................................6
Table 2: Summary Overview MFIs in Indonesia ..........................................................................7
Table 3: Supervisory Arrangements in Indonesia........................................................................ 10
Table 4: Banking Supervision Reports....................................................................................... 11
Table 5: BRI Village Unit Loan Classification and Reserves ...................................................... 11
Table 6: Loan and Deposit Size Comparison of BRI Unit Desa and Village-owned Banks .......... 12
Table 7: Financial Institutions in the Philippines ........................................................................ 37
Table 8: Reporting Requirements of the Bolivian Supervisory Structure..................................... 48
Table 9: Bolivian Superintendent’s Risk Classification and Provisioning Requirements .............. 49
Table 10: History of Savings Mobilization at BancoSol (millions US$)...................................... 55
Table 11: History of Growth: Pro-Credito/Los Andes Business Loans (millions US$)................. 56
Table 12: Financial Institutions in Colombia.............................................................................. 60
Table 13: Loan Provisioning Policies in Colombia ..................................................................... 61
Table 14: Financial Institutions in Peru...................................................................................... 71
Table 15: Peruvian Provisioning Requirements .......................................................................... 74
Table 16: CMAC Credit Products ............................................................................................. 78
Table 17: EDPYME Provisioning Requirements ........................................................................ 84
Table 18: K-Rep Bank Ltd. Shareholders .................................................................................. 92
Table 19: Financial Institutions in South Africa ....................................................................... 109
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MicroFinance Network
CONTRIBUTORS
Shari Berenbach has over fifteen years of experience in the microfinance industry, having worked
in nearly two dozen countries in Latin America, Asia, and Africa. She served as the Director of
Programs for Partnership for Productivity and worked as a microfinance consultant for USAID,
the World Bank, and the International Finance Corporation. In 1997, Ms Berenbach became the
Executive Director of the Calvert Social Investment Foundation, a corporate foundation that serves
as a bridge between the capital markets and community economic development.
Janney Carpenter is a Managing Director of Shorebank Advisory Services (SAS), the consulting
subsidiary of Shorebank Corporation, a development bank based in Chicago, Illinois. Ms.
Carpenter’s expertise is in development finance and microenterprise credit, both in the United
States and internationally. In microenterprise, she has assessed best practices, provided strategic
and business planning help, and conducted assessments and evaluations. In development finance,
she has designed and helped establish several development finance institutions, including
community development banks and loan funds.
Anne-Marie Chidzero is a Private Sector Development Specialist with emphasis on micro, small,
and medium enterprise development. She shares her time between CGAP (the Consultative Group
to Assist the Poorest), where she works as an Operations Analyst, and the Private Sector
Development Department of the World Bank. Most of her microfinance work has been in Africa,
where she has conducted financial appraisals of microfinance institutions, organized and conducted
training programs for practitioners, donors, and governments, and led the World Bank’s
discussions with the Central Bank of West Africa on a regulatory framework for microfinance
institutions.
Craig Churchill is the Coordinator of the MicroFinance Network and the Director of
Calmeadow’s Washington, DC, office. Over the past five years, he has been Director of the
Research and Program Evaluation at ACCION International, has done research for the World
Bank, and worked as an advisor to Get Ahead Financial Services in South Africa.
Gilles Galludec joined CGAP in December 1996 as a Financial Management Specialist. He has
accumulated eight years of experience as a practitioner in the financial sector in Africa. He
worked as a banking expert for Postal Savings in Gabon, where he designed and managed the
finance and treasury department for four years. He also spent four years in Benin as a Financial
Controller of FECECAM (a major credit union network) to reorganize the accounting, internal
control, and management information systems.
Steven Goldblatt is an advocate at the Johannesburg Bar, retained as a legal advisor by the Land
and Agricultural Policy Centre and the Minister of Agriculture and Land Affairs. He was a
member of the Strauss Commission on Rural Financial Services.
Eduardo C. Luang is the Bank Project Director of TSPI Development Corporation and is
primarily responsible for setting up the proposed TSPI Bank. His tasks include preparing the
operating manuals and conceptualizing the organizational and operational details required to
establish and operate a thrift bank. He has 28 years of experience in banking and was Vice
President and Chief Operating Officer of Comsavings Bank. He has also served as a consultant
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Regulation and Supervision Case Studies
for two foreign banks, State Mortgage and Investment Bank in Colombo, Sri Lanka, and People’s
Bank of Zanzibar, Ltd., Tanzania.
Kimanthi Mutua, currently the Managing Director of K-Rep, has over 20 years experience in
finance in general, and small and micro enterprise development in Africa in particular. His special
skills lie in the design and management of microenterprise finance operations, the design and
installation of management information systems, and financial analysis. He has played a principal
role in designing and implementing all of K-Rep’s microenterprise development programs. Over
the past 15 years, Mr. Mutua has authored numerous publications on various issues in the fields of
enterprise development and microfinance.
Henry Oloo Oketch is currently K-Rep’s Manager of the Research and Innovations Department.
He has been involved in NGO development work since 1987. Mr. Oketch has extensive skills and
experience in the design of management information and monitoring systems, as well as appraisal
and evaluation of micro enterprise development projects. He has provided consulting services to
the ILO, USAID, Ford Foundation, SNV/NOVIB (Uganda), World Vision International, Christian
Children’s Fund, University of Edinburgh, and the Kenya Industrial Estates on micro and small
enterprise evaluation and system design.
Rachel Rock is the Director, Program Evaluation and Policy Development for ACCION
International. She is responsible for researching and documenting issues in the microfinance field
for ACCION’s publication series and is a member of the research team for the USAID
Microenterprise Best Practices project. Before joining ACCION, Ms. Rock worked in community
development in the Dominican Republic and in strategic political consulting in several Latin
American countries. She also developed training materials for Working Capital, a domestic
microcredit program in New England.
Malena Vasquez is a Corporate Planning Specialist of TSPI Development Corporation. Her work
involves corporate planning, monitoring, and research. She has worked with TSPI for over five
years.
Rudolph Wilhemse is the chairman of EFK Tucker, Inc., a Johannesburg firm of attorneys. He
has been involved in a number of initiatives relating to the provision of development finance to low-
income communities.
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MicroFinance Network
ACKNOWLEDGMENTS
The MicroFinance Network, with the financial support of the British Department for International
Development (DFID), the World Bank’s CGAP, and a private foundation, has undertaken this
research project to promote a greater awareness of appropriate regulatory and supervisory
approaches for microfinance. The authors thank the funders of this project for their support.
An expert panel of bank supervisors served as advisors to this research. Their contributions helped
to ensure that this study considered the concerns and limitations of supervisory bodies. Most
importantly, they repeatedly emphasized that, for the most part, bank superintendents are not
particularly interested in small financial institutions that do not pose a significant threat to the
stability of the financial system. This panel includes:
• Hennie van Greuning, the former Chairman of the South African Reserve Bank, currently
employed at The World Bank
• Jorge Castellanos, the Colombian Banking Superintendent from 1994 to 1995, now
working for JP Morgan in New York
• Luis Cortavaria, the former Banking Superintendent of Peru, currently working with the
International Finance Corporation (IFC)
• Christopher Beshouri, a Financial Economist at the United States Department of Treasury
The authors are indebted to a long list of other readers and advisors to this project including:
Elisabeth Rhyne (USAID); Richard Rosenberg and Joyita Mukherjee (CGAP); David Wright
(DFID); Maria Otero and Carlos Castello (ACCION International); Barbara Calvin and Stefan
Harpe (Calmeadow); Robert P. Christen; Jacques Trigo Loubi�re (Bolivian Superintendent of
Banks and Financial Institutions); Maria Eugenia Iglesias (Finansol); Cliff Kellogg (Shorebank);
Stuart Rutherford; Harald Huttenrauch and Mark Wenner (Inter-American Development Bank);
Robert Vogel (IMCC); Mengistu Alemayehu (International Finance Corporation); Todd Farington;
Jacinta Hamann (COFIDE); Don Johnston (HIID); Edgar Lasso (Finance Company Delegate to
the Colombian Banking Superintendent); and the staff of BCEAO.
The editor thanks the members of the MicroFinance Network for supporting this research, in
particular those members that have contributed their time and resources directly to this project:
ACCION International, Accion Comunitaria del Peru, BancoSol, Bank Rakyat Indonesia, BRAC,
Calmeadow, Finansol, K-Rep, and TSPI Development Corporation. The perseverance and
cooperation of all the authors during this two year project is also greatly appreciated.
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Regulation and Supervision Case Studies
LIST OF ACRONYMS
ADB Asian Development Bank
AfDB African Development Bank
AMEDP Alliance of Micro Enterprise Development Practitioners
ASA Association for Social Advancement
BAP Bankers Association of the Philippines
BCEAO Banque Central des Etats de l’Afrique de L’Ouest
BKD Baden Kredit Desa
BKK Badan Kredit Kecamatan
BRAC Bangladesh Rural Advancement Committee
BRI Bank Rakyat Indonesia
BSP Bangko Sentral ng Pilipinas
CAF Corporacion Andina de Fomento
CAMEL Capital Adequacy Asset Quality Management Earnings Liquidity
CAS/SMEC Cellule d’Appui et de Suivi des Structures Mutualistes ou Coopératives
d’Epargne et de Crédit
CBK Central Bank of Kenya
CD Certificate of Deposit
CDF Credit and Development Forum
CGAP Consultative Group to Assist the Poorest
CIDA Canadian International Development Agency
CMAC Cajas Municipales de Ahorro y Crédito
COFIDE Corporacion Financiera de Desarrollo
CRAC Caja Rurale de Ahorro y Credito
EDPYME Entidades de Desarrollo para la Pequena y Microempresa
FEPCMAC Federation Peruana de Cajas Municipales de Ahorro y Credito
FONCODES Fondo Nacional de Compensacion y Desarrollo Social
FONDEM Fondo para el de la Desarrollo Microempresa
FMO Nederlandse Financierings-Mautschappij Voor Ontwikkelingslanded
FRASA Fondo Revolvente del Sector Agrario
GDP Gross Domestic Product
GTZ Gesellschaft fur Technische Zusammenarbeit
IDB Inter-American Development Bank
IFAD International Fund for Agriculture
IFC International Finance Corporation
IFI Instituto de Fomento Industrial
IIC Inter-American Investment Corporation
IPC Interdisziplinare Projekt Consult
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MicroFinance Network
K-Rep Kenya Rural Enterprise Program
KUK Kredit Usaha Kecil
KURK Kredit Usaha Rakyat Kecil
LPD Lembaga Perkreditan Desa
LPN Lumbung Pitih Nagari
MFI Microfinance Institution
MIS Management Information Systems
NBFI Non-Bank Financial Institution
NCC National Credit Council
NGO Non-Governmental Organization
NHFC National Housing Finance Corporation
PARMEC Prôjet d’Appui à la Réglementation des Mutuelles d’Epargne et de Credit
PCFC Peoples Credit and Finance Corporation
PDIC Philippine Deposit Insurance Corporation
PFF Private Financial Fund
PKSF Palli Karma Sahayak Foundation
PRODEM Fundacion para la Promocion y Desarrollo de la Micro empresa
ROSCA Rotating Savings and Credit Associations
ROA Return on Assets
SACCO Savings and Credit Cooperative
SBS Superintendencia de Banca y Seguros
SCC Savings and Credit Cooperatives
SDID Société de Développment International Desjardin
SDR Special Drawing Rights
SDS Social Development Society
UEMOA Union Economique et Monetaire d’Ouest Afrique
USAID United States Agency for International Development
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Regulation and Supervision Case Studies
�
INTRODUCTION
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Project Purpose
The MicroFinance Network is a global association of microfinance institutions (MFIs)commited to
improving the quality of life of low-income communities through the provision of credit,
1
and other financial services. Network members believe these services should be provided by
sustainable and profitable financial institutions that reach large numbers of clients not currently served
by the traditional banking sector.
This research is designed to serve as a resource for bank supervisors, regulators, and policy makers.
The Regulation and Supervision Project of the MicroFinance Network reviews case experiences in
nine countries that have some experience with MFIs and draws conclusions regarding approaches to
regulation and supervision that are suited to the unique characteristics of those institutions. Countries
were selected for review because of the presence of a MicroFinance Network member and because this
sample presents a range of regulatory responses in diverse settings. The principal findings from this
project are summarized in the first volume. The country case studies, presented in this second volume,
offer a detailed analysis of the field experience.
Experiences in Bangladesh, Indonesia, and Bolivia provide evidence of the potential of microfinance
institutions to provide financial services on a large scale. While these are exceptional cases, the
microfinance community is emulating these models of success. Under proper conditions, including an
appropriate regulatory environment, there will be an increasing number of successful MFIs in the
coming years. It is hoped that regulators will be proactive in their preparations for the microfinance
wave. It is not necessary, desirable, or realistic to regulate all microfinance institutions. However, if
these services include mobilizing voluntary savings from the general public beyond closed
communities where common bonds exist, it is critical that some form of supervision be involved.
The cases examined highlight two general approaches to regulating microfinance institutions. The
situations in Bolivia, Kenya, and Colombia show the experiences of regulating MFIs within the
existing regulatory framework, either as a commercial bank or as a finance company. These
experiences also highlight mismatches between the standard regulatory framework and the provision
of microfinance services. The cases from Peru, West Africa, and Bolivia again provide insight into
initial attempts to create special categories of laws designed specifically for microfinance institutions.
A third set of experiences, from South Africa and the Philippines, demonstrates a learning process –
for MFIs and policy makers – designed to create standards for the local microfinance industry. While
it is too early in the development of these efforts to have a significant bearing on the discussion, they
1
Microfinance institutions (MFIs) assume a variety of institutional forms. While these cases speak most frequently
about non-profit microcredit programs that create regulated MFIs, other institutional types include government-
owned banks that operate microfinance units, commercial banks that create microfinance subsidiaries, and credit
unions. Successful MFIs typically provide a range of financial services to low-income communities, such as savings,
personal or consumption loans, housing and enterprise loans.
1
