capitalization may be set at levels lower than those for regular commercial banks. It should be noted that many countries' banking laws do not allow for _tiered-banking,_ under which licensed but specialized banks can be established at levels of minimum capital lower than those for "4universal" banks;<sup>31</sup> 89. The experience in Bolivia, Peru and the Philippines with lower minimum capital requirements for specialized institutions licensed to carry out limited banking operations demonstrates the use of a minimum capitalization requirement as a _standard of entry_ rather than a _barrier to entry._ In the recent reforms to its banking laws, Nicaragua will permit the establishment ofnonbank financial entities with a non-profit charter, a specialized microfinance and SME focus and shareholder capital at a level lower than that for regular commercial (multiple) banks,<sup>32</sup> The application of a liability-to-capital ceiling would complement the standard of entry aspect of minimum capitalization, becoming a positive inducement for striving to increase capital (and the resulting capacity to expand microlending) over time.

# **Considerations for governments, donors and MFIs**

90. The worldwide inventory of microfinance institutions undertaken by the World Bank indicates that as of September 1995, some $7 billion in loans to more than 13 million individuals and groups were outstanding in the 206 institutions that responded to the survey These institutions had also mobilized over $19 billion in 45 million active deposit accounts.<sup>33</sup> Supporting the survival and developmrent of the economic activities of the poor has become one of the priorities of the policy agenda of the 1990s.

91. The financial system as a whole continues to evolve and find new ways to service demands for financial services in the emerging markets. The innovative and rapid development of many localized efforts to provide financial services to the poor outside of formal channels has generally overtaken taken policy formulation by governments. The reaction of some governments (e.g., Bosnia, Bangladesh and others) and multilateral agencies (e.g., Asian Development Bank)<sup>34</sup> is unfavorable to microfinance - comprehensive regulation is being proposed for microfinance activities and institutions through mandated standards of performance and risk-ratios. These proposals are based on untested hypothesis about the institutional and market impact of moving from an unregulated environment to one that is as tightly regulated as formal banks and financial institutions.

92. Institutions specializing in supporting and promoting the development of microenterprise development and microfinance services, such as the Consultative Group to Assist the Poorest (CGAP), US Agency for International Development, Microfinance Program at the Economics Institute in Boulder, Colorado, ACCION International, and Women's World Banking to name a few, have initiated and promoted efforts to bring about a supportive policy and institutional environment formicrofinance. This is being done by promoting and intensifying dialogue among the key participants in microfinance -- government regulatory agencies, microfinance practitioners and donors. Aside from assistance through staff training and dissemination by seminars, workshops and publications to increase the awareness and

> 31 "Tiered-banking" exists in a few countries (e.g., the Philippines, Indonesia, Peru) where specialized banks may be established at capitalization levels much lower than for regular universal banks, but with operations limited to specifically-defined geographical areas and deposit-taking limited to savings and fixed deposits.

> 32 In El Salvador, the thrust is to reform the law on Federacion de las Cajas de Credito and Bancos de los Trabajadores, which will permit a new type of financial institution with lower capitalization requirements, taking deposits from the public and providing loans primarily to microenterprises and small businesses.

> 33 Julia Paxton and Carlos Cuevas, A Worldwide Inventory of Microfinance Institutions, Sustainable Banking wiith the Poor (SBP) Project. Washington, DC: The World Bank, 1997.

> 34 Philippines - National Summit of the Coalition for Microfinance Standards, August 20, 1998.

32