of different types of MFIs which trigger a need for mandatory external guidelines, and the proposed regulatory measures and agencies to carry them out.

# **Regulatory Thresholds of Activities by Type of Microfinance Institution**

|**MFI Type**|**Activity that Determines**<br>**Regulatory Status**|**Proposed**<br>**Form of External**<br>**Regulation,**<br>**if Required**|<br>**Regulatory**<br>**Agency**|
|---|---|---|---|
|**CATEGORYA MFls**||<br>_________________________,-_||
|**Type****_I_**<br>Basic Nonprofit<br>NGO|Making microfinance<br>loans not in excess<br>of grants and donated/<br>concessional<br>funds (loan capital).|None - Voluntary<br>registration<br>with Self-<br>Regulatory<br>Organization.|None, or Self-Regulatory<br>Organization.|
|Type 2<br>Nonprofit<br>NGO with<br>limited deposit-takin|Taking minor deposits, e.g. forced<br>savings or mandatory<br>deposit schemes,<br>g from microfinance<br>clients in community.|None -- Exemption<br>or exclusion<br>provision<br>of<br>banking law; compulso**r**y egistration<br>with Self<br>Regulatory<br>Organization.|Self-Regulatory<br>Organization.|
|**Type**3<br>NGO transformed<br>into<br>Incorporated<br>MFI|Issuing instrumen**t**s ogenerate<br>funds<br>through wholesale<br>deposit substitutes<br>(commercial<br>paper, large-value<br>certificates<br>of deposit, investment<br>placement<br>notes).|Registration<br>as corporate<br>legal entity;<br>authorization<br>from Bank Supervisory<br>Authority<br>or Securities<br>&Exchange<br>Agency, with<br>limitations<br>on size, term and tradability<br>of<br>commercial<br>paper instruments.|Compainies'<br>Registry<br>Agency: Bank<br>Supervisory<br>Authority or<br>Securities<br>&Exchange<br>Agency.|
|CATEGORY B**MFIs**|_<br>_<br>_<br>_<br>_<br>_<br>__._A___|__.<br>_;_--<br>_-<br>_.<br>5<br>;<br>,<br>__<br>_i_<br>r|\<br>f<br>,<br>_-_-.|
|Type 4<br>Credit Union, Savings<br>& Credit Cooperative<br>Society|Operating<br>as closed- or open-common<br>bond credit union; deposit-taking<br>from<br>member-clients<br>in the community,<br>workplace<br>or trade.|Notification<br>toand registration<br>with<br>Cooperatives<br>Authority<br>or Bank Supervisory<br>Authority:<br>or certification<br>and rating by a<br>private independent<br>credit rating agency.|Cooperatives<br>Authority,<br>or<br>Bank Supervisory<br>Agency<br>or Credit Rating Entity.|
|CATEGORY<br>C**MFIs**|_|1<br>-*%<br>'-<,<br>e<br>L.77||
|Type 5<br>Specialized<br>Bank,<br>Deposit-taking<br>Institution,<br>or<br>Finance<br>Company|<br>Taking limited deposits<br>(e.g. savings &<br>fixed deposits)<br>from general public<br>beyond minor deposits<br>exemptio**n**<br>i<br>banking law. Microfinance<br>activities more<br>extensive<br>than NGOs but operations<br>not<br>on scale of licensed banks.|Registration<br>and licensing<br>by Bank<br>Supervisory<br>Authority,<br>with a limitation<br>provision<br>(e.g., savings & fixed deposits,<br>smaller deposits-to-capital<br>multiple, higher<br>liquidity reserves,<br>limits on asset activities and<br>uses).|Bank Supervisory<br>Authority.|
|Type 6<br>Licensed<br>Mutual-<br>Ownership<br>Bank<br>Type 7<br>Licensed Equity Bank|Non-restricted<br>deposit-taking<br>activities,<br>includin**g**enerating<br>funds through<br>commercial<br>paper and large-value<br>deposit-substitutes,<br>from the general<br>public.|Registration<br>and full licensing by Bank<br>Supervisory<br>Authority<br>as a mutual-ownersh<br>or equity bank; compliance<br>with capitalization<br>/ capital adequacy<br>requirements,<br>loan loss<br>provisioning<br>and full prudential<br>regulations.|Bank Supervisory<br>ip Authority.<br>|

6. The categories of risk which financial institutions including MFIs need to manage comprise balance sheet structure risk, profitability risk, solvency/capital adequacy risk, credit risk, treasury risks (consisting of liquidity risk, interest rate risk, market risk, and currency exposure) and operational risk. The nature of the microfinance business and the institutional structure of MFIs determine the priority ranking of risks that need to be managed. The processes of internal regulation through governance and mandatory external regulation are closely linked to each other. Several key players from the MFI sector, the regulatory agencies and the general public have a critical partnership and shared responsibility in the risk management process.

7. The approaches to external supervision of MFIs can range from nonexistent to full regulation, either through the existing prudential regulatory framework or by modifying the existing regulatory requirements to fit the organizational and operating characteristics of MFIs. A primary example of the adaptive approach is "tiered banking" and graduated regulation - a structure which takes into account the defining characteristics of the microfinance business and the varied range of MFIs involved in it.

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