# **PRUDENTIAL STANDARDS FOR LICENSED MFIS**

54. The key prudential standards imposed by regulatory agencies of Benin, Ghana, and Tanzania on licensed institutional providers of microfinance services consist of minimum capitalization requirements and capital adequacy levels, asset quality standards, limits on risk exposure, and liquidity management guidelines. The following subsections discuss the different standards.

# **_Minimum Capitalization Requirements_**

55. Minimum capitalization requirements (MCR) are intended to ensure an adequate financial cushion for institutions’ operations and serve to restrict entry to licensed entities permitted to mobilize and intermediate deposits from the public. From the perspective of the financial systems approach, MCR should be set at levels that would enable MFIs to become integrated with the formal financial system while maintaining prudential standards. Applying the same MCR as for commercial banks could be considered an excessive barrier to entry, given the generally smaller scale and restricted scope of operations of MFIs . However, setting the MCR too low risks excessive entry relative to the supervisory authorities’ capacity to enforce prudential standards and the MFIs’ capacity to sustain successful intermediation of deposits.

56. The MCR should be viewed as a primary tool for rationing scarce regulatory and supervisory resources available to the regulators and supervisors, rather than as an instrument for promoting and propagating the entry of new intermediaries into microfinance. The setting of MCR levels should balance the objective of opening the formal financial system to MFIs with a realistic assessment of how many additional deposittaking MFIs the relevant authorities would be able to prudentially supervise with a reasonable capacity building program and how many MFIs would be likely to enter at different MCR levels.

57. The MCR for specialized banks and microfinance-oriented NBFIs in Ghana and Tanzania have generally been low enough to encourage the establishment and operation of microfinance providers as licensed institutions with the authorization to mobilize savings and time deposits from the community at large. However, as table 5 shows, recent changes are more restrictive.

**Table 5** . Minimum Capital and Adequacy Requirements for Licensed MFIs, 2002

|_Requirement_|_Benin:_<br>_credit unions and authorized_<br>_MFIs_|_Ghana:_<br>_licensed banks,_<br>_NBFIs, and credit unions_|_Tanzania:_<br>_licensed banks and MFIs_<sup>_a_</sup>|
|---|---|---|---|
|Minimum capital<br>Capital adequacy (capital<br>as a percentage of risk<br>assets)|No minimum level required<br>No minimum ratio specified|<br>�<br>Rural banks: US$67,000<br>�<br>S&Ls: US$2 million since 2001,<br>up from US$15,000 to –<br>US$22,000 during 1993–99<br>�<br>Rural banks: 6%<br>�<br>S&Ls: 10%<br>�<br>Credit unions: 10%|� Commercial banks: US$5<br>million<br>� Regional banks: US$250,000<br>� Rural banks: US$62,500<br>Microfinance companies:<br>US$1.25 million (stipulated<br>by new law)<br>6%|

a. Data for Tanzania are as June 2003. _Source:_ Gallardo and Randhawa (2003); Ouattara (2003); Steel and Andah (2003).

58. Benin’s licensing framework does not prescribe MCR for the licensed credit unions or for the non–credit union MFIs authorized to operate by the Ministry of Finance. In Ghana, the MCR is only a modest hurdle for RCBs, but no longer for S&Ls. The recent increase in MCR to US$2 million is 15 times the 1998 level in local currency. In part, this increase reflects concerns by the supervisory authorities about the failure of many S&Ls to meet prudential standards and about their own capacity to handle the growing number of applications for new entrants. The MCR now constitutes a significant barrier to entry and 16