classification and provisioning for delinquent loans follow international standards; however, the current tax regime does not permit banks to record provisions for possible loan losses as allowable expenses in their statement of income and expenses for tax purposes, thereby discouraging compliance.

71. **_Labor laws and regulations._** Labor laws on institutional employment continue to present obstacles for financial institutions in general, including MFIs, in their attempts to become more efficient. For instance, in Tanzania firing employees, even for just cause such as fraud, is virtually impossible. Such laws are clearly a substantial deterrent to progressive employment and personnel development programs and practices and need to be reviewed and reformed.

**Box 2.** Facilitating Dispute Resolution through the Commercial Court, Tanzania

Tanzania recently established a separate Commercial Court to ensure the efficient processing and timely resolution of commercial disputes. By avoiding procedural bottlenecks, the court can settle disputes expeditiously and efficiently for the benefit of all parties involved. There is no fixed definition of a commercial case. Broadly, it covers the liabilities of a business person, commercial organization, or individual arising out of commercial or business activities. It also involves the structuring or payment of commercial debt by or to a business person, commercial organization, or individual. The value of cases handled by the court ranges from T Sh 10 million to T Sh 300 million (US$12,500 to US$37,500).

The court’s mandate includes streamlining procedures to facilitate the quick res olution of commercial disputes. Alternative dispute resolution remains available to the Commercial Court, which promotes mediation and other forms of settlement to avoid trials. The government introduced these options because of congestion and excessive delays in the disposal of court cases.

The 43 staff members of the Commercial Court include three judges, one registrar, and a number of deputy registrars. While it enjoys a degree of autonomy in financing and staffing, the court is constitutionally an integral part of the High Court of Tanzania and its staff members are employees of the judicial system. Both parties to a case are required to pay court fees when documents are filed. The fee, currently set at 3 percent of the claim amount, is significantly higher than that payable in the High Court.

Bankers and members of the business community have expressed appreciation of the Commercial Court and are satisfied with its performance, as most cases were resolved within three months. In 2000 the court resolved 104 cases. In 2001, 185 cases were filed and the court had already decided 110 cases during the first seven months of the year.

_Source:_ World Bank 2001.

# **IV. MAIN FINDINGS**

72. The worldwide success that MFIs and microfinance programs have achieved in making financial services accessible to the poor and microenterprises has spawned initiatives to expand them. The regulatory policy responses of governments have ranged from deliberate efforts to promote microfinance development by establishing special regulatory niches to control of heretofore unregulated MFI activities. An intermediate approach has been to integrate commercial microfinance into the formal financial sector by adjusting existing regulatory structures to accommodate and legitimize the provision of microfinance services by various types of institutions.

73. A central issue is whether licensing promotes or discourages the integration of microfinance methodologies into the financial system. Regulations that prevent specialized, commercially-oriented MFIs from entering the market or commercial banks from going down-market can be considered unduly restrictive. Regulations that permit the licensing of sufficiently qualified MFIs and are adapted to the nature of microfinance portfolios can facilitate financial system development that reaches poorer clients. Regulations and government credit programs that prevent MFIs from evolving as self-sustainable financial institutions tend to marginalize microfinance. Based on the countries studied and on other experiences, the financial sector regulatory framework generally compartmentalizes MFIs into several categories, accommodating some forms as licensed financial institutions (with varying degrees of restriction on entry), while allowing others to operate outside the formal regulatory framework. In a few cases the responsibility for regulation is shifted to agencies other than a central banking authority.

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