households and micro-enterprises with access to a wide array of sustainable financial services. CFIs — whether informal or registered (in different countries), such as SACCOs, credit unions, _mutuels_ , or village banks — are of particular interest, both because they offer the potential for offering sustainable, community-based financial services to lower-income rural populations, and because their traditional treatment as cooperatives in most African countries poses special problems for inculcating commercial financial principles and bringing them under financial regulation.

13. The experience of microfinance practitioners in many different settings worldwide underscores the proposition that the future for sustainable microfinance lies in a regulated, licensed environment. In most countries no other environment can enable large-scale, sustainable delivery of an increasing variety of financial services to effectively link the poor to the more developed sectors of the economy (Christen and Rosenberg 2000). When MFIs’ traditional (donor) sources of funds cannot keep pace with expansion in their lending business, MFIs need access to external finance. In addition to loans from upper-tier financial institutions and private institutional savings, securities issues (commercial paper) on the formal capital market may be feasible in financial sectors such as Bolivia’s or Peru’s, where microfinance institutions are recognized as legal entities and are an integral part of the financial system (box 1).

**Box 1.** Transformation to Formal, Regulated Status Enhances Access to Commercial Funds

One of the better known examples of NGO transformation is Bolivia’s Fomento a Iniciativas Económicas S.A. (FIE), a for-profit MFI offering individual loans to micro-enterprises in urban areas. It began lending in 1988 as an NGO and grew its portfolio from US$4 million to US$12 million in only three years, with a debtequity ratio of 2:1. In early 1998 FIE secured its license to operate as a private finance fund regulated by the Superintendency of Banks. By year’s end the organization had been able to raise its debt-equity ratio to more than 6:1, mobilizing additional funding resources from institutional time deposits and increased credit lines from commercial banks. As a regulated, formal financial intermediary, FIE was able to attract institutional deposits and banks were more willing to increase their lending limits. With its newly acquired status as a financial intermediary regulated by the banking authority, it was able to become a private financial fund that played by universally understood rules enforced by a fairly tough banking superintendency. Bank creditors of FIE knew that the accounting rules it used to produce financial statements were the same as those that they themselves used, and that the same banking superintendency that exercised prudential oversight on them also closely monitored its liquidity reserve requirements, currency risk, portfolio quality, loan provisioning levels, and other potential problem areas. _Source_ : von Stauffenberg (2001).

# **METHODOLOGY AND ORGANIZATION**

14. This study is underpinned by country case studies of the legal and regulatory framework for microfinance carried out in 2002 for Benin, Ghana, and Tanzania by separate teams under a joint project of the Africa Region and the Financial Sector Operations and Policy Department (Gallardo and Randhawa 2003; Ouattara 2003; Steel and Andah 2003).<sup>1</sup> In preparing this review, the authors supplemented the findings from the country-specific case studies with information from other reports and studies on the regulatory framework for the financial sector and for microfinance in selected other countries.

15. Even though they are geographically and culturally diverse, Benin, Ghana, and Tanzania share characteristics that are typical of African countries where microfinance could be an important tool for poverty reduction: levels of economic development are low, though per capita income is growing; rural sectors are large; financial sectors are shallow; and poverty is widespread (as participants in the Highly

- 1 A team also undertook a case study of South Africa (not published), whose unique circumstances yield only limited lessons for this review. Participants at a December 2002 workshop reviewed and discussed the findings of the three country case studies featured in this study, together with an issues paper, as a basis for this comparative study. The case studies provide more details on the macroeconomic and policy context, the regulatory framework, the financial sector structure, and the key institutional players in the microfinance sectors of the three countries.

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