**Table 1. Selected Characteristics of 64 Financially Self-sufficient MFIs (In %)**

|_Organiz:ational_<br>_formnats_|_Capital/assets_i|_Operatingself._<br> <br>_suffic:v_<br>_|_|_Dollaraterage_<br> <br>_loan_|_Depth*_|_Etrernalfundsl_<br>_loans(P_|
|---|---|---|---|---|---|
|Bank_|21.0|118.6|_527_|62.5|166.6|
|__N n-bak<br>_<br>I|<br>_27.4---|_<br>110.4_|_958<br>_L|62.4_|__<br>70.3|
|Creditunion<br>i<br>f--------------|42.1<br>-<br>-------<br>'---r-|122.5<br>--~-----~f~----'|1,306|91.6|88.6|
|____,**_**____<br>. .__.__<br>NGO|58.5<br>!|<br>130.8|490<br>1|38.8|26.6|

* Depth = Average loan balance per borrower/GNP per capita.

(P Extemal funds/loans = Borrowed funds @ commercial rates/average loan portfolio.

_Source: The MicroBanking Bulletin, Issue No. 6 (April 2001), Tables C and D._ 20. MFIs have large numbers of clients but low overall account balances compared with traditional financial institutions. While MFIs' share in total assets of the financial system is relatively small, direct measurements of MFIs' relative position in the overall financial system do not take into account the sector's volume of deposits in total banking system deposits, since MFIs maintain their operating accounts and clients' deposits in the banks. Their outreach, measured by the percentage of the population doing business with MFIs, can be quite large. As the clients belong to poor segments of the population a bankruptcy of either the MFI or its depository bank would have adverse consequences. The argument that regulation and supervision in microfinance are less important because of its small place in the financial system misjudges the exceptional receptiveness of this segment and its possible contribution to financial systems development.

21. The existing legal and regulatory frameworks in many of the World Bank's client countries have been unable to support the sustainable growth and commercial integration of microfinance programs into the formal financial system. In addressing this problem, a number of governments have begun to address the issue of a transparent and inclusive regulatory framework under which microcredit can be legitimately provided by MFIs, and so that a continuum of MFIs can be developed and strengthened. These governments have realized the advantages and benefits of a "tiered" banking and financial system (including its regulation and supervision), which facilitates the establishment of smaller, specialized MFIs.

22. The countries which have moved towards a tiered financial and regulatory structure include Bolivia and Peru in Latin America; and Uganda, Ghana and Zambia in Africa. A number of countries in Eastern Europe -- e.g., Albania, Bosnia and Georgia - are restructuring their banking laws and prudential regulations to establish a tiered approach to accommodate specialized financial institutions with capitalization requirements much lower than those for regular commercial banks. In Southeast Asia, the Philippines and Indonesia have had tiered banking structures, although the existing regulatory framework still does not make it possible for a range of MFIs to be integrated into the regulated financial sector. India also has in place basic statutes that would permit the establishment of smaller regulated financial institutions with a regional focus.

23. However, it is important to consider the benefits versus the costs associated with establishing and implementing a regulatory framework for microfinance. Regulation and supervision entail costs, not only for the regulator but also for the regulated institution. For instance, BancoSol's management estimates that complying with the bank superintendency's reporting requirements during its first year of operations generated a cost equivalent to 5% of the loan portfolio, even though this had declined to about 1% of loan portfolio as of last year.<sup>6</sup> In Peru, supervision fees collected by the credit union

- 6 _Cited in Christen and Rosenberg, The Rush to Regulate._

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