# IV IMPACT OF THE LEGAL AND REGULATORY FRAMEWORK ON SUSTAINABLE MICROFINANCE

13. Improving the access of low-income producers and the poor to basic financial services is viewed as an ingredient of the World Bank's efforts to promote economic growth and reduce poverty. The World Bank's approach emphasizes a market-driven approach in which the financial sustainability of financial intermediaries becomes paramount. In many cases that market approach is possible because of the use by MFIs of group lending and other techniques to offset borrowers' lack of collateral. The World Bank's overall strategy for helping countries develop micro, rural and small and medium enterprise (SME) finance includes a number of key measures in the overall legal and regulatory framework, in building up institutional capacity and in the introduction of financial systems infrastructure:<sup>**2**</sup>

**Box 2: The World Bank's financial sector priorities for developing microfmance**

1. Removing legal provisions (e.g., interest ceilings) or adapting regulatory provisions (e.g., banking regulations) inconsistent with financially sustainable rural and micro finance.

2. Establishing registration and titling systems and foreclosure laws to allow the use of assets (lands, crops, cattle, small equipment) owned by rural and poor urban households as loan collateral.

3. Continuing the development of specialized nonbank financial intermediaries (e.g., microfinance institutions, leasing companies, private equity funds) for SME finance.

4. Harnessing modem technologies (electronic banking, credit and payment cards) and/or nonfinancial institutions (postal service) to provide basic, innovative payment and financial services for rural areas, micro-enterprises and SMEs.

_Source: "Strategyfor the Financial Sector", Financial Sector Board, The World Bank Washingion. DC, February 200._ 14. The regulation and supervision of MFIs should be an integral part of a strategy to develop a marketbased financial system. Microfinance is not limited to borrowing, but also includes other financial services such as savings, insurance, transfer facilities, etc. Savings facilities are a particularly important question when considering prudential regulation of MFIs because the prospective microfinance target group is usually many times larger in deposit business than in lending.

15. A clear and transparent regulatory framework is necessary because MFIs' traditional fund sources usually cannot keep pace with their lending business, and thus need to have access to external finance to complement their own resources and those from donors in order to reach as many prospective borrowers as possible. Possible sources of funds are loans from other financial institutions, private savings or - in an advanced microfinance sector - securities issues on the formal capital market. MFIs could thereby advance from credit-only institutions to fully-fledged financial intermediaries. Heretofore, mobilization of savings from the general public has almost always been contingent on MFIs complying with existing banking law. Access to the capital market, in turn, is contingent on MFIs complying with securities regulations.<sup>3</sup>

## _The Rationale_ **_for_** _Rezulation and Supervision_

> _2 "Strategy for the Financial Sector", Financial Sector Board, The World Bank, Washington, DC, February 2000._

> _Stefan Staschen, "Regulation and Supervision of Microfinance Institutions: State of the Knowledge", GTZ: Eschborn, August 1999._

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