This paper informs about the basic principle of regulation and supervision is to protect the system from unsound, excessively risky practices by deposit taking institutions, thereby protecting small and uninformed depositors and the payment system itself
This paper points out the dangers of failing to focus on the fundamentals of regulation and supervision when advocating their application to microfinance and:
* discusses the primary focus of the regulatory debate on the characteristics of microfinance institutions
* contrasts analysis of regulatory laws and norms with actual regulatory practices, emphasizing the importance and relative neglect of the latter
* presents case studies of Nicaragua and the Philippines, including a further discussion of the impact of the Asian crisis on certain aspects of microfinance in the Philippines
The document concludes that:
* microfinance products and services are clearly different from traditional banking products and services
* the risk profile of microlending is clearly different from the risk profiles of traditional bank lending
* more regulators in countries with microfinance institutions contemplating deposit taking activities should be informed of the benefits of risk-based supervision as this could minimize the perceived differences in supervisory approaches to traditional commercial bank activities and to microfinance
The author adds that it would also be helpful if there were greater understanding that, while most financial products and services share a common set of risk factors, they can have very different risk profiles.
