Reaching the Hard to Reach - Regulation and Supervision of Member-Owned Institutions in Remote Rural Areas
As the microfinance sector develops, more and more countries are coming up with specific regulations to formalize, oversee and integrate this sector into the overall financial sector. In some countries, integration may take the form of one law governing the activities of the various types of institutions which deliver financial services to this segment of market. In other countries, laws may regulate financial institutions based on legal status. Typically one law governs companies guaranteed by shares and one governs financial cooperatives (i.e. Savings and Credit Cooperative, SACCO). In many countries where cooperative or SACCO laws pre-exist, reforms have been engaged.
Regulation and supervision of Member-Owned Institutions (MOIs) which deliver financial services to their members can protect small depositors, the financial sector, and the MOIs. Effective, prudential supervision can provide incentives for good governance, thus helping MOIs to maintain the “financial discipline and prudent management” so often lacking in unregulated financial institutions. Regulation and supervision does not substitute for good governance and developing strong institutional capacity is the best means of ensuring institutional sustainability and long-term growth in outreach.
In reality, regulation and supervision of MOIs have largely been ineffective. In many parts of the developing world, they still operate under outdated cooperative laws that are designed for multipurpose cooperatives. Supervising entities often lack the technical expertise needed to supervise MOIs and, in many cases, do not do so either by regulation or because they do not have enough resources. Without effective supervision, most representative MOIs have limited outreach and mismanagement is common. In fact, developing effective regulation and supervision may be an important means of increasing MOI outreach, if some of the constraints and limitation could find appropriate solutions.
Supervising MOIs should be seen as being quite relevant. As MOIs are often the only service providers in rural areas, they represent substantial numbers of poor depositors but a lack of governance places the savings of these poor depositors at risk. The MOI sector, however, typically includes a large number of institutions that represent a small fraction of a country’s financial assets. Because supervising the sector is relatively costly, resource-poor regulatory authorities are often unable or unwilling to do so. Indeed, MOIs are known as “the conundrum” of microfinance supervision (Lyman, 2006).