An Assessment Of Regulatory Barriers Impeding Entry Or Transformation Of New Or Unregulated Microfinance Entities Into Regulated Status: A Comparative Study of the East African Community Microfinance Regulatory Regimes

By Evelyne Kanini Kilonzo
April 2012
About 2.5 billion adults, representing over half of the world’s adult population, have no access to formal financial services to increase their incomes and improve their lives. Among them, 1.1 billion live on less than one dollar a day. While access to financial services is skewed in developing nations, its importance cannot be overemphasized. Various reasons have been advanced to explain the motivations for entry or transformation of microfinance entities into licensed and regulated deposit taking microfinance institutions (MFIs) in developing nations. However, it is noted that the pace at which MFIs in the East African Community (EAC) are being licensed to mobilise deposits for on-lending purposes is rather slow. It is not clear whether, and what provisions in, the EAC microfinance legislations impede or bar the entry or transformation of MFIs into regulated status, or whether the slow pace or licensing deposit taking MFIs is attributed to external impediments. Establishing the impediments is necessary if they are to be avoided, as this will then make it possible to undertake necessary regulatory and legislative reforms to facilitate the increased licensing of MFIs to enable them expand safe financial inclusion.

The objective of this study was to establish whether there were any regulatory barriers that impeded the entry or transformation of unregulated microfinance entities into regulated status under the specific microfinance legislations in the EAC. In order to determine this, it was necessary to establish why new or existing microfinance entities in the EAC are not increasingly seeking to be licensed, regulated and supervised as deposit taking MFIs under the different microfinance legal and regulatory frameworks in the EAC member countries. The methodology of study of this research involved the use of literature review, secondary data collection and administering of questionnaires to Microfinance Associations (MFAs) and MFIs within the EAC member countries.
The findings of the research and literature review based on studies and surveys conducted in several developing nations in Latin America, Asia and Africa indicate that indeed there are motivations and benefits of entry and transforming into regulated deposit taking. Entities seek to transform into licensed and regulated financial institutions in order to access diversified commercial sources of funds, including voluntary savings, to fund growth and outreach; provide a wider range of services, including savings; comply with legal requirements and ultimately increase long-term development impact. Essentially, the regulation and supervision of deposit taking microfinance leads to the ultimate goal of expanding outreach sustainably. The findings of the research study have corroborated this but have also established there are a number of impediments that deter or slow entities from seeking entry or transformation into regulated status, including the cost of transformation, inhibitive regulatory requirements and ownership and shareholding requirements, among others. To continue to enable the entry or transformation of entities and address the impediments and barriers of entry or transformation into regulated status, the following policy recommendations are proposed.
On policy recommendations, the study proposes that there is need for EAC regulators to continually adjust existing, or formulate clear and appropriate microfinance legislation to provide appropriate and relevant provisions that create an enabling environment for ease of entry and transformation. In addition, there is need for EAC regulators to revise the microfinance licensing procedures and other inhibitive regulatory requirements in order to increase entry and transformation of MFIs into the deposit taking regulated environment. Further, regulators in the EAC should embrace financial innovations that make it possible to reduce costs of setting up business for regulated deposit taking MFI. Enabling the use of alternative places of business and allowing the sharing of the MIS and other infrastructure are some of the avenues that may be explored by regulators to reduce costs of transformation for MFIs. Lastly, regulators in the EAC, as well as other MEFMI member countries should develop a peer learning and networking mechanism to share experiences and knowledge on regulatory and supervisory best practices with the aim of improving the various microfinance regulatory and supervisory regimes in the specific countries.