Regulatory framework for microfinance Expectations remain
In Nepal, there is already a flourishing microfinance sector with thousands of microfinance institutions offering a range of services to thousands of customers. During the previous months, the Center for Micro Finance has prepared a model of a new law that aims at regulating microfinance services and institutions as well as protecting the customers.
In the context of microfinance activities, the first microfinance programs in Nepal were from the year 1956, from 13 saving and credit cooperatives. After that, the microfinance program started through cooperative institutions, priority sector credit, Small Farmer Development Program (SFDP), Production Credit for Rural Women (PCRW) and Micro Credit Program for Women (MCPW).
Such programs included mixed target population — both male and female. Remittance, the portion of international migrant workers’ earnings sent back from the country of employment to their origin country have played an important role in the economies of developing countries, and in particular Nepal.
The tie between microfinance and remittance has grown in recent years with a focus of linking the inflows of remittance money to other financial services. In some regions, microfinance institutions (MFIs) have emerged as major actors in savings mobilization and credit disbursement at the grassroots level. MFIs are often better placed than banks to offer money transfer services to remittance recipients, especially for clients in rural areas.
The new law aims at introducing a new standard in rendering microfinance services. One of the objectives is to establish a central agency that will regulate microfinance services, and will approve and supervise microfinance institutions. In this context, the approach that this law takes in regulating the relationship between this central agency and the public embodies concepts of strong corporate governance that will ensure responsibility, responsiveness, accountability and transparency.
When it comes to customer protection, micro-insurance on a sustainable basis and the access of the poor household to protection against risks such as the death of a family member, severe or chronic illness, or loss of an asset, including livestock and housing takes quite an important role. According to the definition of Churchill, micro-insurance is “the protection of low-income people against specific perils in exchange for regular monetary payments (premiums) proportionate to the likelihood and cost of the risk involved.” For Nepal, micro-insurance is essential for the poor people in reducing the risks and redistributing the costs of risky events.
Nowadays, in Nepal, MFIs have experimented with insurance, and they are motivated by social and commercial agendas. In this context, a pilot project would be to provide unemployment insurance by the MFIs. As a general note, insurance becomes appropriate for the MFIs of Nepal when there is an overlap of perspectives of both the household and the provider. Regarding the social agenda, insurance reduces the vulnerability of households and increases their ability
to take advantage of opportunities. It also reduces
the impact of household losses that could exacerbate their poverty situation. While the informal instruments of ensuring against loss do not necessarily run counter to the welfare of the social strata involved, MFIs could contribute to enhance the levels of and the coverage of protection.
Since Nepal has a robust sector that engages in
the question naturally evolves over the utility of such law. This law does not in any way inhibit the growth of microfinance services or microfinance institutions in the country, but adds safety nets for both investors and creditors.
Despite the optimism and enthusiasm that accompanies this law, there are a few words of caution that merits our attention. This law does not substitute for the diligence that ought to be exercised in any financial transaction as well as be embedded in the workings of a microfinance institution. The social enterprise character of microfinance institutions ought not to be replaced by profit driven practices, which have the tendency to become counter productive to the goals and objectives of microfinance activities. As with any law, the application of sound judgment and experience by the new bureaucracy should be the norm rather than the exception. The purpose of the law is not to impede but to facilitate the life of services and institutions, as such, attention must be paid to enforcement in order to prevent a situation that encourages over formalization to the disadvantage of pragmatism of initiatives and consequences. After the grand success of the first Micro Finance Summit in 2008, again second Micro Finance Summit is going to be held in February 14-16, 2010 with the new vision “Microfinance for Inclusive Economic Growth”.
Frasheri is S.J.D. Candidate, Harvard Law School, and Dutta Shree Duwadi is Project Officer, Center for Micro Finance (CMF)