Financial Regulation and its Significance for Microfinance in Latin America and the Caribbean

Tor Jansson
Mark Wenner
Inter-American Development Bank

This paper builds on a questionnaire sent to 23 Bank Superintendencies/Central Banks in the Latin America and the Caribbean during late spring/summer of 1997. The questionnaire, elaborated jointly by IADB's Microenterprise Unit (SDS/MIC), the Chief Economist's Office (OCE), and the Infrastructure and Financial Markets Division (SDS/IFM), identified a number of issues within financial regulation and supervision which could potentially pose obstacles to regulated microfinance institutions.

Although there are certainly a great number of financial regulations which in one way or another affect institutions which lend to microentrepreneurs, this study is not concerned with the majority of them. Instead, the study focuses on those regulations which, while appropriate for most other institutions, may have a negative differential impact on microfinance institutions. As defined, these regulations impose restrictions which are particularly costly to institutions involved in microfinance, either through their inappropriateness with regards to financial service delivery methods of microfinance or through their inability to provide a decrease in risk to microfinance institutions.

The study identifies a number of areas in which such differential biases exist or could potentially exist, including--inter alia--capital adequacy requirements, provisioning, documentation, and restrictions on the operations of financial entities. The areas of potential and actual bias are summarized at the end of the paper where some recommendations are also put forward for how to deal with or eliminate them

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