Financial Sector Development in Africa: Opportunities ... - World Bank

Microfinance in Africa 29
implicitly or explicitly under the broader framework of the banking or
nonbanking financial institutions legislation. It can be argued that this does
not, in fact, create a level playing field between MFIs and banks, because
MFIs are smaller in size and less complex in their financial transactions.
To help guide developing-countries’ regulation, the Basel Committee
on Banking Supervision (2010) has published its guidelines for deposittaking
MFIs. The very existence of this report is an acknowledgment of
the increasing importance of microfinance. The report emphasizes the
need for risk-based supervision that both tries not to overburden the
industry and takes into account its differences. This way the supervisor,
too, is less weighed down by regulatory activities.
The essence of risk-based prudential regulation and application. Apart
from a few principles that are supposed to apply equally to banks and
deposit-taking institutions, 21 the Basel Committee’s guidelines suggest a
tailored application of the Banking Core Principles to deposit-taking
MFIs, taking into account the scope and size of their transactions and
their limited complexity. For example, this means trade-offs in permissible
activities and licensing criteria. While capital requirements might be
lower than those of banks because of the smaller scope and simpler
nature of their transactions, this same size and limited complexity might
impose greater restriction on permissible activities. Further, different MFI
activities will need to be ensured against shocks differently—that is, capital
adequacy ratios need to be higher when MFIs are geographically concentrated
and large and have few options for raising capital, and lower for
the opposite, larger type of institution. As previously discussed in this
chapter, MFIs need to find ways to save costs and become more efficient
and productive. Regulation that takes this need seriously and incorporates
it into regulatory realities will help the industry increase its outreach.
Simultaneously, scarce regulatory resources need to be allocated
according to risk. The suggestions in the Basel Committee report emphasize
the call for regulation that incorporates the need for specialized
knowledge to identify and measure risks specific to microfinance. Across
Africa, there is a need to build up specialized microfinance knowledge
and (electronic) systems that can permanently track and respond to
changing risks such as the risks involved with m-banking and using agents.
To appropriately mitigate credit risk, the Basel Committee suggests setting
loan documentation standards across the industry that reflect the
distinct characteristics of MFIs: loans are the main asset and there is only
one line of business.