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

30 Jarotschkin
Consumer protection. Beyond considerations of risk management, the
trade-off between stability and access to finance will also have to be balanced
with appropriate consumer protection. Effective disclosure and
deceptive advertising have not been singular to banks during the financial
crisis; they are widespread and widely dispersed among MFIs as well
(CGAP and World Bank 2010). Better consumer protection regulation is
costly for the regulator, but it certainly can help the industry increase its
outreach by building trust between MFIs and its customers. The level of
importance of these concerns is illustrated in the Banana Skins report
(CSFI 2011), where “unfair competition” has been strongly lamented.
Disclosure at opening—defined as “the requirement to notify consumers
in writing of pricing, terms, and conditions of a financial product prior
to signing an agreement”—exists only in 40 percent of all African economies.
In most cases, it is only commercial banks that are subjected to this
regulation and not the whole array of financial institutions (CGAP and
World Bank 2010). Even though an increasing number of countries have
introduced or are about to introduce some form of disclosure requirement,
only a few countries include specific language requiring MFIs to be
covered also (CGAP and World Bank 2010).
Financial Infrastructure and Microcredit Rating Agencies
The Basel Banking Committee report is specifically geared toward
deposit-taking MFIs, leaving out considerations on non-deposit-taking
institutions. The regulation of deposit-taking institutions is to protect the
depositor. Institutions that focus solely on microcredit have yet to reach
the size at which they are systemically important, hence making prudential
regulation unnecessary thus far (Christen, Lyman, and Rosenberg
2003). At the same time, increased competition in the absence of information
has fueled imprudent lending practices that led to credit quality
erosion. Thus, although credit-only MFIs might not require prudential
regulation, financial infrastructure that is accessible to MFIs—such as
credit bureaus—will be crucial to put an end to credit quality erosion. For
this purpose, the infrastructure needs to encompass most of the MFIs in
a country and to be competitively priced. The same is true for another
mechanism that can help reinstate market discipline and sound competition:
MFI credit rating agencies. Furthermore, these agencies also need to
take in social ratings—that is, the assessment of the social performance of
an MFI in terms of its ability to put its mission into practice and achieve
social goals—to ensure competition along the double bottom line of
MFIs: financial and social.