Regulation of microfinance institutions in Asia: a comparative analysis

This paper compares the regulatory framework of the microfinance institutions (MFIs) in Asia. We find formal MFIs are generally regulated under the banking legislation and supervised by central banks. In contrast, semiformal institutions like NGO‐MFIs are regulated by either an apex organisation or other government body. Informal MFIs are not regulated but some are of sufficient size to become NGO‐MFIs or even banks. The formal MFI regulation seems effective but the internal controls, governance and ownership structure are disappointing for NGO‐MFIs, and of course for the informal MFIs. We propose a prudential regulatory environment for MFIs similar to the banking sector with the realisation that some existing banking rules may not be applicable to MFIs. The regulator should also remember the cost of over‐ regulation. This regulation is a joint and separate responsibility of the governments, central banks, donors and private sectors. Their regulators require sufficient competence and supervision and enforcement skills to achieve a suitable regulatory environment to protect depositors but still encourage MFI to improve their outreach and attain sustainability.