The Regulation and Supervision of Microfinance: Main issues and progress

This paper attempts to explore three main aspects of the current debate on the regulation and supervision of microfinance.

Using the case study of the microfinance industry development in Indonesia, this paper argues that appropriate regulation and supervision of microfinance is critically important in bringing the poor and vulnerable communities the financial services they need. In order to reach its full potential and further grow as a credible development tool, the microfinance industry must eventually be able to enter the area of licensed, prudentially supervised financial intermediation.At the same time, microfinance regulation and supervision is necessarily complex and filled with challenges. It is also very contextual. Blindly extending domestic prudential rules and consumer protection laws will not work. Specific adjustments will be necessary to capture the specificities of microfinance activities, both in the field of prudential and non-prudential regulation. Regulators will also have to weigh the potential costs of regulation and supervision, including the potential unintended consequences of regulation, particularly in regard to innovation and competition.Regarding supervision, adequate oversight mechanisms are critical for the proper framing of microfinance activity, but, like regulation, these measures have costs, both for public authorities and microfinance institutions. Such costs must be realistically estimated and sustainably supervised.