The Regulation and Supervision of Microfinance: Main issues and progress

This policy brief examines the necessity and challenges of regulating and supervising the microfinance sector. It argues that while a 'one-size-fits-all' approach is inappropriate, appropriate oversight is critical for financial stability and consumer protection. Using Indonesia as a case study, the document highlights the balance between enabling growth through deregulation and implementing corrective prudential measures.

• The microfinance sector has undergone structural changes that necessitate regulation, including rapid commercialization, a shift from 'credit only' to deposit-taking models, and the introduction of new delivery mechanisms like mobile banking.
• Rapid commercialization and intense competition have led to systemic dysfunctions, such as repayment crises in Latin American countries and the Indian state of Andra Pradesh in 2010, often caused by over-indebtedness and a neglect of credit discipline.
• Prudential regulation for microfinance requires specific adjustments because MFIs often face higher operational risks and more volatile portfolios than conventional banks, and their loans are typically unsecured.
• There is a significant debate regarding interest rate caps; while some regulators favor them to prevent abuse, microfinance professionals argue that caps may jeopardize sustainability because MFIs face higher operational costs than standard banks.
• Mobile banking introduces new risks for customers, particularly those with low financial literacy and IT skills, including potential over-indebtedness and loss of social ties between borrowers and agents.
• Standard supervisory tools are often ill-suited for microfinance; for example, portfolio supervision based on loan-file documentation is ineffective because such data is often lacking in MFIs.
• Indonesia's microfinance experience shows that while early deregulation in 1983 and 1988 helped institutions become sustainable and expand outreach, the lack of adequate supervision contributed to unsound credit decisions prior to the 1997-98 crisis.
• Following the 1997-98 financial crisis, Indonesia implemented corrective measures including increased minimum capital requirements, the creation of a deposit guarantee scheme, and the establishment of the independent Financial Services Supervisory Agency (LPJK).

APA

Pouchous, A. (2012). The Regulation and Supervision of Microfinance: Main issues and progress. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/regulation_supervision_microfinance.pdf

Chicago

Pouchous, Anne. The Regulation and Supervision of Microfinance: Main issues and progress. International Institute for Sustainable Development, 2012. https://www.iisd.org/system/files/publications/regulation_supervision_microfinance.pdf.

Wikipedia

{{cite report |last1=Pouchous |first1=Anne |title=The Regulation and Supervision of Microfinance: Main issues and progress |publisher=International Institute for Sustainable Development |date=September 2012 |url=https://www.iisd.org/system/files/publications/regulation_supervision_microfinance.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{pouchous2012regulation, author = {Pouchous, Anne}, title = {{The Regulation and Supervision of Microfinance: Main issues and progress}}, institution = {International Institute for Sustainable Development}, year = {2012}, month = sep, url = {https://www.iisd.org/system/files/publications/regulation_supervision_microfinance.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }