The Regulation and Supervision of Microfinance: Main issues and progress

The document examines the necessity and challenges of regulating microfinance, particularly as the sector shifts toward commercialization and deposit-taking. It argues against a 'one-size-fits-all' approach, suggesting that prudential and consumer protection rules must be adapted to the specific risks of microfinance, such as unsecured lending and high operational costs. Using Indonesia's experience, it highlights the importance of independent oversight and the transition from enabling deregulation to corrective legislation.

• The microfinance sector has undergone structural changes that necessitate regulation, including rapid commercialization, the transition of institutions from 'credit only' to 'deposit-taking', and the introduction of new delivery mechanisms like mobile banking.
• Standard prudential banking rules are often ill-suited for microfinance; for instance, MFIs typically require higher capital adequacy ratios than conventional banks because their portfolios are more volatile, unsecured, and prone to contagious non-repayment events.
• There is a significant debate regarding interest rate caps; while some regulators favor them to prevent abuse, microfinance professionals argue that caps can jeopardize sustainability due to the high operational costs of serving remote areas and may lead to more opaque pricing through hidden fees.
• Consumer protection in microfinance is increasingly addressed through 'soft' measures, such as the Smart Campaign's six core principles and social performance assessment instruments, rather than solely through rigid legislation.
• Supervision of microfinance is uniquely challenging because traditional audit tools based on loan-file documentation are often inadequate, and MFIs have a limited ability to suspend lending without disrupting the collection of existing loans.
• Indonesia's microfinance development demonstrates a progression from enabling policies in the 1980s that freed interest rates and removed entry barriers, to corrective legislation following the 1997–98 Asian Financial Crisis to strengthen prudential practices and oversight.
• In Indonesia, the supervision of the banking sector was eventually transferred from the Bank of Indonesia to an independent body, the Financial Services Supervisory Agency (LPJK), to ensure more effective oversight.

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} }