New authority to monitor MFIs

by Sapumali Galagoda

An authority will be set up to regulate and supervise micro finance businesses, for which the Monetary Board of the Central Bank will set the regulations,principles and standards, states the 2010 Central Bank report.

The board will consist of five members, which can grant licences to carry out micro finance businesses, issue directions to the Micro Finance Institutions (licensed/registered) on capital requirements, liquid assets, premises and acceptance of deposits.

The authority can call for information and examine MFIs and supervise including the cancellation of the licences. The report also states that to ensure an effective micro finance sector, it is necessary to have a set of sound MFIs to carry out operations in a sound and professional manner.

When any institution mobilises deposits, such institutions should be subjected to prudential regulation and supervision to safeguard depositors. With the expansion of MFIs, the authorities are concerned about the safety of the poor man's savings being mobilised, as the MFIs are currently not subject to proper regulation and supervision under any legal statute.

The regulation refers to a set of rules that the MFIs would be subjected to and supervision is the process of enforcing compliance with the rules.

A lack of regulation could also be a reason why some donors/funding agencies are reluctant to provide financial assistance to MFIs as they too believe that effective regulation and supervision are essential, to ensure significant outreach of the industry in an effective manner while maintaining sustainability.

In several countries, the micro finance sector suffers from weak corporate governance, poor repayment rates, high lending rates, unethical recovery methods, high transaction costs, recurring losses and significant deficiencies in regulation and supervision.

Therefore, the presence of an effective regulatory mechanism would help streamline the operations of MFIs which is essential for transmitting the real benefits accruing from the operations of MFIs society, effectively.

A regulatory mechanism would contribute towards ensuring the soundness of the sector, building public confidence and enhancing even wider access of funding sources. This would also discourage the emergence of fraudulent financial activities.