Commercialized Microfinance: Regulatory Structures and Institutional Approaches

Abstract

Microfinance is the delivery of financial services to the poor who have not had access to formal banking. The practice has expanded across the world but most of the developing world remains without financial access. A growing trend in microfinance has been the commercialization of microfinance institutions (MFIs). Many in the industry believe that as donor funding becomes scarce, financially self-­ sustainable commercial microfinance will be the future of microfinance. While the expansion of services has been a positive development, high interest rates and profit motives raise important questions about the commercialization of microfinance. This thesis examines regulatory structures and institutional approaches to microfinance to consider these main questions: Does commercialization of microfinance expand outreach or is there evidence of mission drift of commercial MFIs? Which institutional approach to microfinance is most effective? How should regulatory structures be designed to encourage the expansion of microfinance? This paper finds that the commercialization of microfinance is overall a positive development. Commercial funding has allowed MFIs to achieve sustainable growth and reach more clients with limited evidence of mission drift. Because there are various successful institutional forms of microfinance delivery, regulation should be designed to accommodate a variety of approaches. A consultative approach that involves international microfinance groups and local providers will help supervisors understand the distinctive nature of microfinance in order to design regulatory structures. Proper regulation is crucial to ensure that the potential growth and outreach of commercial microfinance are achieved while protecting consumers and maintaining financial stability.