FULL TITLE: What is a Regulatory Environment that Truly Works for MFIs, Their Clients, and the End of Poverty ROOM: Lenana Hall Translated session: English & French PANEL: Chair: Prof. Njuguna Ndung’u, Governor, Central Bank of Kenya Panelist: Mr. David Cracknell, MicroSave, USA

1. Microfinance Regulation Regulating Opportunity

2. MicroSave MicroSave’s experience in Africa Kenya, Uganda, Tanzania, Egypt, Ethiopia, Cameroon, Ghana, Nigeria, South Africa, Malawi, Democratic Republic of the Congo, Sierra Leone MicroSave has gained specific knowledge in micro-deposits, and has been involved in Transformation of Faulu Kenya Transformation of Ugandan MDIs Initial transformation of Tanzanian MFIs Pilot Test of M-Pesa Central bank discussions in East and West Africa Discussions on SACCO regulations Experience in M-Banking

3. Regulation The financial access imperative provides the strongest rationale for the regulation of microfinance institutions. In many countries in Africa less than ten percent of the population have accounts in formal sector institutions. Why regulation A)deposit taking, reducing cost of access, increasing points of access. B) increasing competition from diverse institutions Note: Regulation does not guarantee successful institutions!

4. Competitive Environment There is rapid change in the wider financial industry for mass market banking means regulation that will affect microfinance will will happen Commercial Banking - Downscaling Credit Unions, Community Banks – innovation MFIs – Outreach, mission, micro-savings innovation MNOs/Banks – M-Banking Agency Banking High cost and high returns to technology

5. The Regulatory Environment Institutional regulations: Direct regulation of microfinance institutions, or credit unions (SACCOs) Payment regulations (m-banking): Who can conduct mobile phone banking, the payments that can be handled through different channels. KYC regulations: The application of KYC principles into microfinance Agency regulations: Can microfinance institutions be agents of banks, or can they have agents of their own.

6. Ranges of Conservatism A restrictive environment for microfinance in Egypt – credit only A similar environment for microfinance and central bank regulation in many countries Kenya, Uganda, Tanzania A less restrictive environment in some countries Ethiopia Nigeria A factor underlying this conservatism in some cases may be Central Bank capacity to regulate on one side, and the large potential number of institutions to be regulated on the another.

7. Challenges Getting the balance right is an Art: Nigeria: Community Banks licensed as deposit taking institutions. Low capital. Low standards. CBN in a race to inject capacity into the industry. Institutional failures highly likely. Difficult to regulate before institutional capacity is built M-Banking regulations highly restrictive with the maximum transaction for non KYC of only a few dollars.

8. Challenges - Uganda Essentially cut down regulations for Banks Similar formats aside from capital – often more restrictive Loan portfolio, ownership, product types Place of business has been a significant cost for microfinance Research suggests customers prefer to deposit in banks MDIs thinking about registering as banks, as they can meet the criteria. Opportunity Uganda registered as a Tier 2 Careful rethinking on Credit Bureau Regulations

9. Challenges – Becoming Regulated Limited number of regulated institutions so far process lengthy and costly. Two institutions supported by donor funds to transform in Kenya – only one regulated so far. Jamii Bora – merger with Credit Bank. But - scale - SACCO Societies Regulatory Authority – 205 institutions to be regulated as FOSAs. (All are supposed to be regulated).

10. Why Regulate – Microfinance Challenge Make use of the regulations Too many institutions see regulation as the end in itself. But fail to adequately position themselves to take advantage of the regulations Its not all about regulations Ugandan microfinance institutions failing to gain significant deposits. Unless you can raise significant deposits – why become regulated? High costs, and vulnerabilities.

11. Challenges M-Banking MNO led: few markets have allowed this, though this is the model that creates the fastest access. Kenya 9 million M-Pesa Accounts. 16,000 agents. Bank led: partnerships with banks is a normal model. This can be much slower than MNO led. Depends critically on the nature of the partnership.

12. Opportunities KYC: Clarity on how KYC impacts on microfinance Regulatory process: Clarity on the process (always difficult for the first few!) Place of Business: Reduce requirements (insurance) M-Banking Regulations: Enable transactions even if this is MNO led. Don’t be too restrictive on the accounts. Clarity on KYC. M-Banking Microfinance Companies: These are coming. Agency Regulations: Develop and implement Shared infrastructures: Support such developments