MICROFINANCE MATTERS - New York State Banking Department Observes the International Year of Microcredit

By Maura McGill, Robert F. Wagner Graduate School of Public Service, New York University

Dr. Stanley Fischer, Governor, Bank of Israel, and Chair, Advisors Group to the International Year of Microcredit

Lady Lynn Forester de Rothschild, Mrs. Miranda Swaray Goeltom, Ms. Ricki Tigert Helfer

Ms. Ricki Tigert Helfer, Mr. Carlos Danel, Mr. Erik Ekue

Mr. Mauricio Moura, Mr. Robert Annibale, Mr. Tom Easton, Mr. James Mwangi, Mr. Jack Lowe

On November 9, the Federal Reserve Bank of New York joined Diana Taylor, New York Superintendent of Banks, the United Nations Capital Development Fund (UNCDF) and the Advisors Group to the International Year of Microcredit in hosting a high-level seminar as part of the United Nations International Forum to Build Inclusive Financial Sectors.[1] This seminar was the first of its kind, bringing global financial sectors leaders together under Wall Street’s auspices to discuss increasing access to finance for poor people around the world, sending a strong signal that microfinance is a key issue in the future of finance.

Central bank governors, government ministers, senior banking executives, and representatives from the world of microfinance from 45 countries participated in the event, which focused on regulation and supervision in the microfinance sector. Key messages that emerged from the Seminar included that safety and soundness need to be balanced with flexibility and innovation; that microfinancial services should not be subject to easier regulations; regulations should be based on maintaining the soundness of the financial sector and making sure that the broadest segment has access at the lowest cost and the lowest risk; and that competition needs to be fostered between lenders to bring costs down.

The event began with opening remarks from Ms. Christine Cumming, First Vice President, Federal Reserve Bank of New York. To set the stage for the panelists and start the audience thinking about the major questions the banking sector must ask itself to implement regulation and supervision strategies into microfinance, Ms. Cummings asked, "How can we level the playing field for financial institutions without sacrificing security and soundness? How do supervisors ensure that access to banking services is available to people from all walks of life?" Ms. Cummings suggested that research can be of great help to the field and highlighted current microfinance programs in upstate New York promoting financial literacy. She then introduced Stanley Fischer, Governor, Bank of Israel and Chair of the Advisors Group for the International Year of Microcredit.

Mr. Fischer spoke of the conclusions made by the Advisors Group in assessing the future of microfinance. One such conclusion was: "as we seek to expand access to financial services to the poor, the private sector will play a critical role. The supervisory framework, if it hopes to facilitate expanding access, will have to deal with the emerging role of the private sector in this industry". Mr. Fischer stressed that governments must encourage competition between lenders and balance the protection of consumers while keeping the burden on the private sector manageable. He also emphasized that microfinance institutions accustomed to subsidized capital should not prevent the entrance of private capital into the market. On the topic of regulation and supervision, Mr. Fischer highlighted one of the Year's important achievements, the Blue Book, a policy dialogue which addressed the key constraints and opportunities in building inclusive financial sectors. Participants of the Blue Book voiced concern that banking regulations in some countries were unsupportive, if not detrimental to building inclusive financial sectors and that regulators, therefore, need to take a more proactive approach in collecting data on microfinance clients and reassessing credit and risk profiles. Mr. Fischer concluded by stating that, "No one should fool themselves into thinking we need easier standards for microfinance". He suggested that supervisory practices should be adjusted to provide safe financial services to poor people without sacrificing standards.

Following Mr. Fischer's remarks, Ms. Ricki Tigert Helfer, Former Chairman, FDIC, moderated the first panel: Encouraging Safety and Soundness amongst Diverse Providers. Panelists included Carlos Danel, Executive Director, Compartamos; Miranda Swaray Goeltorn, Senior Deputy Governor, Bank Indonesia; Lady Lynn Forester de Rothschild, ELR Holdings LLC; Rene Azokli, CEO, PADME Cotonou, Republic of Benin; and Eric Ekué, Director of Microfinance, Central Bank of West African States (BCEAO).

Ms. Goeltorn of Indonesia stressed the importance of institution and capacity building, establishing credit bureaus and technical assistance. She also noted that governments play a crucial role in improving microfinance institutions (MFIs) and strengthening their capacity. Lady Lynn Forester de Rothschild spoke about the role of governments in the microfinance sector, saying that "governments in the developed world can give aid for that first tier of microfinance efforts. There needs to be a layer of support for MFIs that is from donors, but after that, there can be commercialization". On the issue of regulation, Ms. Rothschild suggested that regulators must subsidize costs if they are too high and developing countries need to have less regulation rather than more to encourage more participation both from commercial banks and potential clients.

Mr. Ekué noted the importance of savings and deposits in microfinance and stated that in Togo, the regulatory framework allows for support of cooperative structures and gives MFIs the right to operate and mobilize savings. Supervision in Togo is delegated to ministries of finance overseeing this range of institutions. Mr. Azokli added, "Is there a need to regulate this industry? Yes, because microfinance is finance. Just because we are creating wealth for poor people, doesn't make it different. It's still finance. You need to follow the same rules of the financial sector. If your car is big or small, or if you're riding a bike, you still need to follow the rules of the road". He suggested that regulation needs to be flexible, should not bring bad competition and should protect both the clients and the institutions.

In Mr. Danel's opinion, regulation should help MFIs understand where the risks lie, and not the other way around. He noted that regulation built around traditional banking is not geared towards low cost operations, yet regulators must be conscious of the cost burdens that regulations can place on serving the poor. He also stressed that supervision should focus on deposit taking institutions and that creating parallel financial sectors hinders the entry of different institutions that offer micro and small products. He later noted that "If we are to offer more products to more people, we have to think outside the box and we need to have the full support of regulators".

The second panel: Commercializing Microfinance, was hosted by Tom Easton, Chief Financial Correspondent, The Economist. Panelists included Mr. Jack Lowe, CEO, BlueOrchard Finance; Mr. James Mwangi, Finance Director, Kenya Equity Bank; Mr. Mauricio Moura, Executive Manager, Unibanco; and Mr. Robert Annibale, Global Director of Microfinance, Citigroup.

Mr. Lowe emphasized the importance of regulatory issues, noting that there are problems of collateralization and security in some countries. "Many times the local regulatory environment is not adapted to the kinds of financial instruments of private investors", said Mr. Lowe. Mr. Annibale added that "MFIs are inheriting the requirements of large commercial banks, yet there is a lack of experience…It's an unfair burden in some cases if you want to have the full spectrum of financial institutions to be subjected to the same regulations of commercial banking institutions".

Mr. Moura urged banks to understand that a large part of the Brazilian economy is based in the informal sector, and so regulations need to be built around that. Mr. Mwangi added that in Kenya, there must always be strict justifications when applying for a license. He noted that "it is difficult to create a financial industry and tailor the proper regulation. It's not about just prudential guidance - it can be about consumer protection and market maintenance". Mr. Annibale suggested that when it comes to regulatory laws, "some should be eliminated because they are outdate. Some of these regulations are just on the books and they don't apply anymore. This pulls banks out from where you want them to go".

The discussion then turned to the regulation of remittances in the microfinance sector. All of the panelists agreed that when it comes to migrants, there is a lack of documentation, which presents both problems for the client in opening accounts, and problems for the service provider in regulating transactions.

At the conclusion of the panels, Diana Taylor offered closing remarks regarding regulation in microfinance. Ms. Taylor suggested that "maybe regulation as it's currently set up doesn't work for microfinance. Maybe we need to think more out of the box in terms of what would work". She stressed the need to shift focus from systemic risk to consumer issues on the ground. Ms. Taylor concluded the seminar by congratulating the International Year of Microcredit on its laudable success and expressing hope that these discussions on the development of the microfinance sector continue and result in a system that works.

The seminar concluded the three-day International Forum to Build Inclusive Financial Sectors, hosted by the United Nations in celebration of the achievements of the International Year of Microcredit 2005. Though the year has come to a close, it is the sincere hope of the organizers that fervent efforts pushing for the development of microfinance will continue, as Ms. Taylor said, and that microfinance will become an integral part of the financial sector.