Financial Regulation and its Significance for Microfinance in Latin America and the Caribbean

This study builds on a survey sent to 23 Bank Superintendencies and Central Banks in the Latin America and the Caribbean during late spring/summer of 1997. The survey contained number of issues related to financial regulation and supervision that could potentially pose obstacles to financial institutions involved in microfinance. Although there are a great number of financial regulations which in one way or another affect institutions which lend to microentrepreneurs, the study focuses on those regulations which, while appropriate for most other financial institutions, may have a negative impact on microfinance institutions. These regulations impose restrictions that are particularly costly to institutions involved in microfinance, either by raising the cost of financial service delivery or by not providing the intended reduction in risk to the institution. The study identifies a number of areas in which such biases against microfinance exist or could potentially exist, including, capital requirements, loan loss provisioning, usury laws, documentation, and restrictions on the operations of financial entities. The areas of potential and actual bias are summarized at the end of the paper where some recommendations are also put forward on how to address them.