‘Good Policy and Regulation’: What Is It and How Can It Be Developed in Micro-Finance?

Ramesh S Arunachalam

Rural Finance Practitioner

An often-asked question is: How is ‘good’ policy and regulation best defined and how should it be developed? Unlike what people generally believe, less regulation does not equal better regulation. In fact, as has been noted by several people, many laws that might appear to hinder the growth of a sector may in fact be essential for the sector’s growth. For example, labour law regulations, which may seem ‘troublesome’ for many MFIs to comply with, in fact, promote legal security within employer employee relationships and therefore have the potential to stabilize these businesses from a long-term perspective.

That said, a key challenge for policy making is, therefore, one of developing appropriate and sound policy, sensitive to the existing ways of doing things and to the compliance costs of organizations with somewhat limited resources for such compliance.  

To meet this objective a number of criteria can be used for the development of effective policy and much of this is based on the recent policy making assignments that I and others have been involved with in Asia and Africa. Read on... and the same could be used to look at the plethora of micro-finance regulations, likely to emanate from the Malegam Committee Report and associated efforts (Micro-Finance Bill):

• Lesson # 1 – Policy Must Have Wider Stakeholder and Civil Society Support: Policy and associated regulation must have broad stakeholder and public support. Without this, compliance is likely to be low and cannot be enforced in reality.
• Lesson # 2 – They Should Be Enforceable: The regulations must be enforceable on the ground. They must not conflict (too much) with existing ways of doing business and on-going methods of operating. An additional practical rule here is do not regulate anything that cannot be supervised
• Lesson # 3 – Policy Must Be Simple and Clear: All relevant stakeholders must easily understand the policy and associated regulations. Complexity in policy/regulation undermines their effectiveness and often leads to difficulty in compliance. Therefore, simplicity and clarity are very critical and necessary attributes of good policy/regulation
• Lesson # 4 – It Must Be Balanced, Sensitive and Enabling: Regulation must be balanced and sensitive to needs of those being regulated and there should be an awareness of the possible costs of compliance while making the broad policy and associated regulation. Oppressive regulations may infact encourage institutions (MFIs etc) to move out or even drive cause their ultimate death. This is a very crucial aspect that needs to be focused on while developing policy and associated regulation
• Lesson # 5 – It Should Not Be Paternalistic: Policy and regulation should not be overly paternalistic. In other words, it should not remove all decision making from institutions (or individuals) who could decide for themselves
• Lesson # 6 – They Must Aim to Resolve Conflicting Objectives: Regulations should attempt to resolve potentially conflicting policy objectives - for example they could encourage the growth of employment in MFIs but at the same time, protect the rights and working conditions of employees, which may be rather inadequate in most contexts
• Lesson # 7: They Should Have Clear Accountability: Policy and associated regulations must provide clear and identifiable accountability when things go wrong. The buck must stop somewhere and clearly…
• Lesson # 8 – They Must Reduce Competitive Disadvantages: Regulations should be designed in a way that competitive disadvantages are reduced in favour of those (institutions) being regulated without creating new disadvantages.
• Lesson # 9 – They Should Foster Innovation and Entrepreneurship And Enhance Access to A Wide Range of Services for End User Clients: MFI policy and regulations must seek to promote access to a wide range of (financial and non-financial) services required by their clients for growth and development.
• Lesson # 10 – They Should Encourage Inclusive and Sustainable Economic Growth for End User Clients: Regulations must enable end user clients to take advantage of opportunities for economic growth in the environment in an equitable and sustainable manner.  They must also strengthen the various systems to attract capital flows and manage increased levels of investment and create the environment to promote viable and competitive MFIs that can contribute to employment, income generation and poverty reduction.
• Lesson # 11 – They Must Regulate and Supervise What Has to Be Regulated and Supervised: Overall, the policy and associated regulation must ensure that all aspects to be regulated and supervised (like Governance, Systems and other operational aspects in MFIs) are indeed regulated and properly supervised. They should not leave the onus for this regulation/supervision of mandatory aspects (non-negotiables) on the very institutions that need to be regulated and supervised. The incentives for self-regulation to work are rather low in many contexts and this must be clearly recognized and addressed by policy/regulation
• Lesson # 12 – They Should Be Capable of Adaptation: The policy and associated regulation must be reviewed (perhaps not too frequently) and adapted to suit changing circumstances, using the outcomes of an embedded monitoring and evaluation system in the policy framework

Cheers

Have a nice day!