Some of the recent discussions around microfinance have been contentious, so I'll tread carefully here. Even so, a new paper on regulating microfinance will likely spark some conversation. In Does Regulatory Supervision Curtail Microfinance Profitability and Outreach?, authors Robert Cull et al. utilize the latest tranche of data from MixMarket to look at the effect of prudential regulation on microfinance institutions (MFIs). (For those not versed in the lingo, prudential regulation refers to those rules aimed either at limiting systemic risk or protecting depositors.)
Perhaps not surprisingly, the authors find a trade-off between regulation and MFI outreach:
Our results suggest that microfinance institutions subjected to more rigorous and regular supervision are not less profitable compared to others despite the higher costs of supervision. We also observe that this type of supervision is associated with larger average loan sizes and less lending to women, hence indicating a reduced outreach to segments of the population that are more costly to serve.
While these findings may suggest that greater regulation is a deterrent to poverty reduction, Cull and his co-authors are quick to point out that their findings are only one part of the story. Poor depositers at microfinance institutions almost certainly receive some benefit from the protection afforded by regulation. And in the microfinance equation, I'm more and more inclined to think that the savings side of things is just as important as the credit side.
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