Derek Newberry

Microfinance Regulation: Two Countries Show What Works and What Doesn’t

Microfinance LenderUganda and India have further institutionalized the growing political popularity of microfinance by attempting to regulate it.? A closer look shows how government intervention can facilitate or hinder the growth of these programs. ?

Uganda’s government has chosen to simply limit the interest rate creditors can charge to keep up with inflation.? This effectively kills any profit motive that might have existed in a financial sector where it is already difficult to convince lenders to give out loans with high fixed costs and low yields. ?In contrast to the attitude of the Ugandan government, which is essentially that ?the aim of microfinance is to boost the productivity of the rural poor rather than turn a profit,? India has recognized the business aspect of microfinance and is reacting accordingly.

The regulations proposed by the Indian government will encourage standardization, acknowledging that loans at these small amounts must necessarily have higher rates attached to them.? The Indian proposal appears to be more focused on monitoring institutions and encouraging accountability and uniformity than simply limiting them.

I understand the sentiments of Ugandan politicians, there is no doubt foul play and usury among some of these lenders- there would have to be in a situation where most of the target market conducts its financial business in the informal sector!? Still, the Indian government has the right idea- set up a regulatory body to ensure a basic level of fairplay and let the markets work. ?

Microfinance is not simply a charity, as India well understands with firms such as Unitus and Lok Capital getting involved.? To prevent businesses from making any profit will not solve problems for any of Uganda’s poor, it will just force them to obtain financing under worse conditions.