Sets out the requirements and formalities that natural or legal persons, including non-profit microfinance institutions, must comply with in order to obtain authorization from banking supervisors to acquire shares or shares in microfinance institutions. Defines the requirements, formalities and procedures for the transformation of an investment and credit microfinance institution into a savings and credit microfinance institution. This is not the first case of fraud in Rwanda. In June 2006, Rwanda`s Attorney General, Martin Ngoga, announced that fifteen former heads of microfinance institutions had been arrested for defrauding depositors` funds. The government closed eight microfinance institutions and distributed $5.5 million to compensate clients for up to half of their deposits. Prudential regulation and the means to monitor and enforce it are essential to prevent opportunistic behaviour that can occur in deposit-taking institutions, as it is tempting to take excessive risks in pursuit of higher profits. From this point of view, the purpose of prudential regulation of microfinance would be the same as that which justifies it in the case of other intermediaries. The important question, therefore, is not whether to regulate or not, but how to regulate. Rather, the essence of microfinance has been the development and implementation of FinTech innovations (i.e., new ways of doing things) that have prudently managed the risks associated with the target clientele and reduced the cost of very small transactions, well below the level associated with the use of traditional banking technologies in these market segments. Establishes standards for the Exclusion Committee for Assets and Liabilities of Microfinance Institutions.
This is important because, in some cases, regulation can be an obstacle to the development of financial markets. In this case, we are talking about financial repression, defined as the framework of regulatory measures that distort the flow of money and the allocation of resources, far from the optimum of the market. Some of the instruments of financial repression are interest rate ceilings and mandatory portfolio ratios, confiscatory reserves, inflation tax and overvaluation of the national currency, excessive restrictions on market entry and inappropriate provisions, and other prudential standards. Despite their return to some countries, historical evidence has shown the harmful influence of this policy, which, in the case of microfinance, causes even greater damage and hinders the reach of marginal clients. Regulation of the microfinance sector has many advantages, although it can be a complicated process due to the diversity of MFIs. In general, microfinance institutions can be divided into non-bank and banking MFIs. However, within these two divisions, there are many types, including cooperatives, commercial banks (public and private) and development banks, non-governmental organizations (NGOs) and international NGOs (INGOs). The many types of MFIs also differ in the nature of their activity and the services they offer. Given the size of this industry, there is often no single body that regulates and oversees the operation of all MFIs. The regulatory requirements and standards of each of these regulators are different, which complicates the legal framework.
The same principle of separation should be used by the supervisor when issuing standards for different FinTechs. If a microfinance portfolio has a different risk profile, it should not be regulated as involving the same degree and risk factors as other portfolios. A regulation on pooling would not be optimal. Microfinance deserves different prudential standards than commercial banking and consumer credit. Regulators in countries such as Bolivia and Peru have understood this principle and created a regulatory environment conducive to the success of microfinance. As the Basel II framework allowed financial intermediaries to define their own risk management approaches, this opened up an innovation space for microfinance. Rather, the potential threat of Basel III is a restrictive FinTech perspective that may not recognize the particularities of microfinance. What we know today as microfinance is the result of a series of remarkable innovations in the production and delivery of various types of financial services to populations that previously did not have access to institutional finance.