I. Between Scylla and Charybdis: The balancing act of lending to the poor (Abstract)
Over the past two decades, microfinance has grown rapidly, reaching markets around the world and garnering the attention of policy makers and the media. Microfinance is the practice of offering small-scale banking services to communities in developing nations to improve the client's productivity and quality of life. The microfinance industry has attracted investors and practitioners who wish to unlock the profit potential of new markets while also achieving a philanthropic goal. As microfinance has grown, however, so has the need for legal regulation. Experts and practitioners agree that developing prudential and non-prudential legal frameworks for microfinance institutions is essential for continued growth; however, they are also well aware that hasty or heavy-handed government regulation in a particular country will put microfinance institutions out of business.
In this paper, we examine a regulatory dilemma that has been especially challenging for microfinance institutions. Microfinance practitioners in developing markets make tiny loans to their clients and recoup the cost of administering those loans by sometimes charging above-market interest rates. While it is far safer for an impoverished client to borrow from a carefully operated microfinance bank than a local moneylender, policy makers in developing nations are concerned about the issue of usury and have sought to enforce mandatory caps on microfinance interest rates as a safeguard. We start out by examining the concept of usury as it affects public perceptions and legal responses. We then examine the possible effects of interest caps on the growth of microfinance by comparing the regulatory dilemmas in Uganda and Ecuador, two nations where microfinance has flourished.
The comparison of Uganda and Ecuador yields interesting results about the realities of developing practical lending regulations and the role that lawyers will play in the future of microfinance regulation. In general, while we believe inflexible interest rate ceilings are inappropriate for the microfinance industry, microfinance institutions need to be proactive to assure local governments that their citizens are protected, and no one-size-fits-all framework is the answer. Microfinance lawyers and practitioners must 1.) work with a nation's policy makers and banking institutions to draft nuanced legislation; 2.) develop umbrella associations to organize microfinance banks and enforce non-prudential regulations; and, 3.) recognize the role of cultural norms and recent history in determining the goals of both microfinance clients and government regulators.
Available at: http://works.bepress.com/gray_skinner/1/