Financial Regulation of Microfinance and Mobile Banking

In lecture this week, we welcomed Alice T. Liu, a member of Mobile Financial Services. She spoke to the class on the opportunities and benefits of mobile banking for developing countries. A manager and consultant focused on sustainable business models using Information and Communication Technologies (ICTs) to address development issues, Liu had a great deal of knowledge on the mobile banking industry. She focused on three main e-banks that had been playing a major role in developing countries. These are M-Pesa of Kenya, G-Cash of the Philippines, and Easy Pass of Pakistan. In class, I asked Liu about their regulatory methods, and to be honest, her answer was unsatisfactory. She claimed that the microfinance banks were, for the most part, unregulated. This answer disturbed and I decided to research further. In this blog, I will briefly touch on each bank in regards to the regulation methods found in the country.

In Kenya, there has been some recent regulatory legislation done to the banks, specifically regarding microfinance institutions. According to the website of the Central Bank of Kenya, “The Microfinance Act, 2006 and the Microfinance Regulations issued thereunder sets out the legal, regulatory and supervisory framework for the microfinance industry in Kenya…The principal object of the Microfinance Act is to regulate the establishment, business and operations of microfinance institutions in Kenya through licensing and supervision.” In short, what the Microfinance Act accomplishes is to legitimize the microfinance institutions that are acting as banks and using electronic methods to hold and transfer money. Additionally, the Act imposes core capital requirements to every banking institution. This limits the possibility of a bank running out of monetary capital and forced into bankruptcy.

Regulation in Kenya's ICT sector with Kevit Desai

In the Philippines, the Central Bank of the Philippines (BSP) has created some legislation that attempts to protect consumers from exploitation, specifically regarding “the definition of microfinance loans, licensing of microfinance-oriented banks, guidelines governing the BSP rediscounting facility, rules and regulations of the establishment of branches and/or Loan Collection and Disbursement Points (LCDPs) of microfinance-oriented banks and microfinance-oriented branches of regular banks, and formal minimum credit risk management guideline including the measurement of Portfolio-At Risk (PAR)." All of these different forms of legislation allow the BSP to overlook the micro-finance institutions accurately and efficiently, in order to protect the consumer.

Finally, in Pakistan, there is a push for de-regulation. According to the article “Mobile Banking – Market Dynamicsfor Pakistan,” it discusses the faults of the regulatory method found in current Pakistan. “[T]he present regulatory framework… is based on 1‐to‐1 relationship. This offers a close system between a single bank and a single mobile operator required to develop their own payment solutions with low outreach possibility in terms of subscriber’s facilitation.” The articles goes on to discuss how there is a push among the populace for further de-regulation in order to promote banking services to more individuals and the current system does not allow for this expansion.

After doing the research, I realized that all of the countries are making an effort to regulate their banking industry, some more than others. Kenya and the Philippines are increasing their regulations on microfinance institutions, while, in Pakistan, there is a desire to decrease them.