The number of MFIs in West African Economic and Monetary Union (WAEMU) countries increased sevenfold between 1993 and 2011, from 100 to 770. Regional institutions have set out to address the growth of microfinance by introducing provisions to oversee the activity of MFIs. Regional regulatory harmonization is the prerequisite for the sustainable development of microfinance within a stable and effective ecosystem.
In 1993, WAEMU adopted an initial law to harmonize the legal status of MFIs in the zone. This “PARMEC” law allowed national Ministers of Finance to issue operating licenses exclusively to credit cooperatives and financial cooperatives. The microfinance sector was consequently fully harmonized from a statutory point of view, but had shortcomings and disparities in terms of the allocation of accreditations, the rigor of reporting, and micro-prudential supervision. In addition, the fact that there was no independent supervisory authority was a major weakness in the legal framework established by this law.
The PARMEC law was revised in 2007. This reform led to the emergence of new services, suppliers and investors. While West Africa’s microfinance sector had until then been dominated by non-profit institutions, the new uniform law of 2007 aims to promote the development of profit-making enterprises in the sector and modernize existing structures.
In addition, the Central Bank of West African States (BCEAO) has the role of independent supervisor, alongside the action conducted by national regulators to control documents on-the-spot. This institution is in charge of allocating all the accreditations concerning MFIs whose outstanding credit or deposits exceed USD 4m. The smaller MFIs continue to be under the responsibility of National Ministries of Finance and are destined to merge in order to consolidate BCEAO’s supervision of the entire sector in the medium term. The prudential rules have also been reinforced, in particular through the introduction of specific accounting standards for the microfinance sector and the obligation for MFIs to have their accounts and financial statements certified and audited annually.
…which barely ensures the viability and good governance of MFIs
While these regulations make it possible to supervise MFI activities, they are not sufficient to ensure the viability and good governance of these institutions. According to a study conducted in November 2012 by CGAP (Consultative Group to Assist the Poor), 14 MFIs had been placed under temporary administration in the WAEMU zone in 2011, considering that they posed a threat to their clients. This study showed that poor governance is the main cause of the failure of MFIs. The Boards of Directors often have shortcomings and conduct an insufficient control over the activity of financial institutions and their exposure to prudential risks. In addition, there are also marked shortcomings in terms of information, management and internal control systems.
Unlike the banking system, where supervision is stricter and more rigorous, MFIs seem to enjoy a more flexible supervision, which leads to shortcomings in their management. A more rigorous regulatory system and more robust control mechanism will be necessary to address this situation:
- BCEAO and national regulators should benefit from an extension of their human and financial resources in order to ensure the prudential supervision of financial institutions in better conditions;
- The single system for accreditations should be maintained, but it should be renewable every year. All MFIs, whatever their legal status, would thereby be accountable (performance audit report, IT audit and financial audit) every year to the supervisory authority in order to have their accreditation renewed. The MFI would be sanctioned if it did not submit the three audit reports;
- An annual forum of members of the Boards of Directors of MFIs could be organized in the WAEMU zone in order to recall the prerogatives of these entities, organize training seminars with international experts, and promote the dissemination of good practices. In this respect, it would be mandatory for executives from financial institutions to attend the training seminars which already exist;
- It is desirable to create associations of clients and small savers in order to allow consumers harmed by MFIs to bring civil actions in the event of fraud or wrongdoing leading to damaging loss. These associations should be able to benefit from at least one representative from the Board of Directors of their MFI, as well as a right of veto given the social and participatory nature which is inherent to the microfinance sector;
- BCEAO should encourage improvements in the relationship established between clients and MFIs by developing the principles of client protection (Smart Campaign) and promoting the emergence of client networks. Indeed, it would be useful to institutionalize networks and platforms for dialogue between the managers of MFIs and beneficiaries. In this respect, as women accounted for 73% of MFI clients in 2013, MFIs should organize regular meetings to promote the creation of local networks, as well as experience-sharing between women micro-entrepreneurs. BCEAO could consequently encourage the digitization and computerization of the services offered by MFIs in order to strengthen the control of clients over the management of the MFI;
- Finally, the methodological risk analysis tools should be standardized in order to allow a more regular publication of data by MFIs and thereby trigger temporary administration procedures at an early stage. Reducing the response time will make it possible to redress MFIs in difficulty before their situation has deteriorated too much.
Regulatory harmonization will allow WAEMU to adopt an effective microfinance ecosystem, while promoting economic development at local level. In a context of the decentralization and denationalization of economic activities, which has been underway since the second oil shock, the development of West African States no longer only involves the economic policy conducted by the State, but also the investments and projects undertaken by local authorities. The latter are better able to adapt to the needs and realities of the field and should be able to rely on a dense and stable network of MFIs to carry out their activities. The resources of local authorities, which are currently mainly made up of tax revenues, could increase significantly if their access to financial innovation was guaranteed by a group of strictly regulated and controlled MFIs.
The opinions expressed on this blog are those of the authors and do not necessarily reflect the official position of their institutions or of AFD.