Current microfinance sector performance is associated with the reforms
of Latin American countries’ financial sectors, starting at the end of
the 1980s. Before the reforms, development of microfinance was
constrained by an overly regulated financial industry that was primarily
based on state participation. Streamlining regulation and implementing
practices to supervise the sector provided microfinance institutions
(MFIs) with the right environment to expand, innovate and become
worldwide leaders in their field. This Brief provides an overview to the
Latin American experience in regulating MFIs, covering the history of
microfinance regulation in the region and the positive effects it has
had on the sector’s current performance. It also highlights good
practices in regulations, risk management and oversight, and concludes
with lessons learned that might prove useful for other regions.
Underinvestment in microfinance before the 1990s was associated with
institutional obstacles to private investment. When a sound regulatory
framework was established in the 1990s, it provided an adequate
environment for greater investment, which, in turn, spurred growth in
Although specific policies and requirements vary from country to
country, a set of good practice from the Latin American context emerges,
including: minimum capital requirements, strict standards for related
party lending, increased access by MFIs to more complex or risky
operations subject to fulfilling more demanding requirements, ensuring
adequate scale for efficiency, and promoting competition.
Prudential regulation is key to speeding up the development process of
the microfinance sector. Latin American experience shows that stability
of policies, transparency and the establishment of guidelines that
highlight differences between types of institutions are desirable
qualities of the institutional framework.
Jaramillo, M. ELLA Policy Brief: Latin America’s Institutional and Regulatory Innovations for Microfinance Growth. ELLA, Practical Action Consulting, Lima, Peru (2013) 8 pp.