The Regulation and Supervision of Micro Finance Institutions in Ethiopia: The Need to Balance Social Objectives with Financial Sustainability

Abstract

Microfinance Institutions (MFIs) play an important role in providing access to finance in developing countries. However, how to effectively regulate MFIs remains one of the challenges that needs attention. The need for legal and financial innovation to enable MFIs to continue to provide the much-needed financial service to society is apparent. One of the proposals is to use regulatory frameworks that are closely related or similar to those we use in banks. Ethiopia is currently using laws that are in many ways similar to its banking laws to regulate Microfinance Institutions. However, this approach is not without its limitations. Complex and burdensome regulations greatly affect the efficiency of Microfinance Institutions. We need MFIs not to be just commercial banks. We need them to fill the gap that is created by the existing banking system. We need them to be more open to small-scale borrowers, to use flexible credit packages and to give priority to women and vulnerable groups in society. Therefore, we need a legal regime that considers these special traits of MFIs and provides the required support to these institutions to be sustainable and viable in the market. This article examines the legal regime in Ethiopia, outlines its limitations and provides suggestions to make it more efficient.