Microfinance has been touted as one of the most effective tools in providing financial access to the poor, and helping them move out of poverty. In most developing countries, non-government organizations providing microfinance services are considered informal service providers. They are not regulated and government agencies in most cases acquiesced and allow them to operate in support of poverty alleviation initiatives. One main concern is the fact that most NGOs who are into microfinance lack the needed competencies in financial management. This is explained by the fact that most NGOs are more focused and involved in development issues. Minimalist organizations that focus on one main service, like microfinance, are quite few.
Recent developments like the growing number of MFIs and the emerging commercial investors willing to place money in microfinance are some of the factors that push for the formalization of the industry. Many countries were able to establish legal framework for MFIs to operate, motivating them to register and operate formally. It is viewed that transformation will enhance the image of the MFI. On the one hand, it will give visibility, higher reputation and client confidence for the MFI. On the other hand, MFIs should be able to enhance its governance, operating systems, recording and reporting mechanism to be able to comply with regulatory requirements.
Among the main issues expressed by MFIs against formal registration are the following:
- Minimal capacity to transform from informal to formal institution, especially in upgrading operating systems;
- High requirements to hurdle towards formalization, specially interest rate, reserve requirement, loan loss provisioning, etc.;
- Cost of formalization may be beyond the capacity of the institution; and,
- Possibility of being subject to political pressure as a licensed institution.
In Southeast Asia, countries have varying levels of development. In Cambodia and the Philippines, the regulatory framework is advanced, giving favorable environment for MFIs to develop and grow, while in Vietnam, the regulatory framework is still being developed.