Microfinance Regulation and Consumer Socio-Economic Security

Introduction

In 2006, the Nobel Peace Prize was awarded to Muhammad Yunus, an economist who introduced microloans to poor rural women in Bangladesh to promote their economic growth and empowerment. Prior to this initiative, the poor had no access to financial services that would assist people living in poverty to start a micro and/or business, invest in education or health, or manage unexpected events (Sierra et al., 2020). Microfinance as an economic development model for the poor has expanded throughout the developing world and extended to a wide range of populations with different financial needs, such as micro-credit, micro-insurance, micro-saving, and micro-remittance. These financial services, known as microfinance, continue with the rhetoric of empowerment by providing financial services to the population at the base of the economic pyramid (Mahmoud Ali & Ghoneim, 2019). Microfinance clients typically do not have access to regular banking services because of a lack of collateral or physical proximity to service providers. Microfinance Institutions can serve clients in remote rural areas with little transportation or infrastructure.

The emphasis of many microfinance institutions (MFIs) is on providing microcredit to women for the following reasons, they:

• 1.

  are disproportionately represented among the most impoverished,

• 2.

  more frequently lack collateral to obtain credit from traditional lending institutions,

• 3.

  have less access to productive employment, and

• 4.

  are more likely to invest profits into their household which has a multiplier effect in terms of benefits from the loan (El-Hadidi, 2018; Nader, 2008).

Women are typically extended microloans in small solidarity lending groups (of 3-5 women), who act as a guarantor for each other. They usually do not all work on one project but have separate business enterprises. The solidarity groups pay their installments collectively and are responsible for each other’s’ debts (Everett, 2015). This loan model has a high repayment rate as there are both social and financial pressures to fulfill the obligations of the loan.

Microfinance was first promoted within the domain of Non-Governmental Organizations (NGOs) with a clear mission of serving the least privileged. However, 45 years since Muhammad Yunus brokered the first microloans, the global microfinance market is no longer exclusively the purview of Non-Governmental Organizations. It has become increasingly commercialized and open to free-market forces. Microfinance institutions (MFIs) now include for-profit banks and investment firms. It is a multi-billion dollar financial industry. In 2015, the World Bank estimated that the microfinance industry loans $60 to $100 billion globally, reaching an estimated 200 million clients living in acute poverty.

The rapid globalization of financial markets has posed new challenges for social justice. Regulation of financial markets, focusing on poor and vulnerable populations, provides a buffer and safety net to mitigate the power of multinational, national banks, corporations, and non-government agencies. Unfortunately, developing nations tend not to have the infrastructure and resources to regulate and supervise the financial sector, including the provision of microfinance services.

This chapter aims to examine the case for the regulation of microfinance providers, also known as Microfinance Institutions (MFIs). This chapter will explore the challenges of building legislation and regulation in a rapidly growing interconnection of global financial markets while ensuring sound economic and social justice outcomes. Such regulation can potentially ensure both economic growth and the socio-economic security of vulnerable microfinance borrowers. This chapter uses microfinance regulation in Egypt as a case study to illustrate some regulatory challenges. In the sections below, this chapter explores four interconnected reasons for regulation of MFIs; the history of predatory interest rates, the rampant over-indebtedness of the poor, a concerning change in the focus of microfinance from social justice to profit, and the power imbalance between the lender and the borrower. Each factor is examined in the context of practices in Egypt.