Regulation and Supervision of Microfinance Institutions in the Development of Financial Inclusion in Kenya: Blessing or Curse

Abstract

Appropriate regulation and supervision in the microfinance is imperative in bringing the poor and the low income communities the financial services that they need at their level. This is the essence of financial inclusion and it is important in the wholesome development of all sections of the population. The aim of this research is to contribute to the understanding of microfinance regulatory and supervisory issues. The principal objective is to inform the design of regulatory policyin Kenya. This thesis provides a critical evaluation of the potential impact of regulation on microfinance institutions in achieving financial inclusion. The analysis involves a review of existing research work on regulation of microfinance, analysis of the current microfinance regulatory framework in Kenya and a study of other jurisdictions, namely Peru and Ghana. This study finds that regulation of microfinance has an impact on the effectiveness of the institutions in increasing or encouraging financial inclusion. Moreover, the findings in the study suggest that high minimum capital requirements for Deposit Taking Microfinance close out potential MFIs which can operate on small scale thus hampering financial inclusion. It also finds that the regulatory system of microfinance in Kenya tends to diminish the charity aspect in microfinance. In addition, the findings of the study suggest that the costs of compliance with the regulatory requirement are considerably highand outweigh the potential benefits that would be gained by the institutions. As a result, microfinance services are generally expensive and the poor shy from them. The study thus concludes with the recommendation that a number of aspects of the microfinance regulatory system in Kenya be reviewed. It recommends

practical measures that can go a long way in addressing the problems in the current regulatory framework.