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p. 22 of 95 BACK | NEXT Message from the Chairman of the Board of Directors Members, Capital Stock and Voting Power The Record Abbreviations 2004 in Review: Board of Directors' Report Special Theme: The Changing Face of the Microfinance Industry: Building Financial Systems for the Poor The Challenge The Role of Central Banks in Microfinance Increased Diversity of Service Providers Increased Diversity of Operations Broader Target Markets Commercialization Meeting Future Challenges Part 1: Institutional Effectiveness Part 2: Poverty Reduction Part 3: Financial Statements: Management's Discussion and Analysis

Annual Report 2004 : Special Theme: The Changing Face of the Microfinance Industry: Building Financial Systems for the Poor

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The Role of Central Banks in Microfinance

Central banks have a potentially major role to play in developing sustainable microfinance, but until recently many in the region were not harnessing this potential. Instead they provided highly concessional refinancing facilities for microcredit operations of state-owned financial institutions thus undermining incentives for sustainable microfinance. Recognizing their important role and the potentially adverse consequences of inappropriate interventions, in 1999 ADB published a study on the microfinance activities of 12 central banks6 that, along with ADB's policy dialogue, had a significant impact on the evolution of their roles in microfinance. Many central banks have since begun to play the more appropriate role of building financial infrastructure for microfinance. This new role has elevated the status of microfinance in financial sectors, has increased the space for private sector participation, and has helped integrate microfinance into the broader financial system.

Developing legal and regulatory frameworks to facilitate sustainable microfinance has become an important task of many central banks in the region. Cambodia recently introduced regulations for licensing and supervising NGOs as microfinance institutions. Nepal followed a somewhat similar path and introduced a legal framework that facilitated private sector entry into microfinance, and Pakistan introduced a legal framework for microfinance institutions that resulted in two new, specialized microfinance institutions. The Kyrgyz Republic enacted the Law on Microfinance Organizations that assigns the responsibility for regulating and supervising microfinance institutions to the National Bank of Kyrgyz Republic, and Tajikistan introduced a law on microfinance organizations that regulates different types of service providers and helps to develop the industry. Sri Lanka drafted the Rural Finance Sector Development Act that is expected to provide a legal, regulatory, and supervisory framework for rural financial institutions and microfinance institutions that are not covered by the country's banking law. The State Bank of Viet Nam is formulating a framework for microfinance, and Azerbaijan has prepared a draft legal and regulatory framework for microfinance institutions that is expected to be enacted into law in 2005. In 2000, the Bangko Sentral ng Pilipinas declared microfinance as its flagship program for reducing poverty and improved the policy and regulatory environment for microfinance through nine circular instructions one of which allowed the establishment of microfinance-oriented banks. It has also incorporated microfinance into the basic rural and thrift banking courses that it conducts, has carried out regional advocacy programs in 10 cities to disseminate the message of sustainable microfinance, and has played a key role in developing standard performance indicators for microfinance institutions. ADB played a major role through policy dialogue in these countries to bring about these improvements.

These efforts bring most microfinance institutions that accept public deposits under legal, regulatory, and supervisory systems. Whether they will actually produce financially sound institutions remains to be seen and will depend largely on the effectiveness of the regulatory and supervisory authorities. ADB has provided technical assistance for capacity building to a number of central banks and will continue that assistance.

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