Inclusive Growth: Improving Microfinance Regulation to Support Growth and Innovation in Micro-enterprise

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Micro-enterprises in low-income economies employ hundreds of millions of poor people and make crucial contributions to economic growth, many operating outside the formal economy. In developing countries, where the formal economy cannot provide sufficient jobs, micro-enterprise is critical to the survival of the urban poor, and a key platform for urban economic growth.Increasingly urban growth is taking place in secondary towns, which are not well researched, and where micro-enterprises thrive in economic growth sectors. For example, in 2011 half the world's tin production came from artisanal mining. Similarly, construction is a common entry sector into urban employment and widely reliant on own-account workers and work gangs. The rapid growth in importing consumer goods from the far East to Africa has attracted hundreds of thousands to street-vending; the growth in tourism to Africa has seen many micro-entrepreneurs take up the manufacture and sale of curios and other tourism services; while growing numbers of urban and rural households are involved in the processing of fishery or agriculture produce. However, recent evidence suggests that, even when involved in economic growth sectors, micro-entrepreneurs face significant barriers in implementing innovations and expanding their businesses-level trading. Two reasons which have been put forward are the obstacles to accessing capital and other financial services; and the detrimental impact of unregulated services and lack of consumer protection on their businesses. Thus the growth of microfinance has raised concerns. Significant numbers of borrowers are now over-indebted to a point where they can never repay, as a result of overselling of loans, competition amongst providers, and surplus liquidity. Problems in India have been widely reported, with a spate of suicides, for example in Andhra Pradesh, by borrowers caught in a spiral of debt. At the other extreme, in Africa recent research indicates that micro-entrepreneurs are not accessing the growing microfinance sector, prevented by a combination of unsuitable products and lack of trust in the system.This research examines microfinance regulation, microfinance services and micro-enterprises in five economic growth sectors (retailing, construction, mining, food processing and tourism service) in secondary towns of five countries (Tanzania, Kenya, Rwanda and Ethiopia in Africa and Andhra Pradesh in India), to answer the key question: By what mechanisms and under what regulatory conditions, do micro-finance services facilitate grassroots, micro-enterprise growth in economic growth sectors? The hypothesis of the research is that poor national and local regulation and supervision of MFIs, and lack of safety nets, in particular national consumer protection regulations for MFI customers, may either limit the accessibility and take-up of microfinance services, or result in excessive burdens of debt for poor borrowers. Thus, lack of consumer protection regulations for MFI services inhibits micro-enterprises from innovation and growth. The research is explored through comparative case studies in Tanzania, Kenya, Rwanda, Ethiopia and India.The research objectives are to understand and comparatively analyse:1) National and local policies on consumer protection in micro-finance provision, and in the case study cities:2) implementation of consumer protection mechanisms inherent in types of micro-finance package available; 3) the availability of micro-finance and impact on micro-enterprises' growth of alternative types of micro-finance;4) barriers to and benefits of take-up of micro-finance services experienced by micro-enterprises;in order to deepen understanding and inform national and international practice among all stakeholders, as well as theoretical debate:5) on consumer protection policy in microfinance, competing micro-finance models, financial inclusion, and micro-enterprise growth.