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

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.

The research has direct relevance to policy experts and financial-service managers at international, national and municipal level in providing a conceptual framework for improved understanding of: the financial-service requirements of micro-entrepreneurs in five sectors; the barriers and opportunities for access inherent in a range of microfinance services; the risks undertaken by the poor in accessing them, and the gaps in, and benefits of the regulatory context within which these services operate.
The research is also central to the concerns of grassroots organisations of the working poor in providing a powerful 'evaluation toolkit' to support advocacy for strengthening customer rights and evaluating proposed interventions in the system.
The core aim of the Pathways to Impact (Appendix 5) is to channel the findings into pro-poor policy, facilitate the take-up of the conceptual framework and the proposed 'evaluation toolkit' by international, national, municipal and civil society organisations, and make 'local recommendations' in each of the cities studied.
Key targets groups include:
- In-country organisations including central /local government and professional groups
- International agencies and the donor community
- Organisations of street traders and the working poor.
The Impact Plan includes:
a) Local Dissemination:
In each country a workshop with representatives from micro-entrepreneur associations, microfinance institutions and services, regulators and representatives of other stakeholder groups .
b) International Dissemination:
Two international seminars will be held for donors, government representatives and CSOs, one facilitated by UN-Habitat in Nairobi, and a second facilitated by the ILO in Geneva. A seminar in India at Ahmedabad will facilitated by CEPT University, a leading Indian urban planning school.
c) Dissemination to Organisations of the Working Poor:
The toolkit will be widely disseminated through the WIEGO network. WIEGO and its affiliates of member-based organisations of the working poor together represent about two million workers; and through WILDAF, an international umbrella association of women concerned with legal reform in development.
d) Involvement in Other Programmes:
The research team is well-placed to bring the work to the attention of a wider practice-based audience, for example at the World Urban Forum 2014, and through professional networks, and the Commonwealth Local Government Forum.
To ensure legacy, a core part of the research strategy has been the involvement of Advisors to comment on the detailed research design, help refine the research outcomes, and disseminate findings. The research will be informed by, and feed into WIEGO's five-year project on 'Inclusive Cities for the Working Poor,' which will allow medium term monitoring of the impacts.
The research will also be disseminated through ANLEP, the Academic Network for Legal Empowerment of the Poor, an on-going project to examine mechanisms for pro-poor legal reform, with which the PI has now worked for five years.