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Africa Region Working Paper Series No. 50

Microfinance Regulation in Benin: Implications of the PARMEC Law for Development and Performance of the Industry

Abstract

Legislation to implement the law governing the microfinance industry in Benin and other members of the West Africa Monetary Union (UMOA), known as the PARMEC Law, has been in effect since August 1997. Several shortcomings have become evident during nearly five years of implementation, including issues with interest rate ceiling and a lack of adequate monitoring and supervision by the authorities. The advent of the PARMEC Law has not been able to rid the microfinance industry of weak institutional capacities of microfinance institutions (MFIs) as was envisaged by the authorities.

Although the PARMEC law is generally considered adequate for credit unions, for which it was intended, quite a few modifications are needed to bring the prudential regulations in line with international best practice. Also, a void still exists with regards to the regulation of non-credit union MFIs, which are subject to idiosyncratic rules and some degree of uncertainty.

The biggest issue with the PARMEC Law remains the inability of the supervisory authorities to handle the large number of MFIs that have been granted a license to operate, irrespective of their size and whether they engage in deposit mobilization or not. As it stands now, the Ministry of Finance is responsible for the supervision of the microfinance industry. However, it has little capacity to adequately monitor the industry, and it is doubtful that on-going efforts to improve the situation will yield any position results given the lack of appropriate incentives. As UMOA Governments consider granting the direct supervision of the 40 largest MFIs to the Central Bank, it is hoped that this new arrangement, along with greater selectivity in licensing, will contribute to a better development of the microfinance industry in Benin and the UMOA region.

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