Assessing the viability of a rural microfinance network: the case of FONGS Finrural

3.3 A strong legal and juridical framework

The microfinance legal environment has evolved over the time in West Africa Region Countries especially in those belonging to the West African Monetary Union.

The first initiative of implementing a strong institutional framework for the microfinance in Senegal has been observed with the «Projet d'Assistance Technique aux Operations Bancaires Mutualistes au Sénégal» (ATOMBS). The project was carried by the Canadian Cooperation and aimed at creating adequate conditions for the development of the mutualist banking network. In 1992, the «Cellule AT/CPEC^12(*)» in charge of organizing the conditions of functioning and licensing of mutualist institutions continued the project.

The juridical and institutional framework was effective in 1995 after the adoption of the PARMEC Law and its enforcement decree (decree n°097-1106 of 11 November 1997) sustained by the BCEAO instruction on 10 march 1998. The PARMEC law aimed at designing and promoting the extension of a juridical environment specifically devoted to the microfinance in UMOA context.

Another project PASMEC (Projet d'Appui aux Strutures Mutualistes et Coopératives d'Epargne et de Crédit) was set up to promote the development of microfinance practice in UMOA as well as the financing of small and medium enterprises (SME) and handcraft. The operation permitted the devising of guidelines for the microfinance industry strongly based on the success stories of microfinance practices around the world (Diao, 2006).

However, important weaknesses were observed in the legal framework of UMOA MFIs.

§ The PARMEC law emphasised the development of MFIs with cooperative models, restricting thus the development of other models of MFIs such as limited companies in their various forms. That situation hampered innovations in the industry and accordingly the diversity of financial services for the poor (Fall, 2012);

§ The short term authorization given to non Bank Financial Institutions other than Cooperatives and Mutuals undermined investment in the industry as well as access to financial markets and long term commercial borrowings;

§ The OHADA agreement on the guarantee and tangible collaterals and the recovery policies didn't fit with microfinance industry realities;

§ The transformation of NGO MFIs to regulated MFIs was undermined by the law of 1901 on associations.

§ The contents of the law on usury didn't include MFIs' realities thus hindering their viability.

§ The prudential ratios were not standardized for NBFI and comparisons in the industry appeared difficult (Azocli & Adjibi, 2007).

The new regulation on Decentralized Financial Systems was adopted by Senegal Government on 03 September 2008 through the Law 2008-47. The main changes or initiatives in the new regulation are as follows:

§ The origination of a single policy for the regulation of MFIs involving the removal of the savings and credit group and of the structures under convention as well

§ The assent of the BCEAO in the issuance of the license

§ The intervention of the BCEAO and the Banking Commission in the supervision of institutions having reached a certain level of growth

§ The strengthening of the prudential norms and the penalties,

§ The mandatory certification of accounts of MFIs of a certain size

§ The compulsory membership within the Professional Association of MFIs Practitioners

§ The alternative of creating Limited MFI Companies

§ The implementation of a new accounting standards for MFIs (Fall, 2012, p.38)^13(*)

Its application decree (n° 2008-1366 of 28 November 2008) and other BCEAO instructions designed strong framework to supervise the industry and avoid drifts. In addition, the regulation's new requirements and devised prudential ratios compel MFIs to become viable (financially mainly), to network or to disappear.

* ¹² Assistance Technique aux Caisses Populaires d'Epargne et de Crédit : Technical Assistance to Savings and Credit People Banks.

* ¹³ See also http://www.cgap.org/gm/document-1.9.52111/New_Microfinance_Law_WAEMU.pdf accessed on 09.07.2012