CHALLENGES OF CONPLIANCE FOR MICROFINANCE INSTITUTIONS

I. The compliance

Compliance is a recent concept that has introduced new obligations for businesses in general and particularly for financial institutions. It is defined as the obligation to ensure that the financial institution continuously complies with:

Legislative and regulatory provisions specific to financial activities;
Professional and ethical standards and practices;
Codes of conduct, including ethical codes and internal procedures.

Non-compliance risk is defined as the risk of legal, regulatory, or disciplinary sanctions, significant financial losses, or reputational damage resulting from a failure to comply with specific professional provisions, whether legislative, regulatory, professional, ethical, or executive instructions.

Within the Financial Institution, the Compliance function covers:

Financial Security: Combating fraud, money laundering, terrorism financing, market abuse, and embargoes;
Customer Protection: Continuous protection of customers, preserving their interests and those of the markets or the Financial Institution;
Ethics: Adherence to the establishment’s ethical rules and handling reports from all employees.

The notion of compliance and its objectives are clearly illustrated in the original definition by the Basel regulator: “The purpose of the compliance function is to assist the bank in managing its compliance risk, which can be defined as the risk of legal or regulatory sanctions, financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with all applicable laws, regulations, codes of conduct, and standards of good practice.”

II. Importance of Compliance for Microfinance Institutions

The compliance control function emerged in the financial sector in the late 1980s in Anglo-Saxon countries. Nowadays, it has become a strong international requirement, with international organizations paying great attention to it, and regulators attaching increasing importance to it. The entire society demands more transparency and ethics.

In Tunisia, the compliance control function, commonly referred to as the “compliance function,” was established in 2006 under Article 34 quarter of Law No. 2006-19 dated May 2, 2006. Several texts and circulars subsequently reinforced the positioning of this function:

Law No. 2016-48 dated July 11, 2016, relating to banks and financial institutions, stipulating that banks and financial institutions must establish internal audit, risk management, and compliance control functions independent of operational and support bodies.
Circular BCT 2017-08 dated September 19, 2017, which sets internal control rules for managing the risk of money laundering and terrorism financing. The designated representative of the Financial Analysis Commission (CTAF) and their deputy must be part of the compliance control body.
Circular BCT 2021-05 dated August 19, 2021, titled “Governance Framework for Banks and Financial Institutions.” It highlights the advisory role of the compliance control function to the administrative and management bodies regarding compliance with applicable laws and regulations and requires various compliance-related actions.

III. Microfinance Institutions facing Non Compliance Risk

Microfinance institutions (MFIs) are financial entities specialized in assisting individuals who do not have access to traditional banks. Like a bank, an MFI provides loans, but the loan amounts are smaller than those granted by traditional banks. MFI clients are considered risky by traditional banks due to the lack of tangible assets to secure the loans.

MFIs face specific risks that increase their compliance responsibilities, including institutional risks related to their social or commercial mission and dependence on international organizations, operational risks such as credit risk, fraud, or security, financial management risks, and external risks related to regulations, competition, demographics, physical environment, and macroeconomic conditions.

Compliance with regulations is critical for MFIs due to their ethical commitment and humanitarian responsibility. Ensuring compliance requires establishing a robust non-compliance risk management system and regulatory monitoring within the MFI. This includes adopting various policies, codes of conduct, and risk mapping, as well as providing training and guidance to staff regarding regulatory compliance.

Some analysts believe that the compliance function within MFIs should go beyond defining rules and monitoring risks. It should contribute to developing a strong ethical culture, exemplifying best business practices, and ensuring adherence to rules for sustainable performance. The compliance function should act as a partner to the business, translating regulations into specific operational actions, monitoring real residual risks, and facilitating change initiatives. Moreover, it should be proactive in anticipating changes in the profession and defending the interests of the MFI through lobbying efforts