MICROCAPITAL STORY: Expanding Microfinancing in Latin America

In his article, published in British newspaper Financial Times, Jonathan Wheatley reports that, as the global banking system sinks into its worst crisis since the 1930s, there is a resurgence of interest in microfinance among Latin American banks. Several articles and papers have reported on this up and coming trend.

Since the early 1970’s, Latin America has been a pioneer in microfinance. Today, it has some of the highest penetration rates in the world. According to a bench mark report on Latin American microfinancing created by MIX Market, the microfinance information clearinghouse, “Latin America is home to some of the most experienced, diverse and developed microfinance institutions (MFIs) in the world.” The Economist Intelligence Unit, a leading research and advisory firm founded in 1946, reported that Peru, based on regulatory framework, the investment climate and institutional development, has a business environment ripe for microfinance. The picture across Latin America, however, is far from even.

While Latin American does have some of the highest penetration rates in the world, these rates differ significantly from country to country. According to the International Finance Corporation (IFC), which is the private finance arm of the World Bank, penetration of microfinance in Brazil and Argentina is about three percent, meaning that for every 100 microenterprises eligible for microfinance products, only three are served. In Paraguay, Chile and Peru, however, penetration of microfinance is between 25 and 35 percent. Even more saturated, is Bolivia, where the market is saturated and borrowers are able to tap several sources simultaneously. The penetration of Bolivia is more than 160 percent, as reported by the IFC.

Banks are now expanding their microfinance divisions and pursuing areas formerly unexplored by microfinance. Sandra Darville explains that the current economic crisis has reawakened interest in microfinance among Latin American banks. Banks have found that the microfinance sector appears better prepared than most to face the economic recession. Ms. Darville is the Head of the Investment Unit at the Inter-American Development Bank (IADB). The IABD was established in 1959 and specializes in developing economic growth in Latin America. It has approved lending and grants over the past 12 months total 10 billion USD, and according to their 2007 Annual Report, the IADB’s total assets sum USD 69.9 billion (p 104). The IADB has recently surveyed 108 banks in the region, and 80 percent of the banks have said the microfinance sector was strategically important to them. “In a crisis, you want to have your portfolio spread among more clients,” says Ms. Darville.

An example of a fast-growing area of microfinance that is receiving more interest from banks now is “correspondent banking.” Correspondent banking is when finance institutions set up kiosks or other small outlets in accessible locations such as pharmacies or bakeries. There, customers are able to conduct simple financial transactions, such as paying bills without facing a long commute or a long wait. Recently, these outlets have begun to offer more extensive banking services such as loans and savings accounts. Read a MicroCapital article on correspondent banking here. By making microfinance more readily available to all people with correspondent banking, banks hope to add to their clientele and expand their microfinance sectors during the economic downturn.

By: Andrea Chu

ADDITIONAL RESOURCES

FTimes.com, February 26 2009, “Small is Beautiful for Latin American Financing

Economist.com, February 19, 2009, “Ripe for Development

MicroCapital, January 6, 2009, “Multilateral Investment Fund (MIF), a Fund Administered by the Inter-American Development Bank, to Provide $20m in Financing to the Emergency Liquidity Fund (ELF) to Help Latin American and Caribbean Microfinance Institutions

MicroCapital, February 5, 2009, “FINO and NCR to Install 30 Thousand Smartcard Micro-Deposit Machines in India Over 5 Years in an Effort to Reduce the Cost of Microfinance Services

Inter-American Development Bank: “Home

International Finance Corporation: “Home

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