PAPER WRAP-UP: 2008 Microscope on the Microfinance Business Environment in Latin America and the Carribean (LAC), (Part one of a two part series), by The Economist Intelligence Unit

Published by the Economist Intelligence Unit, October 2008, available at:

http://a330.g.akamai.net/7/330/25828/20081014142739/graphics.eiu.com/marketing/microfinance/English_Microscope%202008.pdf

The Economist Intelligence Unit released a 62 page report (October 2008) that provides a framework of the microfinance business environment in Latin America and the Caribbean. The report was commissioned by the Inter-American Development Bank and the Corporacion Andina de Fomento and also looked at three major individual features that provide greater insight to the microfinance arena.  The three categories are as follows: regulatory framework, investment climate and institutional development.  The indicator scores are aggregated to produce an overall score ranging from 0 to 100 (note, 100 being the best score).  While these scores are provided, the report utilizes these figures in a “strengths” and “challenges” framework.

What follows is a summary of the major sections of the report.  Note, this is part one of a two part series.  The first is a presentation of the key findings and then an overview of the 20 countries surveyed, specifically the top five rated countries in the South American region (Peru, Bolivia, Ecuador, Columbia, and Paraguay). Part II of this series, to be published at a later date on MicroCapital, will cover the final two sections – South America (second half), Central America and the Caribbean (specifically, the Dominican Republic, Haiti, and Jamaica) with a focus on the respective country’s “strengths” and “challenges”. 

Key findings from the 2008 Microfinance Business Environment

This report marks the second year of the Microscope on the Microfinance Business Environment in LAC.  The primary takeaway is that microfinance has become a sustainable and innovative source of capital for the developing regions of Latin America.  While regulations are continuously being formulated, implemented and streamlined, lending opportunities in the region have a positive outlook.  The report provides six major findings as follows:

  • Improvements and setbacks:  Six of the 15 countries listed have registered improvements.  In order of overall improvements they are listed as follows: Columbia, Guatemala, Nicaragua, Peru, Argentina and Ecuador.  Peru has achieved the best business environment for microfinance in LAC with an overall score of 76.6 (an increase of +2.5 points from 2007).  Interesting note is that some countries such as Columbia (score rose 12.5 points to 58.6) illustrated significant improvements in a region that previously had unfavorable environments (p 5).
  • Alterations to the regulatory environment for microfinance: Knowledgeable regulators are key to promote microfinance activity as an economic commercial vehicle in LAC.  Columbia and Peru experienced positive changes with Bolivia experiencing negative setbacks.  A political shift, whereby regulators lose autonomy, could potentially setback any existing growth in the microfinance sector (p 6).
  • Considerable variations in the regions microfinance environment:  Peru scored (76.6) followed by Bolivia (74.4), Ecuador (69.7), El Salvador (59), Columbia (58.6), Nicaragua (58) and Guatemala at (54).  There are two remaining disparate groups (eight countries within the 40 to 50 point range: Paraguay, the Dominica Republic, Mexico, Panama, Honduras, Chile, Brazil, and Costa Rica) followed by five in the lower tier. The lower tier consists of Haiti, Argentina, Uruguay, Venezuela, and Jamaica (p 6).
  • Continuous expansion of microfinance industry:  Value of the LAC market portfolio increased more than seven fold; USD 1.19 billion to USD 9.25 billion, with 565 institutions serving 8.04 million customers (p 6).
  • A disassociation between a country’s size and wealth vs. the quality of its microfinance environment:  The top five (listed in order) in the index are held by lesser developed and smaller countries.  They are as follows: Bolivia (2nd place in the index), Ecuador (3rd place), El Salvador (4th place), Nicaragua (6th place) and Guatemala (7th place).  The report suggests that microfinance is distinct from more general business environments.  Examples of this are Argentina, Brazil, Chile, and Mexico that are geographically larger and more developed countries in the LAC region; however, with less favorable environments for microfinance activity (p 6). 
  • Country score correlates with the level of microfinance penetration: Higher scores tend to have a greater portion of the respective country using microfinance with MFI clients as a share of population, resulting in a large, positive correlation of 0.66 (p 7).

South American Rankings

Peru: Peru’s place for the 2008 Microscope on Microfinance ranks 1st with a score of 76.6.  The World Bank-IMF mission rated Peru’s main regulator (SBS) with a reputation of 96.6 out of 100 in 2005.  The quality of Peru’s financial regulations and supervision was excellent, receiving an 87.5.  This main criteria that lead to a high score was due to loan-loss provisioning based on loan status as well as thorough on-site inspection procedures coupled with strict internal controls for MFIs.  Organizations such as Entidades de Desarollo de la Pequena y Micro Empresa (EDPYMEs) (formerly credit NGOs) have converted into regulated MFI giving them the ability to gain access to wholesale finance.  Most recently, in June 2008, SBS adopted a new decree (Legislative Decree 1028) that aims to expand access to capital markets for regulated non-bank MFIs for EDPYMEs, rural homes, and municipalities.  A couple of key challenges that lie ahead for Peru are the “ease and effectiveness with which MFIs are established and operated.”  Further compounding this is the judicial quality with the courts still lacking impartiality (p 48).

Bolivia: Bolivia’s place for the 2008 Microscope on Microfinance ranks 2nd with a score of 74.4.  It slipped from first place in last year ranking, down by five points from 2007; mostly in part due to a small deterioration in its regulatory framework.  One such example is Bolivia’s creation of a subsidized on-lending facility with interest rate caps to “allow NGOs to upgrade into regulated, deposit capturing institutions with much lower minimum capital standards than private financial funds or other regulated institutions (p 19).”  A key strength is the Superintendency of Banks and Financial Entities (SBEF, in Spanish) pursuance of a “gradual market based approach when building an MFI sector (p 19).”  The organization continuously aims to create greater transparency standards, and methodologies such as risk management to lending institutions.  While Bolvia’s offer a variety of MFI services, their weakest area is its investment climate that includes lagging accounting standards, a lack of judicial quality and  low capital market development (p 19).    

Ecuador: The country places 3rd with a score of 69.7 for the 2008 Microscope on Microfinance in the region.  Interest rate caps were liberalized in August 2007 (with the introduction of the Law of Financial Regulation). Microfinance regulation in Ecuador utilizes specific provision requirements, credit methods and risk classifications.  Capital-adequacy ratios for appropriate regulated institutions are at 9%.  The Economist Intelligence Unit views Ecuador’s investment climate as unsatisfactory due to limited credit by private banks.  The report suggests that this is dues to the “absence of a lender of last resort (p 32).”  The larger regulated MFI are somewhat hampered by the lack of a developed capital markets.

Columbia: Columbia ranks 5th with an overall score of 58.6.  The country has improved the most in its regulatory and investment climate when compared to any of its peers in the region.  The country’s credit bureaus are highly rated with the World Bank’s Doing Business report for 2008 rating Columbia with a score of 5 out of 6 (6 being the best score) on its Credit Information Index.  Governance standards have improved but still have room to grow.  

Paraguay: Paraguay ranks 8th overall in the 2008 Microscope with a score of 49.6.  The investment climate is weak (a ranking of 16th) with minimal improvements; however, institutional development ranks 10th (considered average).  Regionally, their regulatory framework is considered to be very good.  There is minimal competition in the microfinance industry,   typically isolated to rural and agricultural areas from state financial entities.  Capital adequacy requirement ratios for banks and finance companies are at 10% (p 46) with the ability to charge market interest rates.  The report notes that six finance companies and one bank currently have microfinance operations.  NGOs are allowed to engage in microfinance as non-regulated institutions.  According to the MIX Market, Fundacion Paraguaya (an NGO) was the sixth largest microcredit lender in 2008 with a few smaller NGOs attempting to establish microlending operations.  Three considerable challenges in Paraguay have been a decrease in the level of competition, funding constraints in the capital markets having prevented NGOs from upgrading to finance companies, and poor banking regulation that has led to several banking crises since deregulation in 1991. Interestingly enough, less than 20 percent of the finance companies portfolio is in microfinance (p 47).

By Zoran Stanisljevic

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  1. […] MicroCapital reported in February 2009 the state of the microfinance business environment in Latin America and the Caribbean region. According to the Economist Intelligence Unit (EIU), Colombia ranks 5th out of 20 countries in the 2008 microfinance index with an overall score of 58.6 (out of 100).  The country’s credit bureaus are highly rated with the World Bank’s Doing Business report for 2008 rating Colombia with a score of 5 out of 6 (6 being the best score) on its Credit Information Index.  Governance standards have improved but still have room to grow.  […]

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