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Microfinance and Banking Panel: Innovative Strategies for Latin America

The success of microfinance has prompted commercial banks to view low-income client loans as smart business. Speakers at our roundtable discussion outlined potential challenges and possible solutions to ensuring the sustainability of Latin America’s microfinance boom.

 

Introduction

 

Recognizing the significant opportunities and interest in microfinance, the Americas Society and the Council of the Americas brought together public and private sector experts to examine the successful emergence of microfinance in Latin America and its potential for opening new financial markets.

"Microfinance and Banking: Innovative Strategies for Latin America" included the following speakers:

  • Mary Ellen Iskenderian, President and CEO, Women’s World Banking
  • Asad Mahmood, Managing Director, Global Social Investment Funds, Deutsche Bank
  • Carolina Velazco, Sub-Manager of Strategic Planning, Compartamos
  • Francisco Prior Sanz, Senior Research Associate, Director Financial Inclusion Program, Summit of the Americas Center, Florida International University. 

Michele Levy, AS/COA Senior Director of Public Policy Programs moderated the New York roundtable discussion and Nancy Anderson, AS/COA Senior Director of Corporate Relations opened and closed the discussion in Miami. This summary provides an overview of the main points from the discussion.

 

Background

 

Since the early 1980s, microfinance has extended financial services to new, low-income participants throughout Latin America. Today, microfinance loans reach nearly nine million Latin American microentrepreneurs, who account for 37 percent of the global loan portfolio tracked by MIX, the primary market information source for the microfinance industry. These targeted funds to micro and small businesses often provide critical resources to a critical component of Latin American economies. In 2004, the Asian Development Bank Institute reported that micro and small businesses accounted for 43 percent of Brazil’s gross domestic product (GDP) and 48 percent of the Mexican GDP.

In recent years, several microfinance institutions (MFIs) have commercialized, transforming into banks to ensure financial sustainability. The highest rates of commercialization worldwide have been experienced by rural banking services—an important development sector for Latin America. The Spring 2007 MicroBanking Bulletin also notes that "Latin American microfinance leverages more equity, has more assets and attracts more commercial funds than any other region."

 

Summary

 

While microfinance has received greater media coverage over the past couple years, especially with the awarding of the 2006 Nobel Peace Prize to Mohammed Yunus—the microfinance pioneer and founder of the Grameen Bank in Bangladesh—it is by no means a new phenomenon. The act of providing small loans to a population that lacks the resources and credit to receive such loans has been a practice for decades. What we are now seeing are banks and businesses taking a larger role in microfinance and recognizing that it is a smart business practice. In looking towards an emerging class of entrepreneurs, banks are going beyond philanthropy and making microfinance a profitable business sector.

 

New Goals

 

Over the past decade, microfinance has emerged as an important economic development tool in Latin America. Our roundtable discussion outlined several goals to build on this success. First, panelists stressed the need to extend rural coverage and the recognition of microfinance as a social enterprise. Second, despite increased outreach to low-income clients and to the "unbanked" population, development of these small, emerging markets remains highly dependent on foreign social investment inflows. According to Asad Mahmood, citizen empowerment is linked with changing the perception that low-income individuals are potential entrepreneurs rather than charity recipients. This type of new outlook will help to broaden Latin America’s untapped market potential. Third, speakers observed that more funding mechanisms must be developed to meet the shortfall between rising microcredit demand and limited existing funds. Recommendations focused on utilizing subsidies and private investment and better utilizing local financial capital to fund microfinance initiatives.

 

Challenges to Expanding Microfinance

 

In addition to addressing goals, panelists outlined several challenges that must be addressed to effectively expand the Latin American microfinance market. First, Mary Ellen Iskenderian recommended targeting technological innovations and product marketing to specific constituent groups. Strategic outreach will ensure that more—and often rural—communities gain access and exposure to financial markets. Second, panelists cautioned against the politicization of microfinance as competition grows among commercial banks or state funding is utilized. Third, speakers emphasized that financial education should accompany new funds that flow to communities, at least until a culture of responsible financial management develops. Fourth, other panelists expressed concern that MFI interest rates are rising. Mahmood explained that interest rate hikes are the result of the risk posed by shallow, and often new, credit markets. Limited competition also gives MFIs freer reign to set rates. This higher cost of borrowing, warns Mahmood, restricts MFI outreach to low-income clients.

 

Creative Solutions

 

Both Iskenderian and Mahmood shared several recommendations for resolving challenges to microfinancing in Latin America. To effectively re-energize the microfinance concept, a greater focus must be given to marketing micro loans—as financial goods—to low-income clients. Iskenderian emphasized the importance of informing financial institutions, particularly the banking sector, that general investment in Latin America and the growing microfinance community can be profitable. In short, by providing a necessary service to low-income clients, banks can invest in an emerging market as well as increase social returns.

One notable example of innovative growth in the booming Latin American microfinance sector is Compartamos. The project, which began as a non-government organization in the late 1980s, was originally a small finance company before becoming a sociedad financiera de objeto limitado (SOFOL) in 2000. In 2006, Compartamos transitioned again and became a fully licensed bank. Since then, it has started lending for home improvement and insurance services as well as traditional business investments. Today, Compartamos is the largest MFI in Latin America with over 60,000 clients. The bank is rated as mxA+ by Standard and Poor’s and was designated "Sustainable Deal of the Year" in 2006 by the The Financial Times and the International Finance Corporation. Panelists concurred that its innovation—of creating strong capital ties between investors and the clients—sets an important precedent for microfinance institutions.

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