The State of Microfinance in Latin America

Courtesey of Pro Mujer

By Melissa J. Anderson (New York City)

Last Thursday, the Financial Women’s Association of New York held an informational panel discussion on the state of microfinance in Latin America. The panel, moderated by Sheila Hooda, Senior Managing Director, TIAA-CREF, featured a broad spectrum of experts: Sandra Darville, Unit Chief, Multilateral Investment Fund (MIF) of the Inter-American Development Bank (IDB); Gary P. Kochubka, Senior Director, Standard & Poor’s (S&P); Rosario Perez, Chief Executive Officer, Pro Mujer; and Peter V. A. Shaw, Managing Director, FitchRatings.

One of the main takeaways of the event was that it’s difficult to discuss “microfinance in Latin America” because the market is so broad, with the industry taking on several stages of maturity across the region.

As Darville explained, in some areas of the region, the microfinance market is extremely developed (with over 30% penetration), while in other places, penetration is “less than 1%.”

Hooda summarized, “Microfinance originated in Latin America. A lot of institutions are very mature. Government regulation is mostly helpful…” Over the years, she explained, the industry has survived a lot of turmoil – whether hurricanes or political unrest – but, she said of the state of the industry in the past two years, “this is the first time the crisis is not [based in] Latin America – it originated in the US.”

Shaw said, “Broadly and structurally… microfinance as an industry has penetrated deeper in Latin America than in some of the other markets in which it is active today.” He explained that in the last ten years, the industry has undergone a cycle of development in which entities started largely as unregulated institutions, funded mostly by venture capital or philanthropic donations.

As the industry has grown, it has become more heavily regulated. “Non-banks transform into banks,” he explained. “Deposits are becoming more important to balance sheets.”

Weathering the Global Financial Crisis

Shaw said that microfinance institutions have, for the most part, weathered the economic downturn rather well. “They take a very conservative posture” against bad loans in the first place, he explained, which has provided a cushion.

Kochubka said the relative strength of the Latin American marketplace is also a boon for the microfinance industry. He said, in terms of GDP, “we are still seeing growth numbers.” Countries like Brazil and Mexico, he said, are “leaps ahead” of countries like Greece and Spain. The economic downturn has been “a minor setback compared to other global regions.”

Said Perez, “You learn a lot of lessons. In a crisis you learn more.” She continued, “In my 25 years in the business, we’ve never been crisis free.”

While the majority of Latin America fared relatively well during the global economic crisis, Darville said, “Central America took a much bigger hit. It did see a decline in microfinance portfolios whereas other countries didn’t.” The decline, she said, was mainly based on a drop in remittances sent from the US.

Managing Change

Kochubka said, “Growth is a good thing, but you have to manage that.” He explained that as marketplaces mature, the industry is going to need to seek out a regulatory structure that provides “better oversight” over borrower data – for example, he said, lenders need a system to find out who has borrowed from other institutions. They might not want to lend money to a borrower who has taken out five loans elsewhere.

“We see opportunities mainly for risk management and system improvements.”

Referring to new stronger government regulations of the microfinance industry in Nicaragua, Darville explained, “Only 3,000 people who have actually gone into restructuring their loan.” Meanwhile, she said, “there has been a 50,000 client decrease.” Relatively few people have taken advantages of the new legislation, but, as one audience member said, “the damage is done.”

Haiti, she said, “was heavily impacted by the earthquake.” She continued, “There is the potential for implosion of the microfinance industry if something isn’t done. There is a good opportunity for people to look at what they can do to keep it going.”

Looking ahead, she said, the importance of technology for the industry will increase. She cited the use of satellite technology by borrowers to manage their crops.

Kochubka also mentioned the growing importance of mobile phone technology.

The Importance of Good Leadership

Providing an industry perspective, Perez began, “We can’t treat all of our clients the same.” For example, she said, “Our long term clients no longer need communal banking… You need hands on management.” She continued, “I personally think leadership is very important. You can have all of the systems in the world, but if the wrong people are in place it doesn’t matter.”

Kochubka said, “Leadership continuity is very key in terms of a credit perspective, not just an investor perspective.”

Shaw added, “After a while, leadership and [performance] converge. You can put out good numbers for a short time with bad leadership, but not for the long term.”