Micamericas
Apr 16, 2008
Microscope Ranking
New Evaluation Tool Reveals Some Imperfections in the Microfinance Business Environment
By Lucy Conger
Over the years, microfinance institutions have been examined inside and out by a host of professional analysts. About half a dozen specialized microfinance rating agencies have examined the lenders’ operations with a fine-tooth comb. Mix Market, a global micro-finance information platform, publishes detailed, market-oriented profiles of some 600 microfinance institutions on its website. And regulated microfinance institutions are subject to inspections by supervisors.
Now it is the regulators’ and policy-makers-’ turn to be put under the microscope. A new type of rating, introduced by the Inter-American Development Bank at the 10th Inter-American Forum on Microenterprise in San Salvador, is ranking the business environment for microfinance institutions in the region. Called the “Microscope,” the classification identifies strengths and weaknesses in the regulatory framework, investment climate, and institutional development in the 15 largest economies in Latin America and the Caribbean.
Examining economies from the perspective of singling out the optimal conditions for running microfinance institutions (MFIs) definitely portrays a new order among countries. All the leaders in this ranking are Andean countries: Bolivia, Peru, and Ecuador, in that order, followed by El Salvador. The laggards when it comes to making business doable for MFIs are four countries usually considered powerhouses: Brazil (in 12th place), followed by Uruguay and Venezuela, with Argentina at the bottom of the heap. Seven of the region’s smallest and relatively poorest economies snared the highest rankings for the largest number of MFI clients as a percentage of microenterprises, including Nicaragua, Bolivia, Ecuador, Peru, and Guatemala, in that order. The relatively wide coverage of microenterprises in these countries highlights the scanty access to microfinance in large countries that performed poorly on this indicator.
Over the course of the next five years the IDB wants the microfinance client base to at least triple to reach 20 million clients. “The big challenge we have is to fully engage the large countries—Brazil, Argentina and Venezuela,” says Donald Terry, General Manager of the IDB’s Multilateral Investment Fund (MIF), the bank’s funding arm dedicated to developing micro and small enterprises.
How to explain these apparent surprises? In conventional macroeconomic evaluations and rankings of investor-friendly environments, the Andean region would be considered risky and could rank poorly. Under the Microscope, the three Andean leaders have the best and most enabling supervisory and regulatory frameworks in Latin America and also the strongest MFIs offering a diversity of services in a competitive microfinance market. The weighting assigned to each category of indicators was significant in determining the final ranking. To calculate the ranking, the regulatory framework and institutional development were each assigned a weight of 40%, or double the importance granted to the investment climate, which had a weight of 20%.
The purpose of the Microscope is to help move the microfinance industry closer to massive expansion by emphasizing the optimum enabling environments for supporting microfinance and reducing costs to clients. “The instrument will be very useful because you can look at each of the indicators, see the lowest score, and decide which you should attack,” says Sandra Darville, Chief of the MIF’s Access to Finance Unit.
Politicians and technocrats were quick to seize on the Microscope. “We’re very proud of our fourth-place ranking in microfinance accessibility,” said El Salvador’s President Elías Antonio Saca at the Microenterprise Forum. Less than a month after the Microscope was launched, Chilean bank supervisors cited the ranking which places Chile in eighth place and points out the weak capacity for supervising microfinance, obstacles to transforming unregulated lenders into regulated institutions, and the poor competition and lack of access to microfinance on the part of informal enterprises.
The acid test for the Microscope will be whether it can be used to influence policy-makers to reformulate regulations and bolster institutions that facilitate the development of a strong, competitive microfinance sector. Commercially sustainable micro-finance thrives and evolves in countries that have appropriate regulatory and enabling environments. “If you don’t have institutional strength, microfinance won’t work, there is no competition,” says Terry of the MIF.
The Microscope provides food for thought, say bank managers. “Those at the middle and lower levels should think about why they’re there,” says Stefan Queck, general manager of BancoProCredit in El Salvador. “A ranking such as that of the Microscope needs to take into consideration additional factors affecting MFI operations, such as consumer protection legislation and the dominance of large banks in a country’s financial sector,” Queck adds. Industry associations and lobbying groups such as the regulated MFI network Asofin in Bolivia, the Red Financiera Rural in Ecuador, Copeme in Peru, and Central American regional associations such as REDCAMIF could use the Microscope to support their arguments with government and congress for reforms in the microfinance sector.
It is going to take a lot of work to convince investors that they should give weight to the Microscope in their investment decisions. Most commercial funders taking stakes in micro-finance institutions continue to believe that the leading risk factor in micro-finance is country risk, according to one analyst who requested his name
be withheld.
The utility of the Microscope can be expected to improve over time. “The Microscope needs to be enhanced; in particular, more in-depth research based on information from a wider range of sources is needed to describe more precisely each of the indicators in the areas of regulatory framework and institutional development,” says Yerom Castro, vice president of banking supervision and popular finances at Mexico’s Comisión Nacional Bancaria y de Valores (“National Banking and Securities Commission”). Updating the Microscope will be vital to reflect new developments in microfinance in the region. For example, with the participation of microfinance institutions, international consultants, and financial authorities, Mexico is currently reforming its regulations for savings and loan cooperatives, Castro adds.
The Microscope, developed by the Economist Intelligence Unit (EIU) in association with the IDB and the Andean Development Corporation (CAF in Spanish), measures 13 indicators that make up the business climate for regulated and non-regulated MFIs. The indicators tabulated in the ranking include regulation and supervision of microcredit operations, governance and accounting standards, capital market and judicial system development, political stability, credit bureaus, and MFI development.
The Microscope diagnosis for each country points to some models for regulations and institutions. The Andean leaders boast regulations that facilitate the transformation of non-profit MFIs into regulated banks and allow a range of institutions to offer microcredits, including commercial banks, savings and loans, home-loan institutions, and associations specializing in rural and municipal savings.
The top three countries have regulations that are considered MFI-friendly because the requirements for risk categories, credit methodology, and loan-loss provisioning are defined for the activity of microfinance in general. This uniformity avoids the complications of regulations that are different for each type of microfinance institution.
Ecuador stands out for its strong, well-developed public and private credit bureaus with ample information for serving MFIs. Peru is cited for its excellent supervisory agency, the Superintendencia de Banca y Seguros (“Superintendency of Banks and Insurance”), and its capacity to monitor microcredits.
On the other end of the ranking, Venezuela and Argentina take heat for a low level of competition among MFIs and administered interest rates. In Venezuela, directed lending sets credit quotas for microenterprises, and the lack of a credit bureau, since its closing in 2005, leaves MFIs in the dark about the risks they may take on lending to some clients. In Argentina, no specialized methodologies exist for microfinance and only one financial product—business loans—is offered to low-income borrowers.
Usually regulatory framework and institutional development show a similar performance, so the relative strength or weakness of the regulatory framework is reflected in a similar performance in institutional development, according to IDB officials. In other words, a good regulatory environment will nurture a robust microfinance sector with a large number of competing institutions and a wide range of financial services for low-income clients.
The Microscope will be updated annually and next year’s version will include a more refined system for capturing information for the indicators, says Sergio Navajas, the IDB official who coordinated the formulation of the ranking with the EIU. In the current version, much of the information on microfinance regulations and institutions was based on interviews and secondary sources, such as the Mix Market information platform.
The Microscope will be dynamic and the rankings are expected to change over time as government authorities make adjustments in the microfinance operating environment. The rankings could shift significantly if different weightings are assigned to regulatory framework, investment climate, or institutional development.
The continuing expansion of regulated microfinance institutions and the growing availability of market funding for MFIs will push a shift in country rankings. “In the future, investment climate will be important because the funders will be mainstream investors and not donors,” says IDB’s Navajas. Brazil and Mexico can then be expected to rise in the rankings as more microfinance banks seek funds in international markets. When that change comes, the Microscope will readjust its focus to reflect the new priorities and possibilities of the evolving microfinance industry.WEIGHTS
| Category | Relative Weight | Percent |
| Regulatory Framework | 4 | 40.0% |
| Investment Climate | 2 | 20.0% |
| Institutional Development | 4 | 40.0% |
| Regulatory Framework | ||
| Regulation of microcredit operations | 1 | 25.0% |
| Formation and operation of regulated/ | 1 | 25.0% |
| Formation and operation of non-regulated MFIs | 1 | 25.0% |
| Regulatory and examination capacity | 1 | 25.0% |
| Investment Climate | ||
| Political stability | 1 | 16.7% |
| Capital market development | 1 | 16.7% |
| Judicial system | 1 | 16.7% |
| Accounting standards | 1 | 16.7% |
| Governance standards | 1 | 16.7% |
| MFI transparency | 1 | 16.7% |
| Institutional Development | ||
| Range of MFI services | 1 | 33.3% |
| Credit bureaus | 1 | 33.3% |
| Level of competition | 1 | 33.3% |
RANKING
| Overall Score | Regulatory Framework | Investment Climate | Institutional Development | |||||||||||
| ?1 | Bolivia | 79.4 | ?1 | Bolivia | 100.0 | ?1 | Chile | 75.0 | ?1 | Bolivia | 75.0 | |||
| ?2 | Peru | 74.1 | ?2 | Peru | ?81.3 | ?2 | Brazil | 62.1 | ?2 | Dominican Rep | 75.0 | |||
| ?3 | Ecuador | 68.3 | ?3 | Ecuador | ?75.0 | ?3 | Mexico | 58.3 | ?3 | Ecuador | 75.0 | |||
| ?4 | El Salvador | 61.5 | ?4 | El Salvador | ?62.5 | ?4 | Peru | 57.9 | ?4 | Peru | 75.0 | |||
| ?5 | Dominican Rep | 57.5 | ?5 | Paraguay | ?62.5 | ?5 | Uruguay | 54.2 | ?5 | El Salvador | 66.7 | |||
| ?6 | Nicaragua | 53.8 | ?6 | Guatemala | ?56.3 | ?6 | El Salvador | 49.2 | ?6 | Nicaragua | 58.3 | |||
| ?7 | Paraguay | 52.9 | ?7 | Nicaragua | ?56.3 |   © 2007 Inter-American Development Bank. All rights reserved. Terms and Conditions  | ||||||||
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