Dialogue: The Future of Microfinance

By Peter Bate

One of the main events of the 10th Microenterprise Forum in San Salvador was the roundtable on the prospects for microfinance in Latin America and the Caribbean. To look beyond the horizon of the present, IDB President Luis Alberto Moreno called together distinguished persons in the industry: María Otero of ACCION International, Carmen Velasco of Pro Mujer, Carlos Labarthe of Compartamos, Jorge Londoño of Bancolombia and Manuel Méndez of the BBVA Foundation for Microfinance to tackle subjects such as the expansion of coverage, access to capital markets, the need for regulation and the influence of technology. The following are excerpts from their presentations:

How can we reach those who still do not have access to microfinance?

Carmen Velasco (Pro Mujer): When we talk about microfinance institutions, I think we can feel very proud, because had it not been for them, there would be no such solution for 6 million people. However, when we think about whether they have a future, I’m sure they do, because 60 million people still do not have access. I believe that microfinance development institutions both large and small (all under the misnomer NGO), have shown enormous creativity and initiative in developing more innovative strategies and methodologies to reach the extremely poor. [...] Without overlooking the need for financially stable, sustainable institutions, they are only one means of reaching those 60 million people. I believe there is a long road ahead and room for all, because as someone mentioned, the cruel fact is that poverty is expanding like a malignant tumor. If we do not have vigorous action, and set targets with clear indicators so we can show that these clients are better off due to the intervention of microcredit, I think we’ll be fooling ourselves. What is the point of having institutions that are tremendously profitable, that are listed on the exchanges, such as Compartamos, for example, if they cannot show—and I think they are showing—that their clients are better off, that it is a win-win situation. If this is not the case, we are in big trouble.

Carlos Labarthe (Compartamos): For us at Compartamos, growth has been an obsession. A few years ago, we set a goal to reach 1 million clients, which sounds like a large number, but in a country where there are more than 10 million microenterprises, the number still seems very small. We are convinced that in order to achieve that scale, we will have to have access to the capital markets. I am in full agreement with what Carmen [Velasco] says: there are various models, not just one, and this is one of the models, all equally relevant and all equally important, because as Carmen says, the NGOs are doing a much quieter, more focused job, and in many cases, they are also serving people who are much poorer. So the two models are complementary. But I believe that if we are to reach scale, we will need to access the financial markets. [...] In the model we have tried to implement, the purpose is to align those major sources of capital with the interests of our clients.

María Otero (ACCION): What does the new microfinance model consist of? On the one hand, it involves the use of technology, not only to improve the back-office operations of institutions so they can be faster and allow us to do more transactions at lower cost, [but, on the other hand,] it also involves how risks should be managed, what we are doing to measure the risk of providing a loan to a microentrepreneur in such a way that it lowers our cost of having to have an adviser who sees the client face-to-face every time a loan has to be approved. [...] The way I see it, if we are going to talk about what microfinance will be like over the next 10 years, we will have a model that is very different from what we have today. The adviser will still play a very important role. But will we be able to achieve the creativity, the innovation, and the capacity to incorporate front- and back-office technologies in a way that truly allows us to do things in a completely different way? Will these technologies allow us to reach not just the 3 million clients we have in the ACCION network right now, but will we be able to add a zero to this total?

How can we broaden microfinanciers’ access to capital markets?

Jorge Londoño (Bancolombia): In today’s world we have an extraordinary economic scenario, in that there is enough capital; the challenge for the executives is to be capable of developing business models that are profitable, that are attractive. The truth is that, at least for executives in our countries, going out on a road show is an incredible experience. The responsibility we have to contribute to the development of our countries is enormous. To go abroad and to gather hundreds of millions of dollars from institutional investors all over the world in eight days shows us that it is truly possible. If we are capable of creating a viable business of providing financial services to the low-income and lower-middle-income strata of our societies, we will be contributing in a highly profitable and very gratifying way to the development of our countries.

Carmen Velasco (Pro Mujer): Access to financing sources is no longer a problem, not only because the institutions can capitalize their gains. [...] I believe we are in an urgent situation of having to train middle management and senior executives so that they may move into the next phase and learn how to reach the 60 million people we need to reach. When I recently visited Pro Mujer México, I told the team there that there were so, so many people in Mexico who need our services and asked them what we could do to reach them so they will believe in us, so they will believe they have the option to approach us if they want to start a business. [...] So, what is required to motivate these people so they can play a role in the development of their country, so they will be able to take up the standard and move out of marginalization? Not only do we have to develop strategies for reaching these people, but we must find the instruments and the models that will enable us to serve them.

What new products and services do microentrepreneurs need?

Carlos Labarthe (Compartamos): As an industry we have a great task pending: how to take advantage of [remittances,] those financial flows generated by our conationals who do not live in our countries, but not just so they reach our countries and are consumed. Not that this is bad, but so far, the benefit reaches only the family. One of the great tasks pending is how we can link these flows to another set of products and services; credit to improve housing is of the utmost importance. While other countries are more advanced, in Mexico we are still beginners, but it is still impressive. We can see how much it costs a family to build a small room, that it takes them three years to do it and costs them 40 thousand Mexican pesos because they buy the materials bit by bit, paying more because they are unable to buy it all at once. Today we can offer them a service, give them a loan so they can build that room in three months for around 17 thousand pesos.

Jorge Londoño (Bancolombia): As a financial executive, one of the things that depresses me is when financial services do not reach the segments that need them. Obviously, the fact that the credit has to come through informal lenders or loan sharks is depressing. But the fact that investment opportunities are not available is equally depressing. In our cities, when I look out the window and see this blur of yellow taxis with no demand, I think it is clear evidence of the financial sector’s inability to offer suitable investment services to the low-income and lower-middle-income segments of our population. The only investments at the top of the list for our low-income and lower-middle-income groups are a dwelling, perhaps a second property as real estate, and a taxi. And typically it is a bad dwelling, bad real estate and a bad taxi, one that is not in suitable operating condition. I think we have an enormous challenge in seeking to provide full financial services.

What role should technology play in broadening microfinance?

Manuel Méndez (BBVA): [...] A great deal of work must be done with respect to organization, procedures, and systems so that it will truly flourish [...]. One example: all the back-office tasks of the 12 banks with which BBVA works in Latin America are done in Monterrey, Mexico, which enabled us to bring costs down. [...] But above all, technology must be harnessed to create a circulatory system for the region. If I were a doctor and had to make a diagnosis of Latin American microfinance, I would say: “What we have is a circulatory problem; here the nutrients don’t reach the cells that need them because there are no arteries and veins to carry them.” We have to provide the region with a circulatory system so that the impact [of microfinance] can in fact be great, and this can only be done through the intensive use of technology.

Carlos Labarthe (Compartamos): To be able to get a grip on new technology, we often have to unlearn prior technology. What is going on in this segment is that there wasn’t much prior technology, we only had to learn the new. There are many examples: how many of our clients never had a land line in their houses but nevertheless now have a cell phone? Today, in Mexico, there are almost 45 million cell phones; that is, almost one of every two Mexicans has a cell phone. That is why, moving into the future, technology will play a key role. I see two basic areas: one is the construction of a network; we need to connect with our clients. It is often a problem to reach the most remote locations, and it is especially difficult to give clients the ability to carry out transactions. [...] All the work we do to construct a network, to bring us closer to the client, with cards, ATMs, where the client can use the technology, is fundamental. [...] The other subject is cell phone capabilities: in Latin America, they will undoubtedly play a key role in the future. In countries such as the Philippines or South Africa, it is impressive: you can even send a tip to a waiter from cell phone to cell phone.

How should microfinance regulation be improved?

Manuel Méndez (BBVA): There is no substitute for competition. If we want to have financial systems with good resource allocation and good price formation, what we need is stable and extremely competitive economic frameworks. [...] We have to foster competitiveness in this segment. Once competitiveness is established, through that fact alone, resource allocation and price formation will emerge in an absolutely natural way. Regarding stable regulatory environments, lots of work needs to be done. For job-related reasons, I was charged with working on various international committees, and it was truly deplorable to see the representatives of regulatory institutions in certain countries change every year. The independence of the supervisor, absolute freedom from political pressures on decision-making and the stability of regulatory frameworks are vital for establishing competitive microfinance institutions.

María Otero (ACCION): We have to see where regulations for microfinance institutions in our region are today, because to think that we might begin to involve regulatory institutions in, for example, supervising [banking] transactions that go from one cell phone to another implies that we have the other regulatory issues resolved, and in no way is that the case. As I see it, governments have not advanced with the same speed that microfinance has advanced, not only in their ability to reach a growing number of people, but also in terms of creating institutions and incorporating them into the financial systems of their countries. [...] The matter of what regulations would be appropriate is easy; there are four or five key issues having to do with risk, minimum capital, how reserves are to be set, leveraging, and the prices that can be charged. In my opinion, the great challenge that governments still have is how to study these four or five things, and even think about establishing a regional regulatory framework, which would enable all of us to work in a way that would truly increase the capacity of microfinance to grow, which varies from country to country. In this regard, the IDB may fulfill a very important role in harmonizing these ideas, clearing away the details that sometimes keep us from moving ahead and creating a framework that would truly allow us to manage.

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