Microfinance: An Emerging Market within the Emerging Markets
By Marguerite Berger (07/01, En, Es) See also Microenterprise
This working paper is being published with the sole objective of contributing to the debate on a topic of importance to the region, and to elicit comments and suggestions from interested parties. This paper has not gone through the Department's peer review process or undergone consideration by the SDS Management Team. As such, it does not reflect the official position of the Inter-American Development Bank.
The microenterprise sector represents a huge untapped market for the financial service industry in Latin America and other developing countries. Microcredit - one of a number of microscale financial services -- is a lending technology that allows lenders to manage the risk and costs of lending to very small borrowers who are dependent on income from self-employment or business ownership. The data presented in this paper show that micro finance can be profitable, although the size of the loan portfolios and total assets remain small by the standards of commercial banks. Microcredit tends to have lower rates of arrears, but higher administrative costs than conventional loan products. Its higher operating costs are compensated for by higher interest yields.
The variety of micro finance institutions operating in Latin America ranges from commercial banks and finance companies with some microenterprise clients, to NGO's that give credit, but are also involved in many different non-financial activities. Over the past ten years, dramatic changes in the financial sector of most Latin American countries has increased competition and created new opportunities for expansion of microfinance. Commercial private sector participation in microfinance is on the rise, both through the creation of formal lending institutions from the portfolios of nonprofits (often called "upgrading") or by, the entrance of commercial banks and finance companies into the microfinance market (called "downsca1ing"). The paper reviews these experiences.
Microfinance appears to constitute an interesting niche for a small group of emerging market investors, but the commercial development of microfinance is still in its infancy. The locus of micro finance is just beginning to shift from the nonprofit world to private investors, and the industry does appear to have growth potential. However, while microfinance is allowing investors to tap a new emerging market within the emerging markets, its growth will ultimately depend on continued policy reform, standardization and transparency of information on lending institutions, and the industry's capacity to innovate and increase efficiency in order to serve the lowest end of the market.
Last updated: 05/08/07
