Financial institutions in Latin America and the Caribbean have traditionally catered to the elite few, leaving the vast majority of the region’s population without access to credit, savings accounts and other financial services. This pattern of exclusion not only results in lost opportunities for asset creation on the part of low-income families and would-be entrepreneurs, but also in missed business opportunities for banks to tap into a huge market with great growth potential. 

At a recent IDB conference launching the new initiative, Building Opportunity for the Majority, the panel discussion on financial democracy, one of the initiative’s six priority areas, explored the causes and implications for the majority of the lack of access to formal financial services. Panelists also discussed issues surrounding microcredit.

Panelists included Alfonso Prat-Gay, former President of the Central Bank of Argentina; Maria Otero, President of Acción International, USA; Vicente Cruz, President of Banco del Desarrollo in Chile; Ignacio Sánchez-Asiaín, General Manager of So. America BBVA Group, Spain; and Rolf Hüppi, founder of Paralife, Switzerland. The session was moderated by Richard Lapper of The Financial Times.

Prat-Gay provided a general look at the market failures that prevent the poor from accessing credit, both in terms of their inability to provide collateral—other than “moral collateral”—as well as the financial institutions’ incapacity to identify potential borrowers’ solvency in the absence of basic information, like credit histories.  

In light of these market imperfections, NGOs have traditionally filled the gap in the provision of microcredit to low-income populations, essentially creating an industry for a sector formal banks were not reaching, said Acción International’s Maria Otero.

However, over the last fourteen years or so, she added, microfinance has become increasingly commercial. In that time, some 50 formal microfinance institutions (MFIs) have opened in Latin America, 20 commercial banks have “downscaled” their operations to include microfinance and 60 NGOs have been providing microfinance services. Together, the 50 MFIs and 20 commercial banks make up about 80% of the lending portfolio to microenterprises in the region.

While the microfinance industry has been growing, especially in the past five years or so, the panelists agreed that the need to promote the economic value of this market and amplify the commercial space of traditional banks within the sector remains paramount in expanding access to microfinance and other financial services.

BBVA’s Sánchez-Asiaín stressed that traditional banks lack knowledge of the market at the “base of the pyramid” and would need big investments in technology to make a business model work for this sector, a sentiment echoed by other panelists as well.

The characteristics of the base of the pyramid differ from other sectors of society, signaling the need to rethink business paradigms and approaches to effectively understand and reach this market, Prat-Gay emphasized. Similarly, panelists expressed the need to enhance existing regulatory frameworks to promote the expansion of microfinance at the base of the pyramid, suggesting incentives for NGOs to become regulated financial institutions. 

In the end, while the ongoing success of microcredit has proven that the poor can be good credit risks, only a fraction of all microenterprises have obtained loans, signaling that much work remains in promoting financial democracy at the base of the economic pyramid.