October 8, 2008
Warning Signs in the Midst of the Storm
The he year 2007 has been a tough year in global financial markets. The crisis reminded us that one swamped ship can create dangerous waves for others plying the economic seas.
Consistent with its scrappy origins,however, the microfi nance sector in Latin America and the aribbean continues to motor on at a healthy pace. Leading institutions in the region have focused on mobilizing domestic savings, thereby easily funding growth, with robust overall portfolio quality and performance. Funding has continued to increase and buoy the sector’s growth. In fact, the past 12 months saw both the healthy expansion of existing MFIs and the birth of start-ups in countries such as Honduras, Mexico, Colombia, Panama and Brazil.
The year 2007 also marked the transition of an adolescent industry into adulthood. Earlier concerns over the problems of youth (e.g., sustainability, credit methodologies, and governance) have given way to a healthy identity crisis, with concerns over rapid growth, the supply of high quality managers, the need for new technologies and products, ethical standards, and continued controversies over interest rates and profits.
Investors such as Procredit, Fundación BBVA and Planet Finance have put money into start-ups, and leading institutions (e.g., ACP in Peru) ventured outside their home country with cross-border investments. The growth of the industry has blurred definitions, and analysts debate which institutions
are MFIs, while donors and MFIs debate the social impact of various models. MFIs that spent their early years desperately seeking resources now face multiple, competing offers for funding. The
influence of private donors and investors like the Gates Foundation and Omidyar Network was significant and greatly contributed to the dialogue on measuring results,success and impact. Banking regulators across the region have encouraged this growth, fine tuning the regulatory environment in some countries and making major changes in others (e.g.,Mexico, Colombia, and Peru). Going forward, the microfi nance industry will be increasingly product based rather than institution-based. In other words, microfinance will be provided by a range of companies, NGOs, for profit entities, banks, insurance companies and others that do not work exclusively in microfi nance. Credit is the first microfinance product to make this transition, but as the industry continues to grow, other financial services will surely follow suit.
Given that the sector is well on its way, what next? In fact, much remains to be accomplished. The success stories of a few may mask the exclusion of the vast majority of microenmicroenterprises and low income households from credit, savings and other financial services. Moreover, while the sector is highly advanced in some countries, it barely exists in others that lack enabling regulatory and institutional frameworks. As shown in the Economist Intelligence Unit’s Microscope on the Microfinance Business Environment, major obstacles remain in the way of improved innovation and scale. More work is needed in the areas of financial transparency, regulation and supervision, and in expanding the supply of financial services (e.g., the “rural gap”). Intraregional investment and collaboration will require greater harmonization of standards and prudential regulations. Just as regulators and policymakers are beginning to collaborate on these issues, the region’s MFIs and other actors will also need to keep working more closely together toward a shared regional system. The creation of an organization such as a federation for microfi nance for Latin America and the Caribbean could be a useful means of encouraging these regional partnerships.
Going forward, the MIF will leverage trends in microfinance to help expand innovation and scale in the industry. Increasingly, microfinance will include many types of financial services provided by myriad institutions using a broad array of technologies.
Under President Moreno’s leadership,MIF intends to promote this evolution. Our goal is to see the sector reach US$20 billion by 2012. With the dynamism in the market to date, this goal is well on its way.
Consistent with its scrappy origins,however, the microfi nance sector in Latin America and the aribbean continues to motor on at a healthy pace. Leading institutions in the region have focused on mobilizing domestic savings, thereby easily funding growth, with robust overall portfolio quality and performance. Funding has continued to increase and buoy the sector’s growth. In fact, the past 12 months saw both the healthy expansion of existing MFIs and the birth of start-ups in countries such as Honduras, Mexico, Colombia, Panama and Brazil.
The year 2007 also marked the transition of an adolescent industry into adulthood. Earlier concerns over the problems of youth (e.g., sustainability, credit methodologies, and governance) have given way to a healthy identity crisis, with concerns over rapid growth, the supply of high quality managers, the need for new technologies and products, ethical standards, and continued controversies over interest rates and profits.
Investors such as Procredit, Fundación BBVA and Planet Finance have put money into start-ups, and leading institutions (e.g., ACP in Peru) ventured outside their home country with cross-border investments. The growth of the industry has blurred definitions, and analysts debate which institutions
are MFIs, while donors and MFIs debate the social impact of various models. MFIs that spent their early years desperately seeking resources now face multiple, competing offers for funding. The
influence of private donors and investors like the Gates Foundation and Omidyar Network was significant and greatly contributed to the dialogue on measuring results,success and impact. Banking regulators across the region have encouraged this growth, fine tuning the regulatory environment in some countries and making major changes in others (e.g.,Mexico, Colombia, and Peru). Going forward, the microfi nance industry will be increasingly product based rather than institution-based. In other words, microfinance will be provided by a range of companies, NGOs, for profit entities, banks, insurance companies and others that do not work exclusively in microfi nance. Credit is the first microfinance product to make this transition, but as the industry continues to grow, other financial services will surely follow suit.
Given that the sector is well on its way, what next? In fact, much remains to be accomplished. The success stories of a few may mask the exclusion of the vast majority of microenmicroenterprises and low income households from credit, savings and other financial services. Moreover, while the sector is highly advanced in some countries, it barely exists in others that lack enabling regulatory and institutional frameworks. As shown in the Economist Intelligence Unit’s Microscope on the Microfinance Business Environment, major obstacles remain in the way of improved innovation and scale. More work is needed in the areas of financial transparency, regulation and supervision, and in expanding the supply of financial services (e.g., the “rural gap”). Intraregional investment and collaboration will require greater harmonization of standards and prudential regulations. Just as regulators and policymakers are beginning to collaborate on these issues, the region’s MFIs and other actors will also need to keep working more closely together toward a shared regional system. The creation of an organization such as a federation for microfi nance for Latin America and the Caribbean could be a useful means of encouraging these regional partnerships.
Going forward, the MIF will leverage trends in microfinance to help expand innovation and scale in the industry. Increasingly, microfinance will include many types of financial services provided by myriad institutions using a broad array of technologies.
Under President Moreno’s leadership,MIF intends to promote this evolution. Our goal is to see the sector reach US$20 billion by 2012. With the dynamism in the market to date, this goal is well on its way.