SAN SALVADOR – Bolivia, Peru and Ecuador have the best conditions for microfinance in Latin America, according to a new scorecard presented here by the Inter-American Development Bank (IDB), the Andean Development Corporation (CAF) and the Economist Intelligence Unit (EIU).
The index, called “Microscope”, was commissioned by the IDB and CAF from the EIU, a specialized service provided by the prestigious journal The Economist. Microscopio analyzes such factors as the investment climate, institutional development and the regulatory framework for microfinance.
The results of the first evaluation, which covered 15 Latin American countries, were presented on Tuesday at a meeting of bank regulators and microfinance practitioners the eve of the Tenth Microenterprise Forum, which will be held in San Salvador October 3-5.
“The microfinance industry has developed considerably in Latin America and the Caribbean, where there are some six million microcredit clients,” said Sandra Darville of the Multilateral Investment Fund, an IDB affiliate that has provided support for major microfinance networks in the region.
“But we are still only reaching one tenth of the poorest entrepreneurs,” Darville added. “This index can provide guidance to countries in creating conditions conducive to microfinance, especially in the bigger countries and in rural areas, so that the millions who need access to formal financial services can get it.”
According to the index, which countries can use to compare their performance with that of their neighbors, the smaller, poorer countries beat out the larger, richer nations in terms of microfinance. After the three Andean countries, the microfinance industry has the best conditions in El Salvador, the Dominican Republic, Nicaragua and Paraguay. Venezuela and Argentina came in last.
Robert Wood, senior analyst for Latin America and the Caribbean for the Economist Intelligence Unit, noted that ideal conditions for microfinance differ from those usually considered for traditional investments. The index thus shows that microfinance can thrive in countries with a weaker business climate.
“It’s not enough to have stable macroeconomic and political conditions if you don’t have other key conditions that are more specific to microfinance regulation and operation,” said Wood. “Naturally, countries with good microfinance environments can make more progress if they improve their political stability, capital markets, judicial systems and other factors.”
The index also underscores that while microfinance has developed considerably in Latin America, progress has not been even in all the countries. In most, there is still room to improve aspects such as regulations on the establishment of microfinance institutions, the variety of services they offer their clients, coverage by credit bureaus and effective dispute resolution.
In addition, the review found that in recent years many countries in the region have carried out auspicious reforms for microfinance that may eventually bear fruit. However, on a cautionary note, the Economist Intelligence Unit states in its executive summary of the report: “One cloud on the horizon for some countries, however, is the prospect that current governments could yield to political temptations to undertake counterproductive measures—such as competing directly with microfinance insttutions through subsidized public programs, placing caps or ceilings on interest rates, or allowing the upgrading of NGOs to formal, regulated status without proper capitalization, supervision and oversight.”
Alejandro Soriano, CAF's deputy director for microfinance and small and medium-sized enterprises, said that the Microscope index should promote effective microfinance development in countries that do not have specialized institutions, and where government authorities may help by supporting the establishment of prudential regulatory frameworks.
“The findings of the study were in general terms what many of us expected. However, we needed this to be published to prompt action rather than opinions, to prompt changes in our countries, which, with few exceptions, have troubling poverty levels,” Soriano noted.
The Microscope index takes into account 13 criteria related to the effectiveness of the regulatory framework for microfinance, the degree of institutional development for microfinance and the investment climate in Argentina, Brazil, Bolivia, Chile, Colombia, Dominican Republic, Ecuador, El Salvador, Guatemala, Mexico, Nicaragua, Paraguay, Peru, Uruguay and Venezuela.
Based on these criteria, data from government and private sector sources, academic studies, news reports, interviews with experts in the region and evaluations conducted by the Economist Intelligence Unit, the index assigns points. It can then be used for comparison purposes and to analyse the strengths and weaknesses of the business climate for microfinance in each country.
The MIF and CAF expects that in the coming years Microscope will conduct an even more in-depth analysis of microfinance conditions in Latin America and will survey more industry stakeholders, such as regulators and bank examiners, and will cover more countries in the region. Its findings will be released annually.
The index was presented on the eve of the Tenth Inter-American Microenteprise Forum organized by the IDB and the Ministry of the Economy of El Salvador. Over 1,200 participants are expected, representing microfinance institutions, credit unions, commercial banks, social investment funds, foundations, research centers, consulting firms, government agencies and international organizations.
OVERALL SCORE
1
Bolivia79.4
2
Peru
74.1
3
Ecuador
68.3
4
El Salvador
61.5
5
Dominican
Republic
57.5
6
Nicaragua
53.8
7
Paraguay
52.9
8
Chile
48.3
9
Mexico
48.3
10
Colombia
46.1
11
Guatemala
44.0
12
Brazil
43.3
13
Uruguay
35.8
14
Venezuela
27.4
15
Argentina
26.8