Where Does Latin America's Microfinance Industry Stand Today? Kai Schmitz answers

February 3, 2012

The following appeared as part of an article in the January 5-18, 2012 edition of the Inter-American Dialogue Financial Services Advisor. It is reproduced on Microlinks in four parts.

Capital letter QMicrofinance, which had been hailed as a tool to help the indigent escape poverty, last year became increasingly associated with misery and controversy, as debtors in places like India and Bangladesh were driven to suicide and critics decried the industry's interest rates as exorbitant. Where does Latin America's microfinance industry stand today, following a year when the negative sides of microfinance captured headlines? To what extent has microfinance in Latin America avoided abuses seen in other parts of the world? Has the concept been successful in the region, and what is the future of microfinance in Latin America and the Caribbean?

Capital letter AKai Schmitz, senior financial sector specialist at the Payment Systems Development Group of the World Bank: "The current discussion about the benefits of microfinance is important, especially in light of its expansion over the past few years. However, there is a risk of throwing the baby out with the bathwater. The benefits of microfinance and its development impact have been widely analyzed and demonstrated before its large expansion began at the start of the millennium. Following the claim that only a very small portion of microfinance demand was met because there was not enough capital available, many donors increased their funding for MFIs and, at the same time, new, often commercial private investors offered capital for microfinance. The result was comparable to the beginning of the housing crisis and other debt bubbles: a lot of capital was chasing a limited number of borrowers. As a result, many MFIs, under pressure to put the newly raised capital to work, reduced their lending standards or more aggressively pursued borrowers."

"With hindsight, it seems likely that the number of suitable borrowers was not as large as claimed so that either these borrowers received loans that were too large, or loans were made to borrowers who under more conservative appraisal standards should not have received them. The microfinance crisis should therefore be a cause to carefully analyze the lending standards and the role commercial capital can (and should) play in microfinance. The recent commentary by some that microfinance just unduly exploits poor borrowers is as simplistic as the previous calls for a massive increase of capital."