Where Does Latin America's Microfinance Industry Stand Today? Luis A. Viada answers

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.

Microfinance, 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?

Luis A. Viada, member of the Financial Services Advisor board and executive vice president of MicroRate, Inc.: "The crisis in India was the product of a very unique set of circumstances. There were four main contributors to the problem. The first was the existence of two national microfinance programs—one public sector, the other private sector supported—both competing for the same markets in southern India. Next was the declaration of microfinance as a priority economic sector. Banks were obliged to invest 40 percent of their portfolios in those sectors. As a result, microfinance institutions (MFIs) were awash with excess funds, leading to aggressive growth and the emergence of less qualified MFIs Then ICICI Bank devised a program in which MFIs primarily acted merely as loan-origination offices. Loan volume soon replaced risk management as the focus of these institutions. Over-borrowing, defaults and tragedies ensued."

"Nicaragua has so far been Latin America's sole trouble spot—where deteriorating conditions led to a grassroots 'No Pago' moratorium. Growth in the rest of the region has been more measured and regulators have tried to set up safeguards to prevent predatory practices. In the 2011 Economist Intelligence Unit 'Microscope' global report on microfinance conditions, 12 Latin American countries appear in the top 20 overall rankings, with Peru and Bolivia in 1st and 2nd place. However, asset growth is accelerating in Peru and Colombia, and Mexico's interest rates are among the highest. Problems may still arise, but so far Latin America is one of the bright spots of microfinance."