Where Does Latin America's Microfinance Industry Stand Today? Michael Chu 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?

Michael Chu, senior lecturer at Harvard Business School and managing director and cofounder of IGNIA Fund: "Latin American microfinance today continues to grow steadily, delivering to low-income clients billions of dollars in an ever-widening array of financial products, at declining prices (Bolivia's BancoSol has lower rates than Grameen Bank). At the same time, it is providing superior returns to investors (In Mexico, Compartamos Banco's market capitalization is twice what it was before the global financial meltdown). This is the result of two powerful forces, commercial markets and intense competition, acting in unison under a regulatory framework that promotes both fiscal prudence and transparency, while keeping politics at bay. This combination has ensured through two decades that the greatest amount of people is being reached, with the best alternative available, at the lowest possible price and in the least amount of time."

"While the pace of microfinance in the region as a whole has been dramatic, in the largest countries of Latin America there is still ample room to grow. While specific institutions may face crises and even die, microfinance as an industry will continue to thrive. It will be a pillar in the future economic development of Latin America. All these factors were absent in Andhra Pradesh. The debacle in India was not a failure of microfinance but the collision of two different interpretations of financial inclusion: should the poor access finance through the political process or through the market? Once the crisis erupted, two interpretations of regulation also came into play: should the regulator define product or policy? Now, the world can judge."