10, April, 2013

Guide to Microfinance in Latin America

Unique features of Latin America’s recent microfinance evolution - including innovations in regulations and technology - reflect lessons learned that may be interesting for other regions.

Developing countries around the world struggle with supplying resources to the poor. Though social assistance programmes are one option, the challenge of creating dependence amongst the intended beneficiaries always arises. Hence the draw of microfinance, an institution with origins in Europe in the 1800s as a ‘cooperative movement’ involving urban wage earners and small farmers, that has been adopted in Latin America and has grown at a two-digit rate for the past decade. This Guide reviews the concept of microfinance as developed in Latin America, underscoring its unique features. We present an overview of its recent evolution and the current state of the market. The different types of institutions offering microcredit in the region are also presented and analysed. Next, regulations and practices of Latin American institutions are presented, as they are key to understanding microcredit in a context where neither guarantees nor documentation is mandatory. Finally, the Guide reviews technologies and strategies that microfinance institutions use to increase profits and presents what may be the next frontier for the industry, integrating services to support company development combined with microfinance. The Guide concludes with lessons that may be relevant for other contexts, as well as highlighting key publications and organisations related to microfinance in the region.

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Key Lessons:

  • Specific policies and requirements vary from country to country, but a set of good regulatory practices in Latin America includes: minimum capital requirements; strict standards for related-party lending; increased access for MFIs to engage in more complex or risky operations subject to fulfilling more demanding requirements; ensuring adequate scale for efficiency; and promoting competition.
  • Strategies implemented in Latin America show that capital investments in technology are essential in order to reduce risks, but they need to be matched with proper organisational innovations that involve personnel management. Technological devices reduce costs, but it is loan officers who need to be capable of managing issues related to microcredit with the clients. Communication skills and mutual trust are essential where no guarantees exist.
  • In spite of its importance and widespread implementation, evidence on microfinance’s effectiveness in Latin America is limited, signalling a need for more and better research.

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