Latin America as Microfinance’s beacon

While increasing attention is being given to the less than scrupulous elements of the microfinance industry, I thought it curious that the Economist Intelligence Unit’s annual “Global microscope on the microfinance business environment”, released last month, seems to go a bit in the opposite direction. Not that it ignores the ethical challenges facing microfinance—indeed, the very point is made rather clear in the categories the EIU uses to describe the business environment: supporting institutional framework, stability and regulatory framework. I realize that these sorts of qualitative measures do have an effect on profitability, but investors looking for some discreet idea of the sorts of returns to expect from the 55 countries covered in this index will be left wanting. Perhaps it’s still too early to draw any conclusions on that front, but if the industry ever wants a critical mass of foreign capital, it still has to figure out how to be more quantitative in the way it expresses itself.

In any event, here’s a snapshot of the latest ranking:

Latin America clearly dominates the top of this index. From the report’s key findings:

Latin America has the largest number of top-performing countries in this year’s Microscope. Eight of the top dozen countries by overall rank are in Latin America, with Peru and Bolivia placing fi rst and second, respectively. Notably, the high overall scores are driven by comparatively strong results globally in the Supporting Institutional framework category, with a particularly robust showing on credit bureaus, which are relatively well established throughout the region. As a group, the Latin American countries perform less well on Regulatory Framework and Practices, although top performers Bolivia and Peru, joined by El Salvador, Ecuador, hold their own, placing in the first eight spots in the overall ranking. Peru stands out for having one of the most sophisticated microfinance sectors in the region, owing to the effective supervisory capacity of its principal regulator, the Superintendency of Banking, Insurance, and Pension Funds, and a favourable regulatory framework that sets out well-defined rules for both regulated and nonregulated MFIs. El Salvador is the only country in the region that scores relatively highly for its deposit taking framework.

Here’s the thing: much like the World Bank’s Doing Business index, Transparency International’s Corruption Perceptions index or any variety of indices that come out of the United Nations apparatus, these sorts of rankings are mere estimations of relativity. More specifically, just because Peru is at the top of this particular list doesn’t mean it’s a haven for microfinance transparency or that investing in Peruvian MFIs is a sure bet or even that microfinance is alleviating poverty there, whatever that even means; all this shows is that Peru is a safer place for socially responsible investment allocation than Vietnam. But then we didn’t really need this index to tell us that, did we?

Actually, what I find more interesting here is that there’s even any data at all for China, and that Mexico ranks as “highly” as it does.

Relativity — not just for physicists.

EIU report downloadable here.

2 responses to “Latin America as Microfinance’s beacon

  1. The index may have a paradoxical effect. It merely reflects the degree of hype and enthusiasm for the country. For example, Mexico is widely known to be over-heating, the degree of over-indebtedness in the country is astonishing. Peru, Colombia and Ecuador are probably the next frothiest countries on the planet. This is merely an ex-post measure. Like rating agencies that downgrade countries after collapses, the last thing Mexico needs right now is additional MF investment. I lament the fact that it is not number 55, that would probably limit the supply of (generally unsophisticated, uneducated) capital to the country, make the MFIs compete more fiercely for said capital, encourage them to think twice before on-lending such capital, and tighten the standards of due diligence all around. Instead, any Mexican armed with an ID card and the ability to sign his or her own signature will have access to credit on any street corner, even if used simply to repay the loan to the microfinance bank on the opposite street corner, and any bank that has a set of vaguely audited accounts will be able to attract money from the likes of BlueOrchard and responsAbility, the same funds that provided the fuel for the Nicaragua crisis.

    The only lesson we can learn from this is that we fail to learn any lessons from the past. Expect the next Latin American crisis soon. It might not be covered with such fanfare in the Economist, however.

    As an aside, according to a recent ILO report, the top performing countries (Peru and Bolivia) also suffer the highest rates of child labour. Not wishing to imply any causality, which could be spurious or run in either direction, it is interesting to note that this statistic does not garner much discussion. Is it conceivable that flooding a country with credit for labour-intensive, high-volume, so-called micro-enterprises could encourage a short-term rise in employment, albeit employment of the rather cheap variety – own children? This would be a rather unfortunate unintended consequence of the apparent economic development that microfinance brings to a nation. One might expect the self-regulatory bodies to track such statistics, but alas they conveniently fail to include the rights of children in their measures of how astonishingly miracluous microfinance is. It is politically unacceptable in microfinance to discuss child-labour in the same sentence as the miracle cure for poverty.

    28% of Peruvian and Bolivian kids work in contravention of the ILO standards (nearly 3x the continent average), in the informal sector, which is financed increasingly by microfinance banks. If these countries don’t collapse under the traditional speculative hype, expect them to collapse in a generation when they wake up to the fact that no one bothered to go to school and sold tomatoes instead. Welcome to over-hyped microfinance.

    ILO reference: http://www.bbc.co.uk/news/world-latin-america-18058079

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