MICROFINANCE IN LATIN AMERICA AND THE CARIBBEAN: PAST, PRESENT AND FUTURE

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1 MICROFINANCE IN LATIN AMERICA AND THE CARIBBEAN: PAST, PRESENT AND FUTURE Nancy Lee General Manager MULTILATERAL INVESTMENT FUND Multilateral Investment Fund Member of the IDB Group

2 Microfinance Trends in Latin America and the Caribbean Institutional and Regulatory Frameworks Microfinance and the Poor Next Generation Projects 2.

3 TRENDS IN MICROFINANCE LAC Microcredit Volume and Borrowers Lending Volume (US$ billion) Borrowers (millions) NOTE: Microcredit information includes only the portfolio portion devoted to microenterprises excluding housing, consumer and SME lending. SOURCE: Multilateral Investment Fund Dramatic and consistent growth in volume and clients 3.

4 TRENDS IN MICROFINANCE Active Borrowers and Depositors IN 48 MFIs IN LAC Borrowers Depositors MILLIONS NOTE: Portfolio information includes all types of credit products (Housing, Consumer, Microenterprise and SMEs). SOURCE: MIX Market Number of depositors has grown even faster than the number of borrowers 4.

5 TRENDS IN MICROFINANCE Average Loan and Deposit Size IN 48 MFIs IN LAC (IN US$) Loan Size Deposit Size 2,000 1,503 1, SOURCE: MIX Market Slight growth in average loan size; stable deposit levels 5.

6 TRENDS IN MICROFINANCE Lending Portfolio Shares BY CREDIT TYPE IN 48 MFIs IN LAC Housing Consumer Microenterprise Commercial 100% 8.6% 6.0% 26.3% 27.6% 50% 44.4% 53.3% SOURCE: MIX Market 0% 17.2% 9.7% Overall, focus remains on microenterprises 6.

7 TRENDS IN MICROFINANCE Funding Sources IN 48 MFIs IN LAC 100% Deposits Borrowings Other Liabilities Equity 57.1% 61.0% 50% 0% 21.8% 18.2% 6.3% 5.1% 14.9% 15.8% Local deposits are a growing percentage of MFIs funding sources: from 41% ten years ago to 61% in 2011 Result is more reliance on local markets and less vulnerability to external shocks 7.

8 TRENDS IN MICROFINANCE Portfolio at Risk >30 days IN 48 MFIs IN LAC PAR>30 days 6% 4% 3.6% 3.5% 4.3% 5.3% 4.8% 3.7% 2% 0% SOURCE: MIX Market Portfolio remains relatively strong, after some deterioration during the financial crisis 8.

9 TRENDS IN MICROFINANCE Interest Rates % 70% 60% 70 30% 0% NOTE: Portfolio yield SOURCE: MIX Market 84% 84 60% 60 40% 40% 31% 35% % 20 LAC Bolivia Peru 28% 28 Microfinance interest rates have dropped substantially, down to an average of 30% in the region 9.

10 SUMMARY OF THE EVOLUTION OF MICROFINANCE IN LAC FIFTEEN YEARS AGO NOW 200 microfinance institutions More than 675 microfinance institutions ~1.5 million clients ~15 million clients ~US$1 billion in Gross Loan Portfolio Public/multilaterals crowding out private sector Counter-cyclical Savings mobilization: optional Regulated: optional Funding: external sources important Focus: access to microcredit Interest rates: high double digits ~US$19 billion in Gross Loan Portfolio Private sector dominates Counter-cyclical, but not independent of macroeconomic events Savings mobilization: imperative Regulated: important Funding: mostly local funding Focus: variety and quality of financial services Interest rates: 30% and trending downwards 10.

11 INSTITUTIONAL AND REGULATORY FRAMEWORKS REGULATORY FRAMEWORK AND PRACTICES RANK COUNTRY SCORE CHANGE =1 Peru =1 Philippines =3 Kenya =3 Pakistan 75.0 =3 Uganda 75.0 =6 Bolivia =6 Cambodia Paraguay =9 El Salvador =9 Kyrgyz Republic 60.0 =9 Mongolia 60.0 =9 Rwanda 60.0 =9 Tanzania 60.0 =14 Colombia 55.0 =14 Ecuador =14 Honduras 55.0 =14 Madagascar =14 Mexico 55.0 =14 Mozambique 55.0 =14 Panama 55.0 SUPPORTING INSTITUTIONAL FRAMEWORK RANK COUNTRY SCORE CHANGE 1 Peru Bolivia =3 Armenia =3 Pakistan =5 Bosnia and Hercegovina =5 Chile =5 Colombia 60.0 =8 Ecuador 55.0 =8 El Salvador 55.0 =8 Ghana =8 India =8 Kenya 55.0 =8 Mexico 55.0 =8 Panama 55.0 =15 Brazil 50.0 =15 Nicaragua 50.0 =15 Philippines =15 Uruguay of the top 20 countries for regulatory practices are in LAC 11 of the top 18 countries for responsible finance framework (transparency, client protection and credit information) are in LAC 11.

12 DOMINANT ROLE OF REGULATED INSTITUTIONS TYPE OF INSTITUTION NUMBER OF INSTITUTIONS Regulated 180 PORTFOLIO (US$ MILLION) 11,924 (79% of the total portfolio) BORROWERS 8,380,537 (67% of the total borrowers) Downscales 46 4,376 2,567,755 Greenfield 63 2,934 1,258,737 Upgrades 42 3,978 4,318,066 Cooperatives ,979 Non regulated 495 3,244 (21% of the total portfolio) 4,095,842 (33% of the total borrowers) NGOs 376 2,473 3,850,506 Cooperatives ,336 TOTAL 2010 (20 countries) ,168 12,476,379 SOURCE: Multilateral Investment Fund 12.

13 RATINGS: 2010 More than ¼ of MFIs in LAC are Rated Institutions DIAMOND LEVEL SUB- SAHARAN AFRICA EAST ASIA AND THE PACIFIC EASTERN EUROPE AND CENTRAL ASIA LATIN AMERICA AND THE MIDDLE EAST AND NORTH AFRICA SOUTH ASIA TOTAL Number of MFIs reporting in SOURCE: MIX Market 4 Diamonds: published client and financial data and audited financial statements 5 Diamonds: all 4-diamond requirements, plus rating 13.

14 MICROFINANCE AND THE POOR Percentage of Microfinance Borrowers Below Poverty Line 80% 83% 40% 50% 43% 42% 26% 11% 0 East Asia and the Pacific (15) South Asia (23) Latin America and the Caribbean (38) Africa (6) Eastern Europe and Central Asia (14) Middle East and North Africa (6) Sample size: 102 MFIs SOURCE: MIX Market In LAC and other regions, microfinance reaches the poor as well as low-income borrowers 14.

15 MICROFINANCE AND THE POOR: IMPACT The research so far suggests that: POOR PEOPLE NEED FINANCIAL SERVICES Credit, savings and insurance help smooth consumption, deal with emergencies, pay for large expenses (education, weddings, funerals) Evidence that poor households use 8-10 different types of financial instruments in a year THE POOR VALUE FORMAL FINANCIAL INSTRUMENTS BECAUSE THEY ARE FAR MORE RELIABLE Consistent with the high repayment rate of microfinance loans THERE IS CLEARLY AN IMPORTANT ROLE FOR FORMAL MICROFINANCE INSTITUTIONS, BUT THE QUESTION IS WHETHER THEY ARE PROVIDING THE RIGHT SERVICES 15.

16 MICROFINANCE AND THE POOR: IMPACT NO SYSTEMATIC EVIDENCE THAT MICROCREDIT RAISES HOUSEHOLD CONSUMPTION An indicator of poverty reduction at least in the short run EVIDENCE THAT MICROCREDIT IMPROVES MICROENTERPRISE PERFORMANCE Investments, profits, new business starts GROWING EVIDENCE OF BENEFITS OF MICROSAVINGS For both enterprise performance and boosting and smoothing household spending AVAILABLE EVIDENCE FOR LATIN AMERICA AND CARIBBEAN IS LIMITED But consistent with this global picture (see FOMIN.org for literature review) THE MIF IS PLANNING AND CONDUCTING IMPACT EVALUATIONS Six studies in microcredit, microsavings and microinsurance on which products work, for what segments of people 16.

17 THE MIF S TWO DECADES IN MICROFINANCE THE MIF HAS SUPPORTED 212 MICROFINANCE INSTITUTIONS IN THE REGION Total of US$313 million in MIF financing OVER ONE QUARTER OF MICROFINANCE CLIENTS IN THE REGION BENEFIT FROM MIF SUPPORT DEVELOPING THE MICROFINANCE SECTOR REGION-WIDE Used technical assistance grants, equity investments and lending to help scale up microfinance institutions EMPHASIS ON PRUDENTIAL REGULATION AND AVOIDING OVER-INDEBTEDNESS Support for client protection and competition to drop interest rates PRIORITIZING RURAL AND FRONTIER MARKETS 17.

18 NEXT GENERATION PROJECTS: BEYOND CREDIT Remittances & government payments Microsavings MICROFINANCE as a platform for other products and services Green microfinance Microinsurance Basic services for the poor MICROSAVINGS Agent banking and mobile phonebased savings products for the poor MICROINSURANCE Preventive health care services, accident insurance, disaster insurance REMITTANCES AND GOVERNMENT PAYMENTS Savings products for recipients of remittances and social protection payments BASIC SERVICES FOR THE POOR Affordable, reliable services for low-income households (such as health screenings for MFI clients) \ \ GREEN MICROFINANCE Tools to help microfinance institutions assess their clients vulnerability to climate change and offer financing for green technology 18.

19 THE MICROFINANCE SECTOR IN LAC IS HEALTHY DESPITE GLOBAL FINANCIAL TURMOIL Commercialization, regulation, integration into financial markets have brought sustainability DEPOSITS ARE GROWING AS RAPIDLY AS LOANS Providing a formal store of value for clients and a stable local funding source for MFIs MFIs REMAIN FOCUSED ON MICROENTERPRISES AS CLIENTS Average loan and deposit sizes have not greatly increased, not seeing major mission creep with commercialization MICROFINANCE INTEREST RATES IN THE REGION HAVE DROPPED SUBSTANTIALLY LAC DOES WELL IN MICROSCOPE S RESPONSIBLE FINANCE INDICATORS AND IN RATING INSTITUTIONS MFI CLIENTS IN LAC ARE A MIX OF POOR AND LOW-INCOME POPULATIONS Loans to low-income clients may help raise the incomes of the poor MORE RESEARCH NEEDED ON IMPACT Microcredit promotes better microenterprise performance, while microsavings appears to boost both business investment and household consumption \ \ NEXT GENERATION MIF PROJECTS TESTING MFIs AS PLATFORMS FOR ADDITIONAL MICROFINANCIAL SERVICES Need to avoid overloading MFIs 19.

20 THANK YOU