Microfinance: Latin American Style
Spain, June, 11 2007 -
The research paper "Acceso a servicios financieros en Latinoamérica. Revisión comparada de prestación de servicios microfinancieros en Ecuador, Colombia y Perú" ("Access to Financial Services in Latin America: A Comparative Review of Better Practices in Microfinance Service Provision in Ecuador, Colombia and Peru") by IESE researcher Francesc Prior looks at how to resolve the lack of access to financial services in Ecuador, Colombia and Peru, a factor that clearly impedes economic development in the region.
The level of financial penetration in Latin America and the Caribbean is low compared to that of developed countries, and even to that of other developing areas of the world. In Latin America and the Caribbean, private sector credit represented, on average, 28 percent of the GDP between 1990 and 1999. In Asia-Pacific countries, it was 72 percent, while in Middle Eastern and Northern African countries the figure was 43 percent.
A detailed analysis of Ecuador, Colombia and Peru shows that 66 percent of the population above 18 years of age in the case of Ecuador, 55 percent in Colombia and 65 percent in Peru have no access to basic financial services. These figures contrast with those of developed countries such as Spain or the United States, where just 2 percent and 10 percent of the population lack access to these services.
The macroeconomic indicators for financial deepening show similar conclusions. The percentage of private sector credit with respect to the gross domestic product of Ecuador, Colombia and Peru in 2003 were 23.4 percent, 19.9 percent and 20.8 percent, respectively. These numbers are far below the 158.3 percent average of developed countries, though they do correspond to the average for Latin America.
In an attempt to correct this lack of access, which explains the low banking activity in the Andean countries, a few financial institutions in Ecuador, Colombia and Peru have recently made efforts to develop the supply of microfinance services. Two types of institutions are spearheading this endeavor: banks specializing in microfinance and the leading banking institutions in each country.Banks Specializing in Microfinance
Latin American banks that specialize in microfinance have managed to develop sustainable and profitable business models that reach population segments not served by traditional banks. They have done so by developing specially designed products (i.e., Banco Caja Social Colmena in Colombia), by making electronic payment formats more efficient (i.e., Mibanco in Peru) and by improving practices in analyzing and monitoring credit risk (i.e., Banco Solidario in Ecuador).
Nonetheless, these institutions face important challenges for expanding their offer to the rest of the "non-banking" population. Due to their small size, they lack the infrastructure for applying improved banking practices in products, risks and alternative channels and for optimizing the impact of remittances, which is handled by the leading banking entity in each country.
Leading Banking Institutions
The leading banking institutions in Colombia, Ecuador and Peru have decided to apply downscaling strategies to develop alternative distribution models for low-cost financial services. They aim to use new technologies and to optimize their existing infrastructures. Notable cases include those of Banco del Pichincha-CREDIFE (Ecuador), Bancolombia (Colombia) and Banco de Crédito (Peru). The first two stand out for their ability to create alternative distribution models for their financial services. Ecuador's Banco Pichincha-CREDIFE, by establishing itself in its existing distribution network of banking agencies, and Bancolombia, by developing alternative distribution channels, have managed to develop efficient business models that, due to their scale, could convert much of the population of these countries into the "banked variety." Peru's Banco de Crédito, meanwhile, stands out for its technological leadership; it uses electronic media to distribute microcredits.
Countries such as Spain, Germany, Canada and France have inclusive financial systems. The positive experiences of these nations demonstrate that public policies which promote the required scale of institutions specializing in microfinance are necessary for prompting a mass transition toward a "banked" population. Thus, the Colombian government's program "Banca de las oportunidades" ("Bank of Opportunities") has sought to apply these improved international practices by creating an organization to provide financial services to co-op, financial and banking institutions which, due to their size, do not have individual access to the latest technologies. Colombia's policy to promote supply, which follows in the footsteps of Bansefi of Mexico, has not yet been replicated in Ecuador or Peru. Even though Ecuador and Peru have better regulatory situations for developing microfinance, they lack public policies for promoting economies of scale that could resolve supply problems.
Remittances by immigrants in Andean countries also have a growing financial impact, particularly on the economies of low-income households. Therefore, the model for distributing services at low cost, which aims to resolve the supply problem, should also include mechanisms to make the most of the remittances´ impact.