Characteristics of Microfinance in Asia and Latin America

Microfinance developed in Asia and Latin America under very different ideological, political and economic conditions. Hence, there are distinctive differences in the industry in the two regions. A brief look at the history of two of the most famous MFIs—the Grameen Bank in Bangladesh and Banco Sol in Bolivia—gives an informative picture of how the industry in the two regions can be characterized.

Modern microfinance was born in Bangladesh in the 1970s, in the aftermath of the country’s war of independence, when Muhammad Yunus, an economics professor at the University of Chittagong, began an experimental research project providing credit to the rural poor. That experiment, driven by a strong sense of developmental idealism, developed into what is now the world’s most famous microfinance institution, the Grameen Bank, and institutions that replicate its pioneering methodology worldwide.

Microfinance in Latin America developed under quite different conditions. In Bolivia, a collapsing populist regime led to widespread unemployment. Banco Sol, a pioneering microfinance institution in the region, developed to address the problem of urban unemployment and provide credit to the cash-strapped informal sector. The notion of commercial profitability was embraced relatively early in this approach.

As a result of the different conditions under which the very first microfinance institutions (MFIs) were founded, the industry in the two regions developed distinctive characteristics. In the beginning, “ by comparison with Bangladesh, the Bolivian intervention was typically urban rather than rural, less concerned with poverty and more focused on micro-enterprise. It targeted the ‘economically active poor’—people with established businesses that needed capital to grow. … from the start, Bolivian microcredit was itself seen as a business, potentially as a branch of commercial banking” (Rutherford [2003] p.5). Many of these differences still characterize the industry in the two regions today.

For example, data from various sources suggest that Asian MFIs lead the world in terms of both breadth (number of clients) and depth (relative poverty of clients) of outreach. In their analysis of over 1,500 MFIs from 85 developing countries, Lapeneu and Zeller (2001) find that Asia accounted for the majority of MFIs, retained the highest volume of savings and credit, and served more members than any other continent. The most recent data from the Microbanking Bulletin² , reinforces these findings. The average size of loans and deposits are often taken as a simple proxy of depth of outreach. By these criteria, Asian MFIs have among the lowest Loan and Savings Balance per Borrower, even after adjusting for GNP per capita, suggesting that they are effectively reaching the poor.

See Table 1: Outreach Indicators by Region [ PDF 120.4KB | 1 page ]

The same data indicate that Latin American MFIs are ahead of Asia in terms of financial viability. On average, Latin American MFIs registered with the Microbanking Bulletin show a higher return than those in Asia. Latin America MFIs are also further advanced in the process of drawing in external funding through savings deposits, with registered institutions on average in the region having a deposit-loan ratio of 29%, roughly double the comparable figure for Asia (Ramirez 2004).

Regional data of course cover up some wide disparities within each region. Microfinance is a highly concentrated industry and the giants of the industry—BRI, BRAC and ASA—account for more than 50% of the total number of borrowers from the more than 300 MFIs worldwide who report to the MIX Market. BRI alone accounts for nearly 40% of their gross loans. Bangladesh, Indonesia, Thailand and Vietnam, all in Asia, have the largest number of members served and the largest distribution of loans and mobilization of savings in terms of GNP in the world. In contrast, the two most populated countries in Asia—India and the PRC—have very low outreach, despite a high concentration of the region’s poor. In Latin America, there is very strong skew, with MFIs playing a major role as financial providers to micro-enterprise in Bolivia and Central America, but being largely insignificant in the larger countries of Brazil, Mexico and Argentina. There is wide disparity in terms of financial viability as well. Within Latin America there is a wide range, with the larger MFIs showing a return on assets in 2001-02 well above the average for the commercial banking sector in their countries, and with the smaller MFIs in the region, on average, operating at a substantial financial loss when capital costs are calculated at commercial rates.

The strong financial performance of the larger MFIs in Latin America is linked with a trend toward commercialization of microfinance in the region. In 1992, Banco Sol became the first example of an NGO becoming a commercial bank, and thus became the first regulated microfinance bank. Banco Sol surpassed other Bolivian banks in profitability and became the first MFI to access international capital markets. Following this successful example, at least 39 other important NGOs worldwide transformed themselves into commercial banks over the period 1992–2003 (Fernando [2003]). Given that the failure of commercial financial institutions to reach the poor provided the initial impetus for MFIs, this new trend is paradoxical and raises the question of whether the initial poverty reduction objectives of the transformed NGOs will be subjugated to commercial criteria (so-called ‘mission drift’). This potential disadvantage is still unexplored empirically, but the advantages of transformation are clear: increased access to funding and regulatory authority, freeing the institutions from dependence on donor funds and capital constraints on growth, and allowing them to offer a wider range of financial services.

There is also a recent trend in the opposite direction—traditional banks getting involved in microfinance in a variety of ways. In both regions there are examples of large state banks moving into microfinance, such as Banco Nacional de Costa Rica and Bank Rakyat Indonesia’s (BRI ) Micro Business Division³ Recently there is a similar trend in the private banking sector as well. Until it was closed in April 2004 for noncompliance with prudential regulations, Bank Dagang Bali (BDB) was an early example of commercial banking involvement in microfinance in Indonesia. Rural banks in the Philippines are the dominant providers of microfinance and the USAID-funded Microenterprise Access to Banking Services (MABS) program aims to assist participating rural banks in expanding the services they provide to the micro-enterprise sector. Pakistan has established a number of private commercial banks that provide retail microfinancial services. Malaysia, Nepal and Thailand also have programs in effect to encourage commercial bank involvement in microfinance.⁴ In Latin America, Banco Agricola Comercial (El Salvador), Banco del Desarrollo (Chile), Banco Wiese (Peru) and Banco Empresarial (Guatemala) are examples of private commercial banks that are involved in varying degrees with microfinance. Falling in between state involvement and private commercial initiatives is a program in India started by the National Bank of Agriculture and Rural Development (NABARD), under which a number of private banks have become involved in microfinance. ICICI Bank in particular has experimented with some innovative approaches to microfinance involvement under the NABARD program. These trends place microfinance squarely within the conventional financial sector and raise important issues of governance and regulation in connection with the new institutions.

In both regions, therefore, we see similar trends towards a provision of a wider range of financial services, a move away from traditional group lending to individual loans, and in summary a greater shift towards commercialization of the sector, with Latin America being more advanced in this process. However, in both regions, NGOs remain important providers, and in Asia they are still the dominant mode of delivery. The NGO sector is still, with exceptions, not financially sustainable and continues to rely on subsidies of various sorts. In these circumstances, given what seems to be a fragmenting MFI sector in many countries with a division between NGO-based lending and commercially- driven banking operations, there is a strong need for studies that shed light on the poverty consequences of different modalities. If NGOs are to continue to draw on subsidized finance, there is a need to demonstrate that they can reach the poor and do so in a cost-effective manner, compared with other forms of poverty targeting interventions. If public policy is to encourage the transformation of NGOs into regulated financial institutions or if the delivery of small loans is to be left to the commercial banking sector, the concern that the client base will change so that poor clients are excluded by application of tighter commercial criteria must be addressed. In such instances there is a need to learn more about the poverty consequences of the ongoing changes in the MFI sector in many countries.

The views expressed in this paper are the views of the author/s and do not necessarily reflect the views or policies of the Asian Development Bank Institute nor the Asian Development Bank. Names of countries or economies mentioned are chosen by the author/s, in the exercise of his/her/their academic freedom, and the Institute is in no way responsible for such usage.

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