The roots of financial democracy
Monday, August 7, 2006
By Charo Quesada
The poor in Latin America and the Caribbean tend to live on the margins of the financial mainstream. Unfamiliar with and distrustful of commercial banks, they rely entirely on cash transactions and informal financial services such as those provided by loan sharks.
Improving the situation of millions of families who cannot save money, obtain loans, increase their assets, mitigate risks or transfer resources securely is one of the central objectives of the IDB?s conference ?Building Opportunity for the Majority.?
In recent decades, financial services for people at the base of the economic pyramid have been in the hands of microfinance institutions that provide loans to millions of microentrepreneurs and self-employed workers. More than five million people in the region receive microcredit totaling close to US$5 billion annually. Even so, the supply of microfinance services remains insufficient given its market potential: barely 8 percent of demand for credit and 18 percent of demand for deposit services is being covered.
Mar?a Otero, president of Acci?n Internacional, a microfinance institution that works with affiliates in 20 countries worldwide, believes that this model is successful, replicable and profitable. ?In the past few years, microfinance has been mainstreamed,? she said. ?It has become self-sufficient by offering additional credit services, such as payment processing, remittances, savings and insurance, which are attractive businesses that produce positive results,? she reported. Reaching the base of the pyramid takes time and is costly, she added, but with the right model it can be done.
Some commercial banks have begun ?reaching down? to low-income groups to offer credit and other services. This is a unique market that requires the right information and methodology. ?You have to understand that the microfinance market is a completely different business model than the commercial bank model,? explained Ignacio S?nchez-Asia?n, general manager for South America of Grupo BBVA of Spain, one of the commercial banks most active in microcredit. ?Commercial banks invest heavily in technology, whereas microfinance revolves mainly around networking, communities and personal relations.? In microfinance a motorcycle is more useful than a computer, he added.
A former president of the Central Bank of Argentina, Alfonso Prat-Gay, warned that to intervene appropriately, ?you need reliable information on the investment resources of the base of the pyramid and also on what knowledge the bankers have of this reality.? He explained the need for ?governments to create a regulatory system with built-in incentives for microfinance institutions to grow and commercial banks to develop interest in microfinance.?
The experts agreed that government agencies should learn to better manage the issue of financial democracy. The legal and regulatory systems are generally inadequate and prevent mainstreaming of the majority. There is no proper framework for guaranteed transactions that would allow for bigger loans at lower cost. This situation constrains credit and increases lending rates, transaction costs and risk.
The IDB Group plans to implement an action plan to expand financial services for the majority, especially for immigrant remittances, with the goal of increasing the percentage of transfers through the formal banking system and promoting the development of additional products, such as insurance, health care, education and housing.
