Government intervention in microfinance: Threat or Opportunity?
Monday, November 12, 2007
(via IADB news)
Government intervention in microfinance could bring funds and services to millions of poor people and improve the institutional framework of the industry?at the same time, it could deliver a knockout punch to private MFIs.
By Peter Bate
It would appear that the rosy wave that swept several Latin American countries in the 2006 elections is about to hit microfinance in the region. In January 2007, the Banco Industrial de Venezuela, a government financial institution, announced the intention to purchase Prodem, one of the most important microfinance institutions in Bolivia. In April, Venezuelan President Hugo Ch?vez proposed issuance of US$1billion in bonds to finance soft credit for small producers in Ecuador, Nicaragua and Haiti. Nicaraguan President Daniel Ortega applauded the idea. And in May, the Bolivian government headed by Evo Morales inaugurated the Banco del Desarrollo Productivo with a US$60 million credit line for micro-loans with low interest rates.
Is 21st-century socialism going to nationalize Latin American microfinance institutions? Perhaps the fact that Colombian President ?lvaro Uribe?s government has launched its own program to promote microcredit, Banca de las Oportunidades, suggests that the public sector?s growing activism in the industry has no ideological goal other than to get the costs of financial services down in order to reach the largest number of poor people in the shortest time possible.
For even though the microfinance industry has reached a notable stage in development in Latin America, serving some six million people and generating US$6 billion annually in microcredit, after nearly three decades barely 10% of the potential demand has been met, according to the Multilateral Investment Fund of the Inter-American Development Bank.
Direct government intervention in microfinance is opposed by people who have dedicated all their lives to building this industry. Warnings were heard before the victories by the socialist candidates in last year?s elections. In the Microenterprise Forum held in September 2006 in Quito, several panelists expressed concern for the signals that were already emanating from the public sector.
Ernesto Aguirre, a consultant at the World Bank and ex-superintendent of banks in Colombia, believes that consensus in the industry on governments as providers of microfinance services seems to be “Thanks, but no thanks!”, based on the experiences in the 1970s and ?80s, when they attempted to popularize credit programs through subsidies that turned out to be unsustainable and generated a culture of not paying.
Government intervention can take several different forms that end up reducing incentives for private-sector involvement, observes Pedro Arriola, general manager of Banco ProCredit Ecuador. In some countries, it is caps on interest rates; in others, banking rules and regulations; and in others, a strong state-bank tradition. “As private operators, we want the government to work with us instead of competing against us,” says Arriola. However, results of the SWOT evaluation show that government-run programs almost always end up in the column of “threats” and not “opportunities.”
Nevertheless, broad consensus also exists on what governments can do to support microfinance development, from providing conditions of macroeconomic stability and legislative clarity to promoting specific activities. Pilar Ram?rez, ex-president of the microfinance institution FIE in Bolivia, points out that the government can promote training, support access to technology that lowers the costs of microfinance services or make banking hours more flexible for workers and entrepreneurs. Ram?rez was chosen by President Morales in 2006 to manage a state bank promoting expansion of microfinance services particularly to sectors such as manufacturing and agro industry.
Even though Bolivia has developed one of the most successful microfinance industries in the world, based on free-market policies in the last 20 years, ram?rez reflects and says that perhaps she and her colleagues erred in feeling too proud. Many Bolivian microfinance organizations that started up as nonprofits overnight became lucrative businesses with shareholders. Their high interest rate assets, although technically justified, lacked political substance.
State intervention in microfinance tends to be justified by the slow expansion of the industry, which still has not succeeded in penetrating very deeply into rural zones. But as IDB microfinance expert Sergio Navajas explains, two decades ago this industry did not have great presence in urban zones either, and today nobody disputes the success of that expansion.
Paradoxically, the microfinance industry appears to be a victim of its own success. The institutions that led the development filled the void left by the failure of the state-run loan programs. The NGOs began to experiment with microcredit without state guardianship between the 1970s and 1990s, when the regulated industry of financial services for low-income people began to take form. The prestige of microfinance ended up putting the industry on government agendas throughout the region.
Does the microfinance industry run serious risks due to this interventionist wave? The answer will depend as much on the forms such intervention takes as on its magnitude. Navajas, who has studied the history of Latin America?s microfinance industry, estimates that it will not be threatened by isolated initiatives, which, if added together, would not represent a fraction of the US$6 billion in annual credit volume mobilized by private institutions in the region.
In a study on several possible scenarios for microfinance at the end of 2006, the Consultative Group to Assist the Poor (CGAP) outlined two scenarios on state interventionthat could arise by 2015. Referring to government-launched programs in the region, the CGAP wrote: “The potential damage of these populist approaches in Latin America is particularly worrisome because a number of countries have large and sustainable private microfinance sectors.”
Under the most optimistic scenario, CGAP envisions some governments following the best international examples (see sidebar on page 17) to provide direct and efficient microfinance services through big state banks covering enormous geographical areas. Other governments could opt to offer banking to a large segment of the poor population through poverty reducing programs. A notable case is the Programa Oportunidades de M?xico, which has opened banking accounts for more than one million indigenous families.
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