Populist governments across Latin America are re-shaping the environment in which microfinance institutions (MFIs) provide financial services to low income people. The proposals of these governments are similar -interest rate caps that are politically attractive but unfeasible, public intervention in financial services (as they have nationalized other industries) and a politicized approach to credit.
What may be surprising to those of us watching Latin America from afar is that not all the populists are alike. ACCION Network members, a group of 25 leading MFIs from across the region met last week in Barranquilla, Colombia to compare notes. They report wide differences from country to country. In some countries the populists take an approach that is makes it hard for MFIs to continue operating while in others they are willing to work more constructively with the providers.
In Nicaragua the government's on-again off-again support for the No Pago (I Won't Pay) movement led to passage of a law giving breaks to delinquent clients. The law actually incentivizes clients not to repay by giving delinquent clients a better deal than current ones. Delinquency has shot up across the board, causing two of the four regulated MFIs to collapse, and ending services to tens of thousands of clients.
Ecuador's policy involves scheduled incremental reductions in interest rates over a set period of time. While the rates require drastic change if MFIs are to achieve them, the policy at least has the virtue of providing clear signals and allowing time to adjust. But, it has heavy costs in terms of growth of services, especially for lower income clients. One estimate is that the reduction in rates will squeeze nearly $300 million in annual revenue out of the microfinance market, and this means that new investment in microfinance delivery capacity is likely to dry up.
In Bolivia, interest rate caps have been avoided through intensive ongoing dialogue between the government and the industry. The microfinance industry has agreed to work toward single digit interest rates (requiring a halving of current rates).
MFIs must adapt to the new environments. Their responses include both positive and negative elements. Encouragingly, MFIs in all countries are making major efforts to reduce costs and bring rates down. This includes searches for business model changes like mobile banking and other technologies, in addition to incremental cost reductions. They are also searching for new products to deliver that will benefit clients and generate some fee-based revenue, like bill-payment services, insurance, and money transfers.
On the other hand, interest rate caps make it harder to make very small loans (see my earlier blog post ("Why are microfinance interest rates so high?"). The result is a shrinking of the frontier away from the poorest clients. This, of course, is the opposite of the stated aim of interest rate caps. For example, one MFI reports that its break even loan size, given planned capped interest rates, would rise to $2,000. This is above its current median size, and would put over half of its client base at risk of loss of service. In Nicaragua, major human resources must be devoted to collections, and financial resources used up in write-offs, making it impossible to cut costs or rates until the portfolios recover.
The MFIs have found dialogue with politicians and regulators to be very helpful in moderating initially extreme proposals. In Bolivia, in particular, some mutual appreciation between the government and the MFIs has made it possible to have a more constructive dialogue about practical steps. The MFIs recognize that ultimately, their standing with the populists depends on convincing them that the MFIs play a valuable role in serving the people they both care most about - the majority at the base of the economy.