Finance

Here, There, Everywhere

Microfinance

Peru’s microfinance sector has deep roots dating back to the 1950s and 1960s. Today, as the sector continues to grow, many analysts have identified Peru as a model for microfinance […]

Peru’s microfinance sector has deep roots dating back to the 1950s and 1960s. Today, as the sector continues to grow, many analysts have identified Peru as a model for microfinance development that could be replicated around the world. Over the past few years, Peru has garnered increasing international attention for its positive business and policy framework for microfinance development. In 2010, the Financial Times called Peru “the world’s best climate for microfinance.“ In 2013, Global Microscope, a global ranking of financial inclusion and microfinance sectors praised Peru for ranking number one for its microfinance business environment five years’ in a row.

According to responsibility, a social investment consultancy firm, between 2001 and 2011, Peru’s microfinance loan portfolio grew fifteenfold. The key to this growth has been the business and regulatory environment that Peru has developed for the sector. In particular, what has made Peru’s microfinance regulations unique has been a combination of extensive supervision, strict regulation, and a lack of market intervention by the state. While many developing countries have attempted to provide government subsidized or “zero-cost“ microfinance as a tool for poverty reduction, Peru has relied on a private sector model. The result has been a more efficient, more robust, and lower cost sector. Interest rates in Peru’s microfinance sector have consistently fallen over the past decade, dropping from an average of 44% in 2003 to 29% in 2013 according to MIX

Looking more specifically, there are a few key principles that have made Peru’s microfinance regulations so successful. First, there is extensive supervision of the operations and portfolios of microfinance institutions (MFIs); second, there is no discrimination between foreign and domestic capital in the sector; third, apart from limited exceptions, there has been no subsidized public sector competition for private sector MFIs; fourth, MFIs are allowed freedom in terms of capital allocation; fifth, MFIs are given freedom to determine their own interest rates and commissions; and finally, the market allows a range of types of financial services providers to take deposits, from large banks, to credit unions, and regional savings banks.

Another important element has been the role of credit bureaus. One of the main challenges for the microfinance sector globally is attempting to assess creditworthiness for a segment of the economy that often lives informally. Peru has made remarkable strides in developing credit monitoring systems that include MFI clients. Since 1997, Peru’s banking and insurance regulator, the SBS, which runs a public credit bureau, has required that MFIs share their clients’ information, including total debt and default history. At the same time, international private sector credit agencies, such as Equifax also began covering MFIs in Peru. As a result, Peru now has one of the most effective and complete credit information systems of any developing country.

As the sector moves forward, one major challenge is access in rural areas. Peru has experienced rapid urbanization over the past few decades, with around 70% of the population now living in urban areas. As a result, many MFIs have focused their growth efforts on Lima and provincial capitals. However, according to the IFC, this leaves around 8 million people in underserved areas for microfinance. More than half of rural households in Peru live below the poverty line, so access to finance can play a significant developmental role in coming years.

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