beyondbrics

The success of microfinance sometimes appears simply a matter of a brilliant idea (lending small amounts to unbanked entrepreneurs) and a charismatic leader (Muhammad Yunus, now a Nobel prize winner).

But microfinance’s future growth may depend on governments and big investors. So it’s significant that, according to a new report out today, Peru has the world’s best business and policy environment for microfinance. Bangladesh, home of the Grameen Bank, doesn’t even make the top 30.

Peru was ranked first, ahead of the Philippines, Bolivia, Ghana and Pakistan, in the 2010 edition of the Economist Intelligence Unit’s Global microscope on the microfinance business environment. Ecuador, El Salvador, India, Colombia and Kenya round out the top 10 nations.

The rankings take into account three elements: a country’s regulatory framework, its investment climate (including accounting standards), and the quality of the microfinance services offered.

On those criteria, Bangladesh is placed 33rd out of 54 countries, ahead of China which is 38th. Venezuela sank to rock bottom thanks to weak regulation and low levels of market development. Vietnam and Thailand are also in the bottom five.

Peru’s top position, for the second consecutive year, should come as no surprise. Its microfinance sector has grown at an average 19 per cent a year for the past two decades, with more than 220 lending institutions and 1.8m borrowers last year, according to a study by Richard Webb, former central bank governor and co-author of The Mustard Tree: A History of Microfinance in Peru.

The country is also a good example of what the Global microscope 2010 calls a “new and dynamic phase” of investment in the sector, exemplified by SKS of India’s IPO in July, which drew strong interest from US and European banks.

The report says the IPO “speaks volumes about new attitudes towards microfinance, which is increasingly viewed by both providers and investors as a commercially viable industry.”

In Peru, Care, a US-based charity, cashed in on the level of interest last year. It sold its majority stake in Financiera Edyficar, an institution it founded in 1997 with $3.5m, to Banco de Credito, one of Peru’s biggest banks, for close to $80m.

And this year three social investment funds – Dexia-Microcredit Fund, Oikocredit and the Calvert Foundation – found a new way to invest in Peru’s microfinance sector: partnering with the Inter-American Development Bank (IDB) to deliver $45m in financing to MiBanco, Peru’s leading microcredit institution.

Shari Berenbach, president and chief executive of Calvert Foundation, a non-profit lender with loans in 18 developing countries, told beyondbrics that the partnership with the IDB offered greater scale and security:

As a private investor, we don’t have the same kind of clout that an entity like the IDB may have…

As a sovereign lender they’re able to take advantage of certain benefits that are not available to the average private lender. And at time likes this, when the credit markets are pretty tied up, that additional comfort that they’re able to negotiate directly with governments becomes very important.

Of course, the business environment alone can’t predict how far microfinance will spread in a particular country. But Peru’s example should encourage policymakers and innovators in other countries.

Related reading:
Facing off on microfinance, beyondbrics
Global microscope 2010, Economist Intelligence Unit