LATIN AMERICA - The Latin American microfinance scene is growing fast, and institutions and donors are waking up to the operational risks embedded in the business. As competition from commercial banks for this lucrative business heats up, donors are starting to fund initiatives to investigate and suggest remedies for risk oversight.
The Latin American microfinance market has long been dominated by non-governmental organisations (NGOs), which can often have a relatively unsophisticated approach to finance, says Sergio Navajas, an investment officer at the Inter-American Development Bank (IDB) based in Washington DC. Early work by the IDB to help such businesses included basics such as explaining reporting and accounting processes, he says. Since then, the industry has grown quickly, now serving about six million clients in the region, according to the last large-scale survey of the industry undertaken by the IDB. An increasing number of these clients are dealing with regulated institutions.
Despite advances, significant risks still remain. Loan officers have often been too cosy with local communities, leading to questionable lending practices, says Navajas. Increasingly, microfinance organisations are moving these key staff from location to location to prevent them building overly strong ties to the customers they serve.
The sheer number of clients served in microfinance means systems need to be robust and sophisticated. Commercial banks are professionalising the process as they move into the area: they already have systems in place for lending to businesses and individuals, and staff who understand risk. Even so, some banks have been caught out as they expand services from a small number to thousands of clients, Navajas says. NGOs, which have even less experience of finance, face even greater difficulties.
And, lastly, most of the money for microfinance comes from donors, who often take a more laissez-faire approach than private owners. This sometimes leads to a lower level of monitoring of processes.
These and other difficulties are propelling more money into risk management for the industry. With donor funds, Costa Rican fund manager Omtrix is set to develop tools and training for selected microfinance institutions in market, credit, liquidity and operational risk, and will seek to help clients adopt best international standards as they move towards Basel II compliance.
Omtrixs Risk Management Facility (RMF) will be available to firms based in Peru, Ecuador and Nicaragua initially, says Omtrix manager Juan Carlos Pereira. The programme will then be rolled out more widely throughout Latin America and the Caribbean. The RMF will only be offered to institutions that are regulated, which are still in the minority. Omtrix says it wants to work with these institutions in part because the facility is also tailored to help firms meet Basel II deadlines.