Making Sense of the Commercialization of Microfinance in Latin America: Lessons for Nicaragua

This paper attempts to shed light on the issues arising from the analysis of the economic principles behind microfinance, citing case studies of Bolivia and Chile, while drawing lessons for Nicaragua.It discusses four economic principles underlying microfinance. These include:

• Peer monitoring is a necessary element of microfinance;
• Lenders have an incentive against providing the first loan to a poor individual (or a group) who has never received a loan before;
• Without competition, interest rates might be higher than otherwise for proven borrowers;
• If after repaying principal and interest on a loan, a borrower keeps an amount greater than 0 but less than a minimum acceptable subsistence level, then it is more efficient for the government to provide the differential amount than the whole subsistence amount.

The paper further reviews case studies of Bolivia, Chile and Nicaragua in light of the economic principles outlined. It concludes that:

• Competition is very intense and its negative effects on expansion must be understood and taken into account;
• Government can play a vital role in the development of the industry;
• Using the wrong techniques might hinder expansion, outreach to the poor, and profitability;
• Regulators must be aware of the dangers of over-indebtedness that result from intense competition among providers and the pernicious effects of consumer credit techniques on microfinance.