Downscaling Institutions and Competitive Microfinance Markets: Reflections and Case Studies from Latin America

This paper investigates the differences between the various types of large financial institutions downscaling into microfinance to determine whether these institutions will serve the social objectives of the Latin American microfinance.

The authors interviewed representatives from international consultancies, quasi-private investors and multilateral agencies to understand their views on downscaling in Latin America. The views highlight:

• Downscaling is inevitable, but it will be slower in countries where regulatory and other constraints hamper the progress of financial institutions;
• Due to low growth in major sectors in Latin America, large banks are left with high levels of underutilized liquidity and few mainstream investment opportunities;
• Staff and management of banks are not well-equipped - culturally, technologically and physically - to deal with the needs of large numbers of potential clients running low-income enterprises.

The authors present case-studies of MFIs downscaling, and their strategies in Peru, Ecuador, Venezuela, Colombia, Haiti, and Paraguay.

The authors conclude that:

• Downscalers already have significant share of microfinance market in several countries;
• Consumer finance companies are entering microenterprise loan market;
• The "Demonstration Effect" may encourage new entrants;
• Current microfinance clients receive better service and have access to more credit.