The Commercialization of Microfinance in Latin America
This study examines the impact of regulation on the performance of Latin American MFIs. It uses a proprietary data set of 202 MFIs in 15 Latin American countries from 1997 to 2007.
An increasing number of unregulated microfinance NGOs in Latin America are considering transformation into regulated financial institutions. Regulation enables MFIs to mobilize public deposits, access private capital sources, improve governance and transparency and, ultimately, achieve scale and financial sustainability. At the same time, leading practitioners are concerned about the impact of regulation on the poverty alleviation mission of MFIs.
The study first evaluates the relative success of regulated and unregulated MFIs in terms of financial viability, reflected in self-sustainability and return on assets, and social impact, reflected in breadth and depth of outreach. Results indicate that:
- Regulatory status has no direct impact on MFI performance;
- Institutional characteristics such as age, size, capital-to-asset ratio, loan-to-asset ratio and write-off ratio are highly significant;
- Country context is a key determinant of MFI performance;
- Macroeconomic stability, remittance flows and regulatory quality contribute to MFI performance;
- Impact of economic freedom, political stability and property rights is negligible.
