Impact of crisis on Latin America not easy to generalize: Ayesha Wagle, MicroCredit Enterprises

By Matthew Fuchs

Jan.12, 2010: With its mature and dynamic microfinance sector, Latin America is one of the world’s largest microfinance investment markets. As a result, the region’s response to the financial crisis has profound implications for microfinance investment globally. To gauge the current state of the investment climate in Latin America, Microfinance Focus has conducted a survey of fund managers. This is the second in our series of survey findings.
Here are the views of Ayesha Wagle, Senior Vice President at MicroCredit Enterprises (MCE), on the effect of the financial crisis across the region and how it has highlighted the importance of strong regulatory system. MicroCredit Enterprises is a non-profit organization that uses a guarantor model to leverage private capital for microloans in the developing world. MCE has historically allocated a significant amount of its portfolio in Latin America, with 40% of MCE’s loan portfolio currently invested in the region.

Microfinance Focus: Has funder appetite for the region been affected by the financial downturn?

Ayesha Wagle, MicroCredit Enterprises

Ayesha Wagle: Funder risk aversion has been high throughout the recent global financial crisis, and with that has come a decrease in general investment appetite. Latin America is no exception, but it’s important to note that investment appetite is highly contextual, and varies significantly across the countries of Latin America. Countries that boast strong regulatory environments, and relatively well-developed banking sectors relatively unscathed by the global financial crisis, are still very appealing for many microfinance investors. In contrast, countries that have been hit hard by the global downturn are receiving very little in terms of new international funding.

Microfinance Focus: How has the downturn affected MFI demand for funds? Is there a funding shortage or is excessive liquidity an issue?

Ayesha Wagle: Although it’s hard to generalize, overall we have seen a build-up of cash on the balance sheets of our partner MFIs. In fact, because MicroCredit Enterprises offers no pre-payment penalties on its loans, we have received a few pre-payments this year with two of them coming from MFIs in Latin America. Excessive cash in these cases seems to be the result of two different issues. First, loan officers are focusing on portfolio quality, rather than growth, and cash is not being re-lent as quickly as it had been historically. Secondly, demand for new loans from microfinance clients has diminished in some countries as a result of the economic downturn.

Microfinance Focus: A recent Fitch report argues that the impact of the downturn cannot be generalized across regions but varies from country-to-country. Which countries have fared better or worse than others?

Ayesha Wagle: I fully agree with the statement that each country in Latin America has been impacted by the global downturn in different ways, and that it is impossible to generalize across the region. One obvious example of a country that has been hit disproportionately hard is Nicaragua, as remittances have fallen, export prices have dropped and foreign investment has diminished amid populist rhetoric. In contrast, Peru has fared relatively well because of its strong banking sector, good regulatory environment and prudent fiscal policies.

Microfinance Focus: Multilateral agencies and DFIs have stepped-up their investment activity over the last year, for example the IFC’s Microfinace Enhancement Facility, OPIC’s new fund for Latin America. Do investors face increased “competition” from multilateral agencies?

Ayesha Wagle: Multilateral agencies have always played an important role investing in this space. While this new money could be seen as increased competition, my view is  the more money in the microfinance sector, the better, as long as that money is distributed prudently. As more funding becomes available, it will force investors to offer improved products, which is undoubtedly a good thing for the industry.

Microfinance Focus: The agitation for regulatory change in Nicaragua has been well publicized. Are there any other moves toward regulatory change in the region? If so, what effect could this have on investment in the region?

Ayesha Wagle: Financial systems in Latin America are already better suited to weather financial crises than they were a decade ago, but the current global financial crisis has highlighted the need for further regulatory changes in certain areas. Many of the current discussions revolve around improving loan loss provisioning, credit bureaux, capital adequacy requirements and financial data disclosure. These potential regulatory changes would overall serve to enhance the region’s regulatory environment, which is always a good thing from the perspective of investors, and would likely lead to further investment in Latin America in the future.

Related Posts:

• Downturn has not reduced investor interest in Latin America: Beth Castleberry, Global Partnerships
• There is still a funding shortage for smaller MFIs in Latin America: CEO, Envest
• Excess liquidity an issue in Latin America: Eelco Mol of Triple Jump
• South American countries were better prepared for crisis: Rita de Boer, Triodos microfinance funds
• OPIC Board Approves $125 MN Microfinance Fund for Latin America
• ANALYSIS: Is microfinance investment on decline in Latin America?
• E. European and Latin American microfinance could be hit by slowdown: Fitch
• OPIC’s microfinance funding to help recovery in ‘dried up’ economies

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