Microfinance Focus, October 12, 2011: With excellent legal framework, sophisticated regulators and a government commitment to use microfinance to expand financial access to the poor, Peru’s microfinance business environment has been ranked as world’s best for third consecutive year by Economist Intelligence Unit.

According to the Economist Intelligence Unit report ‘Global microscope on the microfinance business environment 2011, Peru deepened its strong foundations in the past year, with new rules to improve financial soundness, and with a proposed law on mobile banking, among the first in Latin America.

Latin America has the largest number of top-performing countries in this year’s Microscope. Eight of the top dozen countries by overall rank are in Latin America.

This study was funded by the Multilateral Investment Fund (MIF), a member of the Inter-American Development Bank Group (IDB); CAF (Latin American Development Bank); and the Netherlands Technical Assistance Trust Fund at IFC.

Among the top ten countries this year, Mexico’s score climbed the most from a year ago, rising 13 places, to joint 10th overall. Microfinance pricing has become more transparent in Mexico, and dispute-resolution procedures have been improved, boosting the country’s scores for client protection. Accounting practices have also become more standardised, adding a measure of consistency across the sector.

India’s ranking plunged from a year ago, reflecting a massive deterioration in the country’s microfinance operating conditions, which culminated in a crisis late in 2010 that struck Andhra Pradesh. According to the study, a lack of credit discipline by lenders and poor regulatory oversight led to a surge in micro-loan portfolios, prompting the state government to issue a draconian decree that sharply curtailed MFIs’ lending operations and impeded their ability to compete with state-sponsored microfinance providers.

Pakistan and the Philippines top the regional rankings for East and South Asia. These countries both finished in the top ten globally, signifying strong environments for microfinance, the reports says.  Countries such as Thailand, Vietnam, Sri Lanka and Nepal continue to wrestle with both regulatory restrictions and uncompetitive markets, constrained by government players that impede the provision of microfinance.

Political unrest in a number of Arab countries earlier this year temporarily halted the growth of microfinance in those markets and stymied regulatory reform. One of the worst-affected countries, Yemen, went from the best to the worst performer in the region, falling to 44th place from 27th a year ago. This was the largest decline for any country, except India.

Kenya, one of Sub-Saharan Africa’s strongest and most stable countries, boasts the highest score in the region and finishes fourth globally. Uganda, ninth in the world, is not far behind, and is tied for first place globally for Regulatory Framework and Practices. Clients in both countries benefit from active microfinance markets, in which institutions offer a wide range of services beyond microcredit.Transparency and customer protection are still lacking in these countries and in the region more broadly.

Uruguay’s microfinance environment rank has changed the most since last year. Uruguay strengthened oversight of the financial sector broadly and microfinance in particular, mainly through a series of regulatory reforms and a focus on risk-based supervision.