Micromanagement: Fixing Microfinance in Argentina

Article excerpt

Despite Argentina's legacy of welfare payments to support the needy, 23.4 percent of the country's population remains below the poverty line. Microfinance, which provides credit solutions for the very poor, has the potential to improve the situation of the impoverished. Though the microfinance sector has existed in Argentina since 1997, it remains largely underdeveloped. Over time, government support for microfinance has increased substantially, as evidenced by the creation of organizations like FONCAP (Social Capital Fund), a private-public fund that provides capital for commercial microfinance banks, and CONAMI (National Commission for Microcredit). Now the government is the single largest funder of microfinance in the country. Yet microfinance opportunities are still lacking. However, a mere increase in the quantity of funds available to the microfinance sector will not wholly solve the problems with microfinance in Argentina. The government's present system of heavily regulated money disbursements threatens to suffocate the very industry it seeks to bolster. To be truly effective, public initiatives must provide a greater quantity of funds to institutions, but more crucially, these funds must come with much fewer strings attached.

The demand for microfinance services certainly exists, but Argentina's government has not dedicated enough resources to the sector for the young industry to meet that demand or even to satisfy its growth projections. In the province of Buenos Aires alone, a December 2006 study found that 440,000 people would be interested in microfinance services, but at that time, the whole country's loan portfolio was only 30,000 loans. Although at that point the Andares Foundation, a reputable microfinance think tank, predicted a 62 percent annualized rate of microfinance portfolio growth for the next seven years, such impressive growth has yet to occur. While the government cannot reasonably bear all the blame for the failure to meet projections and address demand, it can help solve these problems.

Microfinance depends largely on scale. The more money a microfinance institution (MFI) receives, the more loans it can give. And the more loans an MFI gives, the less overall risk it incurs. In addition, as a bank caters to more borrowers, per-unit costs decline. With less risk and lower costs, the bank can offer even more loans. Then once the industry reaches a certain size, MFIs can issue debt and equity capital in national and international markets to finance their activities. But the Argentine industry has yet to reach that point. For this reason, the government may play a crucial role in the small and underdeveloped microfinance sector by providing additional funds that allow the industry to grow until it becomes self-sustainable.

The microfinance sector also faces the problem of excessive government regulation. While the regulation is in place to prevent abuse of funds and corruption, FONCAP and CONAMI funds often come with so many strings attached that beneficiaries question their decision to accept the money. For example, beneficiaries must fill out extraordinary amounts of endless and unnecessary paperwork, a process that wastes time and money. But particularly problematic is the fact that these organizations cap the interest rates that banks can charge their borrowers. …