Regulatory Threats to Microfinance Plus in Latin America

“Microfinance Plus,” the integration of financial and non-financial services such as health, education and savings, can help the client holistically, leading to improvements in the lives and livelihoods of clients and their families. However, MFIs offering Microfinance Plus have been facing increasingly challenging regulatory environments in a number of countries. Increased regulations will have significant consequences on MFIs and the end-clients if MFIs are forced to stop these offerings. Grassroots is dedicated to supporting the mission-driven MFIs that are working to continue offering these much-needed integrated non-financial services despite regulatory setbacks.

Microfinance Plus (MF+) and the importance of integrated offerings

Microfinance has a track record of over twenty years and, for the most part, that record has more positive than negative outcomes. The direct outcomes of microfinance have been questioned heavily over the past few years, however, and one result of that criticism has been an increasing focus on impact and, therefore, integrating non-financial services with traditional credit and loan products to better address the needs of the poor. This integrated approach, often called “Microfinance Plus” combines health, education, and other non-financial services with credit and pro-poor financial services, like specifically designed savings or insurance products. Such an extension of services supports the client comprehensively, not just as a borrower, and its success is judged by demonstrable improvement in the lives of the poor rather than just the financial viability of the MFI intermediary. By using a more holistic approach, MFIs have found that both the client and the MFI benefit when the clients are supported in using proceeds well and are more resilient in facing setbacks and challenges in their economic or personal lives.

Threats to MF+ multiply in Latin America through increased regulations

Despite successes of this approach both in terms of client benefit and MFI financial viability, Microfinance Plus is in jeopardy. Several countries in Latin America, a region that has pioneered many microfinance innovations over the years, are experiencing regulatory challenges to the MF+ model. An article in Microfinance Focus earlier this month presented the regulatory threat that MFIs in Bolivia are facing. Bolivian policy makers are attempting to “regulate and professionalize the burgeoning sector,” in part by prohibiting the provision of MF+ non-financial services. Other regulators in Latin American countries are also demanding that MFIs concentrate solely on financial products and services and drop other MF+, or severely limit MFIs’ ability to provide such services. In Ecuador, where there are caps on interest rates, regulations require that fees for non-financial services are included in the interest rate calculations. While not explicitly prohibiting MF+ services, this would effectively forbid MFIs to charge fees for MF+ which in most cases is expected to eliminate the ability of MFIs to use their networks and provide non-financial services in-house. While MFIs would still be able to make alliances and liaisons with third party providers, they cannot use their own resources and infrastructure directly which in some cases is more efficient. While some MFIs may be able to escape the new limitations by retaining a regulatory status not subject to the new limitations, this is clearly a second best solution. It would seem preferable for regulators to be supported in devising regulations that satisfy their prudential considerations while permitting the MF+ model to flourish.

Increased regulations will have significant consequences on MFIs and the end-clients

Increased regulations that obstruct the provision of MF+ services will have hefty consequences on both the MFIs and their clients. If regulations such as those in Bolivia are fully implemented it seems inevitable that MFIs will drop their non-financial services to focus exclusively on their financial products. But this trend ignores evidence that these non-financial services can be exactly what is required to enable clients to successfully navigate the financial terrain which leads to the success of the MFIs themselves! The Microfinance Focus article succinctly stated this idea: Poverty is not just a financial issue and cannot be resolved with pure capital injection. It is the ability to build relationships between clients and loan officers, the opportunity to get advice and support beyond the loan itself that makes a loan truly life-changing. Without it, the newly grown, regulated and competitive financial sector in Bolivia risks losing its roots – helping regular Bolivians live better lives. This has been seen in microfinance repayment crises around the world, when microfinance takes its eye off the goal of client welfare and ignores the larger picture that MF+ services such as health, education and livelihoods address, it is ultimately the entire industry that will feel the consequences.

Social investors can offer mission-driven MFIs the capital that is critical for them to continue offering MF+ and non-financial services

Grassroots is committed to supporting MFIs that pursue their social mission with a MF+ strategy. Grassroots believes that with mission-aligned capital and technical support, MFIs can successfully deliver products and services that directly address poverty in ways that are both affordable to clients and fully consistent with the MFI’s transparency, profitability and continued growth. Grassroots and other impact-focused investors can find and create relationships with these mission-driven MFIs in order to create partnerships and continue offering end clients the full spectrum of services they need. But we also need to more effectively make the argument that these MF+ institutions are fully viable and indeed are essential participants in a financial inclusion agenda that is sustainable by reliably benefiting its clients.