Microfinance in Brazil: The Enigma and the Paradox
The development of the microfinance industry in a range of different Latin American countries in the last forty years has proven that it is possible to build a financial sector capable of meeting the demands of micro enterprises in a sustainable way. We can safely say that the vision of a few pioneers of the 1980s has become best practice in the microfinance sector of today.
Existing examples of successful microfinance institutions are extremely important and serve as a reference point for thousands of small (and a few large) initiatives that attempt to replicate their success. Yet the expansion of this industry continues to be restricted to a few small countries.
The big countries still do not possess a microfinance industry of similar magnitude or outreach. In each big country, the “big country enigma” can be explained by a series of specific structural factors and current circumstances that slow ― or even prevent ― the rise of a broad microfinance industry, which can be integrated into the mainstream financial sector. However, these factors cannot be generalized across other big countries in the region.
Many studies have identified the lack of favorable conditions for the creation of microfinance in Brazil. But why is there also not a strong microfinance sector in this country, as opposed to those which one finds in Bolivia or Peru? Looking beyond these Latin American examples, we can see that microfinance also has limited outreach in the large countries of Asia and to a lesser extent Africa, as compared to the experience of small countries in those regions.
What then is behind the “big country enigma”? Is a “microfinance revolution” only possible in small countries? The answer to these and other questions demands a deeper analysis, going beyond current conditions that facilitate the growth of microfinance in small countries and limit it in the big ones. We need to examine the underlying institutional and political issues inherent in microfinance and in big country governance.
In academic debates on microfinance, a broad consensus exists about the need for sustainable, permanent financial institutions in a market segment where the supply of traditional financial services is rationed. At the same time, best practices throughout the world demonstrate that there is no pure market solution for microfinance. The creation and most development of financial institutions specialized in microfinance are affected by exogenous factors, such as changes in regulation/legal framework.
In this context, government has a key role to play ― whether at the national or the international level (the latter in the form of development assistance). Government intervention is justified and necessary in the face of the market failure that leads to rationing of the supply of financial services to micro and small enterprises. However, the goal of government intervention should be to facilitate the construction of the market for microfinance. Governments should create incentives to promote the development of markets, not substitute government administration of distribution channels for market allocation mechanisms.
The rich experience of the Latin American microfinance industry shows that government actions are infused with economic and political factors that make it difficult to build a broad microfinance sector. Experience also shows that small countries can more easily overcome these challenges.
One possible explanation is that economic and political conditions as well as improper regulations have limited the rise of a broad microfinance industry are not as strong in small countries. These conditions can be addressed by development assistance. In the large countries, in contrast, fewer possibilities exist for them to be addressed by foreign aid in large scale.
The big country enigma is the result of a paradox that is inherent in microfinance itself. To develop microfinance requires government support. However, in big countries, the capacity for government intervention in markets is also big. Big country governments are likely to enter the market, disturbing market conditions and discouraging or even suppressing private investors, rather than stimulating market conditions to facilitate the entry of private actors.