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The public and private sectors in Latin America need to get their act together to build a strong and sustainable microfinance sector, the main vehicle of inclusion of low-income people into formal financial systems, Princess Máxima of the Netherlands and María Otero, two of the 25 members of the UN Advisory Group on Inclusive Financial Sectors, told BNamericas.
Despite progress in the area of financial inclusion in Latin America in the past few years, the vast majority of the region's population and micro and small enterprises still lack access to financial products and services.
A recent IDB study shows only 10% of the potential market in Latin America and the Caribbean was being served by microfinance institutions in 2007.
In a region with such a huge need of financial services, "we need to create strong and profitable microfinance institutions providing a range of financial services, not only credit but also saving products," said María Otero, who is also president and CEO of US non-profit microlending organization Accion.
Banks in Latin America - the region's most important providers of financial products - typically serve people in the middle and high-income brackets in a region where in 2006 37% of the population were poor, namely people with incomes amounting to less than twice the cost of a basic food basket, according to data from the UN Economic Commission for Latin America and the Caribbean.
Part of the market not served by banks has been tapped by microfinance institutions, which have quickly expanded in the last few years, fueled by strong demand from microentrepreneurs and fresh funding from investors and depositors.
The region's microfinance institutions grew by 31% in scale in local currency terms and 22% in outreach to end 2007 managing US$13.7bn in over 12.4mn loans to low-income clients in 15 countries, according to the most recent report from the Microfinance Information Exchange.
The public sector, for its part, has an important role to play in creating helpful policy environments that promotes financial inclusion, said Princess Máxima.
"Governments play a key role in establishing regulatory frameworks that ensure sustained long-term development of microfinance institutions".
Governments should also promote consumer protection, transparent prices and competitive market, Otero and Princess Máxima said.
The two UN advisors expect more competition to put pressure on high interest rates charged on microloans in Mexico, where one of the leading microlenders, Banco Compartamos, charges an annual interest rate of 80%.
Compartamos, Mexico's most profitable commercial bank, which posted a 43.9% ROE in 2007, has said it is planning to lower its annual percentage rate by 300 basis points by the end of this year.
Levels of interest rates seen in the Mexican microfinance sector mainly reflect very high demand and low supply, said Princess Máxima.
An illustration that competition does put pressure on interest rates is Bolivia's microfinance sector, one of the most competitive microfinance markets in the world that today offers microloans at interest rates as low as 17%, María Otero said.
The UN Advisors Group on Inclusive Financial Sectors consists of 25 individuals representing governments, central banks, regulatory agencies, microfinance institutions and other financial services providers, private sector financial institutions, civil society, development agencies, donors and academia globally.