It seems that the topic of microfinance is in fashion, because now everyone is talking about it. Even politicians comment on it. Some without knowing what it is, make statements in the media. Some even believe that microfinance is synonymous with small business. Gross mistake. I share some criteria that are valid to understand microfinance in Peru.
It is a tool
It is a social development tool that aims to combat poverty in general. Microfinance is not an academic concept, nor "small" finance. Microfinance in Peru is (singular) a tool that has its own unique dynamics and technology.
It is an industry
Microfinance (IMF) is an industry in the sense that it is custom made. It is not the traditional industry that is known, but because of the processes it uses, it is called the “microfinance industry”. They are processes that must be fulfilled in the established times and with goals set in advance. By having processes, it approaches management performance based on good corporate governance.
They are financing channels
They are financing channels in two ways. First, because the funding line providers (whatever the organization) channel resources to a microfinance institution, and this in turn, does so through placements to entrepreneurs linked to micro and small enterprises (MYPE). This MFI-MYPE relationship confuses many people who believe that it is the same. In this relationship line, it is only here that the MYPE or SME (Small and Medium Enterprise) appears.
Use processes
The MFI uses various measurement processes as indicators of credit and business development. By using processes, it is also understood that there are risks to be taken, which is why another key actor appears in microfinance. These are business risk management methodologies (in some cases even software) (Credit, financial, operational, strategic, etc.). Of all the risks, reputational in strategic is devastating if not properly managed.
Use internal controls
Microfinance as a social tool is exposed to possible risks (sinister if risk occurs), many of which are in the same organization. Hence, the proper application of internal controls is essential for transparent management. Audit and supervision are valid in this part. Hence, some microfinance institutions are supervised by the SBS and by FENACREP in the case of credit unions. Even external audits for unsupervised organizations are essential to access greater sources of financing, such as the case of non-governmental organizations. Mibanco was an NGO before transforming into a bank.
It has regulatory standards
The microfinance industry, being financial in nature, has regulatory standards established by the Superintendency of Banking, Insurance and Pension Fund Administrators (SBS). For example, the Basel rules are applicable to certain MFIs, often outside their scope. Controversial, but real standard for the microfinance industry.
They have their own technologies
Microfinance in Peru has developed its own technologies that make it different from MFIs in other countries. Each technology, including methodologies, is specific to each country and between them as well. The credit technology of a municipal savings bank is not the same as that of a “communal bank” of such an NGO. An Edpyme differs greatly from a financial or credit union.
Information technology
Information technologies are also different. A correspondent ATM of a municipal bank is different from that of a commercial bank, not only for its cost, but for the services it provides.
Credit technology
Although some MFIs such as municipal savings banks have come very close to traditional banking, and this in turn has approached microfinance, “microcredit” continues to be the main flagship product of the microfinance industry. Not only does it differ in interest rates, but it is a product that still remains in the field of microfinance. Banks will rarely be able to approach microcredit because of the operating costs it represents.
Financial products
Given the reality of the country, MFIs develop their own financial products ranging from microcredit and micro-savings to microinsurance. Some NGOs develop successful community banks and certain municipal savings banks are oriented to solidarity or rural loans, for example.
