DEVELOPMENT-LATAM:
Toward a New Financial Democracy?
Analysis by Ulysses de la Torre*

MEXICO CITY, (IPS) - Two multi-billion-dollar industries are converging in Latin America, driven entirely by lower-income citizens trying to improve their economic situations.

Microfinance and remittances sent home by migrant workers are having social, economic, development and marketplace ripple effects across the region -- some positive, some negative, but all worth bearing in mind as these global trends continue.

A movement born in the 1970s has since spread across the developing world that today can be summed up in one word: microfinance. Simply put, it is a business model that offers favourable terms for any combination of savings accounts, insurance, loans (known more commonly as "microcredit") or mortgages to those historically considered too poor to warrant the attention of banks.

At the same time, the money migrant workers send home has increased annually since serious record-keeping began, which was roughly a decade ago in Latin America. Remittances, as these money transfers are often called, were dominated for a long time by money transfer operators such as Western Union and Moneygram.

The notion that poor people do not have enough money to warrant financial services was once conventional wisdom in the global banking community. Those days are clearly long gone, however: 40 percent of the 2.8 billion dollars in remittances to El Salvador last year landed in areas where less than 10 percent of people have bank accounts, and the proportional breakdown of the 20 billion dollars sent to Mexico is nearly identical.

The businesses of microfinance and remittances today are growing at double-digit rates, due in large part to increasing efforts of commercial banks and microfinance institutions (MFIs) to leverage the two businesses off each other. Industry professionals universally agree, however, that many obstacles remain to fostering greater advancement in this area.

"One of the reasons why this has not happened more is that the awareness of this potential just started a few years ago," says Juan Buchenau, executive vice president of the Washington-based Microfinance International Corporation.

"The second reason is because remittances are used very much for consumption, so the surpluses there are not as big as one would imagine. In addition, the linkage of microfinance and remittances still has to be consolidated in the form of different financial products, which themselves require piloting and fine-tuning, before they can rapidly expand in the market," he says.

As this development picks up pace, ripple effects are occurring at several levels. One is a growing "culture of consumption", as perceived by Buchenau, though he is far from the only one noticing this. Surveys from the Inter-American Development Bank show it is especially strong in El Salvador and Mexico. The main concern about such high consumption rates is that they imply less money for longer-term investment and development.

An elementary response would be to channel more of this money toward uses that are more "productive" than consumption -- savings, loans, mortgages, in short, the very services upon which the microfinance concept was built. But how exactly to do this is the source of much debate.

Some development experts, such as Jennifer Isern, the lead microfinance specialist at the Consultative Group to Assist the Poor, say that "way too many MFIs are jumping into remittances because it's the flavour of the month."

Isabel Cruz, the executive director of a network of rural MFIs in southern Mexico, reports consistently higher levels of savings and investment than most of Latin America, along with rising employment.

But the high savings and its spillover effects among the MFIs under Cruz's purview so far seem the exception to the rule. Many MFIs speak of backlash when they attempt to encourage clients to do something with their money other than just spend it.

For Caja Libertad, a Mexican MFI based in the state of Querétaro, Director of Marketing César Izurieta says proprietary research of the local market indicated that a lot of incoming clients were turned off with attempts by other MFIs to get them to use other services with their money.

Remittances represent more than just money, however, and they also represent more than the possibility for a better future. They are changing the way societies operate, and as tempting as it may be to try isolating the influence that remittances and microfinance have on each other, certain facts render such an aspiration unrealistic.

The first is that microfinance institutions not only mobilise financial resources but also tend to be cooperatively owned and managed by the very people they serve. This puts them in a position of being both eyewitnesses as well as active participants in the economic behaviour of lower-income communities. The second is that the transnational nature of remittances makes it virtually impossible to discuss one aspect, such as social impact, without taking another into account, such as economic policy.

The latter characteristic becomes more evident in the circular logic required to examine the effects of remittances on domestic labour markets south of the Rio Grande: the more money a community receives from its migrants abroad, the greater potential the community has for economic development. This potential is then undermined by more residents migrating to chase the very money meant to improve conditions that cause migration.

Mexico and El Salvador are among a handful of developing countries with enough experience toward this end that glimpses are emerging of what other nations might expect when they arrive at a similar stage. The only way forward is to launch as many fronts as possible and look for the overlap.

*Ulysses de la Torre is a journalism fellow at the Instituto Tecnológico Autónomo de México in Mexico City. This article is the first of a five-day series that examines the ripple effects of remittances and microfinance from social, economic, development and marketplace perspectives.