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Microfinance is defined as small scale loans designed for less fortunate citizens. Ever since its creation, an economic development tactic that was hoped to greatly benefit developing economies, has been under much scrutiny. Why is this supposed poverty alleviating lending tool under such scrutiny? Well a quick outlook on Compartamos Banco profit statistics along with knowing that their loan default rate is near one percent is a good place to start. Latin America has taken Yunus’s social welfare Microfinance model and turned it into a profit generating giant with an interest income of 74.7% in the Mexican Microfinance sector. Although profits are good for some, they usually come at a cost for others. The others in this case have been the public Microfinance institutions in Mexico. Compartamos has dominated the Microfinance competition in Mexico and been able to charge interest rates of up to 120%. Due to this competitive advantage, other Microfinance institutions have been forced to adopt this dangerously high microcredit lending rate. Unlike the country of Peru, Mexico’s Microfinance institutions have stood out for their high profit business models. In Peru, the country has been able to establish a complétive microcredit rate that changes with the relative price of good in the market. The competitive rate has allowed for balanced competition along with a national commitment to Microfinance. Commercial banks have started to purchase Microfinance institutions in the country of Peru and this has had a large impact on the success of the sector. With the backing of a large corporate structure, Microfinance institutions have had the ability to expand operations to the rural sector of the economy which has a high demand for microcredit. Peru’s has been the pioneer for Microfinance in Latin America and Mexico should learn from their success story.
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Frawley, Dylan Kevin, "Establishing an Effective Interest Rate in Latin America’s Microfinance Sector: A Comparative Analysis Between Mexico and Peru" (2019). Senior Projects Spring 2019. 293.
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