Evaluating Efficacy: From Commercialization Forward, Understanding Microfinance Institutions in Evolving Central American Markets

Abstract

Given the increasing commercialization of the Latin American, and specifically. Central American microfinance sector, this paper seeks to analyze the efficacy of various types of microfinance institutions in order to identify which organizations investors can expect to have the most impact on poverty alleviation in the coming decade. In the process of measuring efficacy, it became clear that microfinance organizations must balance two contradicting goals: depth of outreach and sustainability- which must be measured using household impact assessments and portfolio assessments, respectively. Thi s paper examines two influential MFIs, a bank and an NGO in two Central American countries. in order to determine which organization is most efficient, and thereby. worthy of investment. These profiles demonstrate that banks and NGOs serve separate niches within the microfinance sector, offering different services and servicing different loan sizes, and, therefore, should be able to coexist within the Central American microfinance sector. Looking forward. there will be successful and not successful MFls of both types-NGOs and commercial banks. A successful institution will balance these two goals of outreach and sustainability, and to that end, will be willing to continually innovate and reassess their practices-and particularly, will incorporate lessons learned from the experience of their competitors.