Microfinance in Latin America and the Caribbean: the curse and blessing of ethnic diversity

Latin America is one of the most ethnically diverse regions in the world, and is also characterized by high levels of poverty. As a poverty alleviation tool, microfinance emerged in the region and has significantly evolved over the years. However, the implications of the region’s high diversity on the performance of microfinance institutions (MFIs) are however not known. We attempt to fill this gap by providing evidence on the association between MFI performance and indices of ethnic and linguistic fractionalization. Our findings suggest that fractionalization promotes MFI financial performance but is detrimental to outreach depth. These results are robust to various sensitivity tests.