by Carlos Arenas
Executive Director
According to the Inter-American Development Bank, only 30% of the population in Latin America, and only 10% of their enterprises (including microenterprises) have access to credit. At the rural level, only 4% of the rural families in the Latin American region have access to credit from a financial institution.1 This lack of credit has allowed the birth of microfinance organizations throughout Latin America. At the same time, the success of the microfinance industry in Latin America and elsewhere has been a wake-up call for the banking industry in the entire region. In fact, during the last few years the main umbrella organization of banks in Latin America, the Latin American Federation of Banks (FELABAN), has been very proactive promoting the idea of providing microfinance services to the poorest members of society.2 Some people call this process “downscaling,” meaning that banks are now going down the social ladder to offer services to people who were previously excluded from services due to their economic level.3
Nicaraguan banks have just started doing this. This past June, the WCCN staff had the opportunity to talk to an officer in a commercial bank in charge of creating this new service for that bank. Banks in Nicaragua and other Latin American countries are learning how to start microfinance programs from people with experience in the industry. In fact, this bank officer was a former general manager of a major microfinance organization in Nicaragua. She even allowed us to witness a training seminar where managers from several branches of this bank were being re-trained on how to evaluate potential customers for microfinance loans, since it is a totally different process than the traditional way banks do business.
In my mind, there are two main reasons that explain why banks are suddenly interested in microfinance. The first is obviously the success of the industry. Banks want to profit from a model that has proven successful and profitable. In a previous issue of Nicaraguan Developments, I wrote extensively on the success of the microfinance industry in Nicaragua, so I will not address this topic here.4 The second reason is that microfinance organizations in Nicaragua have become very important competitors for banks in the credit market. As a result, while microfinance organizations expand all around the country, they are causing obvious structural problems in the way banks operate in Nicaragua. In this article, I want to elaborate on this topic, based on the latest data available on Nicaraguan banks and microfinance organizations.
What is the place of the microfinance industry in Nicaragua?
As of December 2006, Nicaraguan banks and the non-regulated microfinance industry together lent $1.97 billion dollars to 1.16 million borrowers.5 Non-regulated microfinance organizations were providing almost $200 million dollars in loans, representing 10.1% of all the credit available in Nicaragua, and serving 29.3% of their total borrowers (Table No. 1). Although the size of the microfinance industry is very impressive, especially if we compare it to its counterparts in other Central American countries, there are other issues to highlight in the Nicaraguan microfinance industry that are even more impressive.
A major characteristic of Nicaraguan banks is their extremely heavy concentration of loans in the department of Managua, where the city of Managua is located. In fact, 78.4% of banks’ total loan portfolio has been disbursed in the department of Managua to 87% of the total borrowers. In comparison, if we look at the microfinance industry, we see a more equal distribution of credit over the whole territory. In fact, currently no region receives more than 20% of the total. The northern region of the country received 20%; the western region 15.9%; the department of Managua 15.4%; the Segovias 14.4%; the Southern region 13.4%; the Central region 12.2%, the Atlantic 8%, and the department of Rio San Juan 0.7%.
Another important characteristic of the microfinance industry in comparison to the banking industry is that it serves more borrowers in all the different regions of the country, with the exception of Managua. As a result, as of December 2006, microfinance organizations were serving 25,392 more borrowers in the southern region; 45,657 more in the western region; 23,409 more in the central region; 23,094 more in the northern region, 32,266 more in the Segovias region; 8,592 more in the Atlantic region, and 1,503 more in the department of Rio San Juan. In contrast, as of December 2006, banks were serving 639,313 more borrowers in the department of Managua (Table No. 2).
The purpose of the loans is another important difference between the credit offered by commercial banks and microfinance organizations. Banks concentrate heavily on personal credit. In fact, as of December 2006, a total of 682,679 borrowers of banks, or 83.2% of all banks’ borrowers, received personal credit, and had 26.5% of their total portfolio. In contrast, most of the borrowers of microfinance organizations received loans for commerce. Specifically, as of December 2006, a total of 143,807 borrowers, or 42.2% of the total borrowers of microfinance organizations received loans for this purpose, and administrated 30.3% of their total portfolio. Personal credit is also an important purpose for microcredit organizations. As a result, 78,341 borrowers received credit for personal purposes from microfinance organizations, but they only represented 11.3% of their total portfolio.
If we look at productive activities, such as agriculture and livestock, that are the main source of income for the Nicaraguan economy, we will see important differences in the priorities of banks and microcredit organizations. As of December 2006, banks had only 11,663 agricultural borrowers, compared to 33,001 from microcredit organizations. The amount of money disbursed by banks for agriculture totaled $165 million, compared to $33 million from microfinance organizations. This means that banks are providing credit almost exclusively to medium and large agricultural producers, considering that their average loan was $14,153. In comparison, microfinance organizations are providing loans to micro and small rural producers, at an average of $809. Regarding livestock, banks only lend to 6,788 borrowers. In comparison, microfinance organizations lend to 34,772 borrowers for this purpose. Banks have a total portfolio for livestock of $76 million, and microfinance organizations only $34 million. However, the average bank loan for livestock was $11,295, but was $1,652 from microfinance organizations.
Housing is another area where banks and microfinance organizations differ in their approaches. Only a few years ago, banks started to develop the mortgage market in Nicaragua. In fact, currently there are only 8,150 mortgages for housing, representing only 1% of banks’ borrowers, but 11.9% of their total portfolio, meaning that their average loan size is only affordable for the upper class. In fact, mortgages averaged $28,821. Microfinance organizations have not developed mortgage products yet. Instead, they are offering small loans for home improvements for the working poor. Those loans now represent 7.4% of the total borrowers of microfinance organizations, and 9.5% of their total portfolio, with an average loan of only $745.
Finally, credit for industrial production is another economic sector where banks and microfinance organizations have clear differences in their approaches. Banks have 8,169 borrowers receiving loans for their medium and large industries, with an average loan of $21,263. In contrast, microfinance organizations have 6,386 borrowers for their micro and small industries, with and average loan of only $502.
In summary, microfinance organizations in Nicaragua are lending to more people all over the country, except in the city of Managua. At the same time, microfinance organizations are lending mainly for commerce and personal needs, and to support productive activities such as agriculture and livestock. As a result, microfinance organizations are lending to 21,338 more borrowers for agriculture, and 27,984 more for livestock than banks, at a signifi cantly smaller loan size, meaning they are lending to micro and small rural producers, instead of big landowners. Regarding housing, microfinance organizations have been lending small amounts of money to thousands of low income families mainly for improving housing conditions, in contrast to banks that offer mortgages only affordable for the upper classes. There is still a lot of room for improvement, but there is no doubt that microfi nance organizations play a very important role in Nicaraguan society and in the fight against poverty and social and economic exclusion in the Nicaraguan social fabric. It is a good sign that banks are starting to be concerned about offering financial services to the poor. Microfinance organizations are also starting to transform into regulated financial institutions, considering the lack of a clear legal framework for their activity. Hopefully, competition between banks and microfinance organizations will benefit the poor even more, as it could result in reduced effective interest rates and improved financial services overall.
Notes
1 Data provided by Luis Alberto Moreno, President of the Inter-American Development Bank at the 69th Bank Convention of the Mexican Associations of Banks. Acapulco, March 23-24, 2006. www.iadb.org.
2 Federación Latinoamericana de Bancos and Women’s World Banking (2005). Bancarización para la mayoría: microfinanzas rentables y responsables. www.felaban.com/documentos_interes.php.
3 Marulanda, Beatriz and María Otero (2005). Profile of Microfinance in Latin America in 10 years: Vision and Characteristics. Boston: Accion International. www.accion.org.
4 Arenas, Carlos (2006). “Microfinance in Central America. Nicaragua’s place in the industry”. Nicaraguan Developments. Vol. 22, No. 2.
5 In this article, I talk about the nonregulated microfinance institutions to refer to all microfinance organizations that belong to the Nicaraguan Association of Microfinance Institutions (ASOMIF), plus the microfinance organization FAMA. All these microfinance organizations were, as of 2006, legally non-regulated institutions. However, during 2006 FAMA dropped from ASOMIF in preparation to move into a regulated financial institution. On January 1st 2007, FAMA transformed into Financiera FAMA, a regulated institution.
