Bringing services to the people: Many opportunities exist for microfinance institutions

In 2011 Peru came top in the Economist’s Global Ranking for Microfinance Business Environment for a third year running. This can be attributed to the sector’s high level of sophistication resulting from 30 years of history in the country. Microfinance institutions also benefit from a strong regulatory framework outlined and enforced by the Superintendency of Banks, Insurance and Private Pension Fund Administrators of Peru ( Superintendencia de Banca, Seguros y AFP, SBS).

TOP PLAYERS: The country counts a total of 34 microfinance institutions (MFIs). Among the largest in terms of loan volume is Mibanco, a private bank specialising almost exclusively in small business loans. Mibanco accounts for around 22% of the MFI gross loan portfolio (GLP). The biggest MFI in terms of clients served is CrediScotia. Formerly known as Banco del Trabajo, CrediScotia was acquired and converted into an entity of the Canadian Scotiabank in 2009.

While some of the biggest MFIs are concentrated in Lima, outside of the capital the sector is made up of 13 municipal savings banks (CMACs), 11 rural savings banks (CRACs) and 10 smaller lenders legally classified as small and microenterprise development companies (entidades de desarrollo de la pequeña y micro empresa, edpymes). The largest of these is the Arequipa CMAC, which accounts for 10% of the national MFI GLP.

PERFORMANCE: Despite the global slowdown, Peru’s microfinance segment has maintained high growth rates and returns over the last several years. In December 2011 loans for the segment were up 19.7% year-on-year. This exceeds the increase in lending for the banking sector, which was 16.6% in 2011. Though such rapid growth may spur concern over asset values, returns remain high and non-performing loan (NPL) ratios low. In 2011 Mibanco saw returns on equity (ROE) of 21.23%, while CrediScotia’s ROE came in at 29.9%.

While the NPL ratio for microfinance is higher than that of the financial sector overall, it is still manageable given the comparatively high interest rates MFIs charge to account for higher-risk client profiles. Improved credit screening techniques have led to a fall in NPLs over the last several years. According to the Association of MFIs in Peru, the NPL ratio for the sector was between 4.17% and 4.42% as of December 2011. This is down from an average of 5% in mid-2010. The ratio for the financial system overall is 1.47%. José Beltrán, the planning manager at CrediScotia, told OBG, “We are comfortable with this level of NPLs given our focus on socioeconomic sectors B- and C. Going forward we will aim more for segments D and E.”

PENETRATION: The main goal among Peruvian MFIs is increasing profitability through greater banking penetration. Ana María Zegarra Leyva, the CEO of Financiera Edyficar, one of the five largest MFIs in Peru, told OBG, “In microfinance there are basically three different camps. These are MFIs that are anti-poverty focused, those that promote access to financial services or, finally, very commercial institutions.” The general focus among MFIs in Peru falls squarely in the second camp.

Increasing penetration has proved a difficult task so far. Despite growing incomes over the past five years, very few Peruvians are taking their additional earnings to the bank. Only 28% of Peruvian households utilise one or more formal financial or banking instruments. Compare this to banking penetration levels in Chile (70%) or Brazil (greater than 90%). While there is a long way to go, much of Peru’s eight percentage points increase in banking penetration since 2005 can be attributed to the efforts of MFIs to reach parts of the population underserved by the financial services sector. “Peru has been growing above 5% over the past 10 years and the middle class has been expanding significantly. Therefore, the microfinance sector receives 600,000 new potential clients every year,” Ramón Larrea Dávila, the CEO of Financiera Universal, told OBG.

Strategic partnerships have played a key role in expanding the physical infrastructure of microfinance banks both within and outside of Lima. For example, Edyficar partners with Banco de la Nación, a state bank with the largest network of branches in the country, to share 25 offices, primarily in rural areas. In 2012 Edyficar hopes to expand this partnership to include an additional 20 offices. Many of Peru’s MFI and larger commercial banks rely on an extensive network of trained agents. Known locally as cajeros corresponsales, these are individuals who are trained and equipped with the tools necessary to execute basic banking transactions such as bill paying and transfers. Cajeros corresponsales are normally located in pharmacies, bodegas ( convenience stores) and other small local businesses in both rural and urban areas. Since the law regulating cajeros corresponsales was passed in 2005, they have expanded to a network of 12,800. Edyficar reports receiving 8% of loan payments through the cajeros.

These efforts to reach customers where they live and in places they feel comfortable visiting, such as the bodega on the corner, are attracting more and more previously unbanked individuals to MFIs. Gustavo Morón, business manager at Edyficar, told OBG, “Every month 35% of our clients are new and 40% of them have never received a loan before.” Beltrán explained the long-term strategy: “CrediScotia serves the financial needs of socioeconomic sectors C and D. Our goal is to bring these customers into the financial system and help them develop personally and in their businesses.”

REGULATION: In addition to MFIs’ efforts to expand infrastructure, solid regulation by SBS plays a major role in supporting sector growth. MFIs are essentially governed by the same regulation as large commercial banks. They must report financial information and abide by regulations that limit credit and exchange rate risks, including maintaining higher reserves on assets denominated in dollars. MFIs must also complete internal audits and submit to an annual external audit. There are additional regulations that apply specifically to MFIs. For example, regulators use fiscal incentives and low capital requirements ($340,000) to encourage nongovernmental organisations (NGOs) engaged in microfinance to convert to edpymes, which are regulated by SBS. The activity of edpymes, however, is strictly limited to issuing credit. They may not accept deposits.

SBS’s commitment to encouraging greater bank penetration is notable in the passage of the Basic Account Law, which will allow cajeros corresponsales to perform the additional function of opening savings accounts for new customers and accepting deposits.

While the Basic Account Law will allow more clients to open savings banks, it does so under certain conditions, which limit the size of accounts and the amount of money that can be withdrawn in a given month thus safeguarding against money-laundering activities. The new legislation is one example of how SBS supports MFI growth while maintaining prudent supervision.

OPPORTUNITIES: While the microfinance sector was traditionally oriented to serving small businesses in urban areas, the coming years will likely see Peru’s MFIs branching into new products and regions. The passage of the Basic Account Law presents an opportunity to increase MFI funding through deposits, which grew only slightly slower than loans – 18.9% year-on-year in 2011. “Not everyone needs credit, but everyone must save,” said Morón. Edyficar has also seen a large increase in home improvement loans. Over the last couple of years many families have received subsidised homes via government programmes such as Techo Propio. As their economic situation improves, people are expected to use microloans to fund home improvements. Personal/consumer loans are another major source of growth. This can be attributed to a strong economy and a rise in consumer demand overall. Rural/agricultural microfinance is one segment that remains underserved, accounting for less than 5% of loans. PRISMA, a local NGO, is one of the few entities operating in this area.

An important challenge for MFIs going forward will be overcoming the misunderstanding and fear that prevents unbanked customers from attempting to access financial services despite the benefits of doing so. Morón told OBG that according to a recent study by SBS, four in 10 Peruvians keep their savings under their mattresses where it is all too often robbed, lost or destroyed by other means. It will be the banks’ job to convince Peruvians that their money is safer stored in a financial institution than at home under the bed.