The microfinance industry has played an important role in improving social development, despite facing challenges in recent years

The centrality of microfinance to Peru’s economy extends beyond its contribution to banking profits, given its role in reducing poverty, accelerating formalisation of the workforce and bringing growth to regions previously beyond the reach of traditional banks. Even so, its development has not been consistently smooth. Some weaker players have been taken over or merged with their competitors, and a reorganisation of the industry that looks set to continue into 2015.

Industry Structure

Darío León Urribarri, head of corporate services at the Peruvian Federation of Municipal Savings and Credit Banks, told OBG that this phase of consolidation among microfinance institutions (MFIs) was triggered in 2007 by some of the large commercial banks acquiring existing MFIs. The trend gained momentum, leading to “the period around 2008 and 2009, when we reached a peak in terms of MFIs being bought by banks”, according to Alejandro Rabanal, the head of equity research at Credicorp Capital. Yet Credicorp’s acquisition of Mibanco, previously Peru’s largest MFI, for $179m in February 2014, following the latter’s disappointing performance in 2013, signalled that the landscape for MFIs continues to evolve.

As of June 2014, there were 31 non-bank MFIs operating in Peru, comprising 12 municipal savings and credit banks (Cajas Municipales de Ahorro y Crédito, CMACs), 9 rural savings and credit banks (Cajas Rurales de Ahorro y Crédito, CRACs) and a further 10 so-called entities for the development of small and micro-businesses (Entidades de Desarrollo de la Pequeña y Micro Empresa, Edpymes). Further to this, 12 of the commercial banks are active in the microfinance sector.

The CMACs dominate the sector, accounting for 82.6% of loans by MFIs, with the CRACs and Edpymes providing the remaining 10.6% and 6.8%, respectively. The Edpymes differ from the CMACs and CRACs, as the former are prohibited from taking deposits and are dependent on multilateral organisations for funding.

Credit Supply

Even against a backdrop of upheaval in the industry, the year leading to June 2014 saw an acceleration of the rate of credit growth among MFIs to 7.4%, up from 4.8% in the 12 months to June 2013, which meant that total lending by MFIs reached PEN15.4bn ($5.5bn) by the end of the second quarter of 2014. During the period between June 2013 and June 2014, the CMACs and CRACs increased lending at rates of 8% and 8.4%, respectively. The reduction of 1.3% in lending by Edpymes during this same period was explained by the reclassification of Edpyme Nueva Visión as “other financial institution” by the SBS in October 2013, thus wiping out its statistical contribution to data for the Edpyme group of MFI providers.

Portfolio Diversification

Just as some commercial banks participate in the microfinance sector, not all MFI activities are confined to this sector. As of June 2014, 39.1% of lending by MFIs was to small enterprises, defined by the SBS as firms with total borrowing needs of between PEN20,000 ($7140) and PEN300,000 ($107,100), and 23.6% of lending went to micro-businesses, defined as firms with total borrowing needs of less than PEN20,000 ($7140). This meant that of the remaining 37.4% of lending, 18.8% was destined for consumer finance, 10.4% for medium-sized enterprises, 7.2% for mortgage customers and 0.5% each for large companies and corporates. This diversification of MFI credit portfolios looks set to continue, with MFI loans to corporates, medium-sized enterprises, large companies and mortgage customers showing the strongest year-on-year (y-o-y) growth rates of 212.3%, 25.4%, 21.4% and 17.6%, respectively, in the year to June 2014 – albeit from low bases. The increase in credit from MFIs to small enterprises, consumer finance and micro-businesses during the same period averaged more modest rates of 5.7%, 4.4% and 4.1%, respectively, per annum.

Deposits

Deposits in MFIs reached PEN14.8bn ($5.28bn) in June 2014, up by 7.3% from a year earlier. The CMACs held 88.1% of these deposits while the CRACs held the remaining 11.9%. These two types of MFI increased their deposit balances by 7.2% and 7.7% y-o-y, respectively. The 12 months to June 2014 also saw a divergence between the CMACs and the CRACs in terms of the types of deposit they took in. Whereas in CMACs demand deposits grew at a faster pace than term deposits (13.9% versus 5.6%), the CRACs saw their term deposits increase by 9.5% while their demand deposit balances fell by 2.2%. MFIs continued to rely primarily on term deposits for funding: these accounted for 79.6% of total deposits as of June 2014.

Regional Arbitrage

According to Rabanal, as MFIs typically charge higher rates of interest than commercial banks, they can offer depositors higher rates too. This has led several MFIs to open branches in urban areas such as Lima for the purpose of taking deposits, which are then redeployed in rural areas. This trend is reflected in the distribution of CMACs’ sources of deposits with respect to that of their credit portfolios: while the urban regions of Lima and Callao accounted for only 17% of CMACs’ credit portfolios as of June 2014, with the remaining 90% going to other regions, Lima and Callao were the source of 35.6% of CMACs’ deposits.

Funding

The steady growth in credit and deposits with MFIs has been accompanied by efforts to shore up the financial strength of the industry, with mixed results. Overall, MFIs reduced their reliance on the wholesale markets for funding in the year to June 2014, with the segment’s debt decreasing by 5.3% to PEN1.9bn ($678.3m). This fall had been driven by the CMACs, which reduced their debt by 21.5% during this period, whereas the CRACs took on 39.9% more debt. Over the same period, the Edpymes were able to marginally reduce their debt by 0.2%. Most MFI debt (79.8%) was in soles. Foreign currency debt fell by 12.1% y-o-y, compared to a 3.4% rate of reduction for debt in soles. According to the SBS, the fall in MFI debt levels can be explained by the shrinking of their balance sheets coupled with a rise in deposits as a source of funding.

Key Indicators

The capital ratio of MFIs fell y-o-y by 110 basis points to 15.3% in June 2014. According to Rabanal, microfinance institutions are subject to the same regulations as regular banks, except that where banks are required to maintain a capital ratio of 10% the microfinance institutions must maintain a level of 14%. Of the different groups of MFI, the Edpymes had the strongest average capital ratio of 21.5%, with the CMACs and CRACs having ratios of around 14-15%.

Credit Quality

The non-performing loan (NPL) ratio of MFIs similarly deteriorated slightly between June 2013 and June 2014, rising 90 basis points to 7.1%. The weakest performers here were the CRACs, with an average NPL ratio of 10.9%, while the CMACs and Edpymes posted ratios of 6.8% and 5.2%, respectively. José Beltrán, head of strategic planning at Crediscotia, told OBG that rising NPL ratios were symptomatic of the over-indebtedness of many small and micro-businesses, many of which had taken out credit prior to the deceleration of the economy. Moreover, Urribarri told OBG this had come about due to the high level of competition, which gave rise to instances of multiple providers lending to the same client, in turn resulting in the over-indebtedness of such clients. Rabanal was more optimistic about MFIs’ capacity to address rising NPL ratios, telling OBG, “MFIs tend to develop their bankers internally, so they are experienced at assessing the type of credit risk their clients may pose.”

Liquidity

All categories of MFI have healthy liquidity ratios, both in terms of soles and foreign currency. Despite a fall of 2.9% in the year to June 2014, MFIs’ liquidity ratio in soles stood at 39.6%, nearly five times above the 8% required. Similarly, the liquidity ratio in foreign currency was 73.3%, far higher than the 20% level set by the regulator and a rise of 16.7% y-o-y.

Efficiency

The growing maturity of the MFI sector is reflected in providers’ disciplined approach to costs. In the year to June 2014, the operating efficiency of MFIs, calculated by the SBS as the ratio of administrative expenses to credit, fell by 20 basis points to 10.6%. The CMACs and CRACs were the more efficient operators by this measure, both recording ratios of 9.7%, while the Edpymes had an efficiency ratio of 19.8%.

Profitability

Nevertheless, the MFIs still have some way to go before they start generating returns comparable to the rest of the banking sector. Return on equity for the MFI sector in the year to June 2014 fell by 1.2% to 9.9%. This was primarily caused by a fall in ROE of seven percentage points by the CRACs to -3.3%. The Edpymes and CMACs on the other hand managed to generate positive ROEs, although these figures still fell by 1.7% and 0.5% to 4.3% and 12.2%, respectively.

Continuing Development

Further consolidation should see MFI profitability rise over time. Despite the huge appetite for credit among Peru’s small and micro-businesses – 70% of which Urribarri estimates are informal and as a result, have no means of obtaining finance from the banks – the challenge for MFIs will be to learn from past mistakes and ensure NPL ratios do not rise any further. However, even taking into consideration these concerns, Rabanal predicted the MFI sector will continue to grow in line with the rest of the economy. “By their very nature, MFIs tend to be more dynamic organisations, so they are accustomed to seizing opportunities as they present themselves,” said Rabanal.