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Microfinance in Central America: Nicaragua's place in the industry
Microfinance in Central America: Nicaragua's place in the industry
By Carlos Arenas
WCCN Executive Director
According to a recent report by the Inter-American Development Bank (IADB), 70% of the population in Latin America is still marginalized from financial services by commercial banks. In rural areas of Latin America only 4% of the families have access to credit through a bank. This reality has made it necessary for the poorest sectors of society to access small credit and other financial services through non-governmental organizations (NGOs) since the 1980s. Over the years, little by little, most of these NGOs have become specialized in the field of microfinance and transformed into more sophisticated organizations. As a result of these forces, the microfinance industry is well developed in several Latin American countries, including Bolivia, Peru, Colombia and Nicaragua.
The microfinance industry in Central America has been growing and professionalizing at a very fast pace during the last five years. National associations of microfinance organizations have emerged in Nicaragua, Honduras, El Salvador, Guatemala and Costa Rica. Also these national associations have created a regional network called Central American Network of Microfinance (REDCAMIF) helping to energize the entire industry and making it more transparent. Near the end of 2004, REDCAMIF began publishing a magazine called “Microfinanzas en Centroamerica”. For the first time, it was possible to find reliable financial information about all microfinance organizations that belong to their national networks in the five Central American countries cited above.
The availability of information on the main players in the microfinance field in Central America has allowed us to compare Nicaragua with the rest of the microfinance industry in the region. Based on that information, it could be stated that the Nicaraguan microfinance industry is currently the largest in size and weight in Central America, as I will explain in detail in this article.
Types of Institutions offering microfinance services
To have a better understanding of the microfinance industry in Latin America, it is important to keep in mind that generally speaking, there are at least three different kinds of institutions that offer microfinance services to the poor:
Non-regulated NGOs that specialize in microfinance: In general, these are the original players in the microfinance field. They usually start as part of a broader development project through NGOs supported by international cooperation agencies. Despite having their own legal status, most of them are still operating as non-governmental organizations for two main reasons. First, many believe it is the legal status that best fits them, or second, they are still too small to transform into regulated financial institutions. The majority of them are not-for-profit organizations.
Regulated microfinance institutions: Most of these were originally NGOs that became regulated financial institutions, such as banks. However, microfinance continues to be the core focus, even if they now also offer other financial products to other segments of the population. It is important to keep in mind that the decision to continue as an NGO or to become a regulated financial institution is not always an option available in several countries, as it depends on the regulatory framework of each country. In countries such as Bolivia, the government has created a very supportive legal framework for the microfinance industry, even encouraging NGOs to transform themselves into banks. One of the advantages of being regulated is that only in that way can these institutions offer savings, which is just as important as credit to the poor.
Commercial banks that offer microfinance services: These are the newcomers that have entered the microfinance business for three main reasons: First, because microfinance has proved to be profitable many bankers are anxious to be involved in the business. Second, in some countries, banks have been forced to offer these services. In fact, some governments in Latin America, including Venezuela and Brazil, have forced banks to offer microfinance services as a small portion of their total portfolio. Third, banks see microfinance as an opportunity to show their social commitment to the poorest sectors of the society. According to the Latin American Federation of Banks (FELABAN), “Progressively, banks in Latin America have been offering savings, credit and other financial services to low income entrepreneurs and households.” However, FELABAN recognizes that “to develop successful microfinance services, banks should overcome an organizational culture that traditionally does not consider this sector of the market attractive.” Associations of banks in Brazil, Colombia, Mexico, Peru and Venezuela are leading those efforts in the Latin American region. Commercial banks in Central America are not yet important players in the microfinance field.
Nicaragua, the largest microfinance industry in Central America
Nicaragua has the largest number of borrowers among regulated and non-regulated microfinance organizations in Central America. At the end of 2005, around 898,616 borrowers were receiving credit in five Central American countries from regulated and non-regulated microfinance organizations. Of that total, 355,819, or 39.5%, were borrowers from Nicaragua. Guatemala had the second most borrowers served, with 164,259 borrowers, or 18% of the total.
To our knowledge, there are only four regulated microfinance institutions in Central America, two in Nicaragua, and one each in El Salvador and Honduras, with a total of 170,880 borrowers and a total portfolio of $237 million dollars. Nicaragua accounts for 87,678 of the total number of borrowers among these regulated microfinance organizations, or 51%. El Salvador has 66,617, or 39%, and Honduras has 16,585, or 9.7%. In terms of portfolio size, Nicaragua accounts for $119.9 million of the total portfolio (50%), followed by El Salvador with $104.1 million (44%), and Honduras with $16.5 million (5.4%) (Table No. 1).
As of June 2005, there were 94 non-regulated NGOs offering microfinance services to 661,566 borrowers in Central America with a total portfolio of $334 million. 268,141 of these borrowers were from Nicaragua, at 40.5% of the total, followed by Guatemala with 164,259 (24.8%). In terms of portfolio size, Nicaragua accounts for $124.5 million (37.2%) of the total portfolio, followed by Guatemala with $74.8 million (22.3%) (Table No. 2).
What is the weight of the microfinance industry in Central America?
If we compare the total loan portfolios of microfinance organizations with the total loan portfolios of the overall financial industry (banks and other financial institutions) we could have a better sense of the weight of the non-regulated microfinance industry in each Central American country. To do this comparison I used data as of December 2004, the latest data available for both sectors at the time of writing this article.
The main conclusion from this data is that Nicaragua’s non-regulated microfinance industry represents the equivalent of 10% of the total portfolio of loans made by the regulated financial system. In comparison with other countries, non-regulated microfinance organizations are still marginal; when we consider that in Honduras it is only 1.3%, in Guatemala 1.2%, in El Salvador and Costa Rica only 0.6% (Table No. 3).
Who Reaches the Most Borrowers in Central America?
If we take into account regulated and non-regulated microfinance organizations, the five largest organizations offering microfinance services in Central America at the end of 2005 were the following: PROCREDIT-El Salvador (66,617 borrowers), followed by PROCREDIT-Nicaragua (58,117), Génesis Empresarial from Guatemala (55,184), Fondo de Desarrollo Local (FDL) from Nicaragua (50,969) and ACODEP from Nicaragua (45,582).
Looking at the ten largest non-regulated microfinance organizations in Central America, as of December 2005, we found that Genesis Empresarial from Guatemala is first, followed by FDL from Nicaragua. Five out of the ten largest non-regulated microfinance organizations in Central America are from Nicaragua, three are from Honduras, one is from Guatemala, and the other one is from El Salvador (Table No. 4).
Rural lending, the distinguishing characteristic of the Nicaragua’s microfinance industry
For several reasons, microfinance services in Latin America have been offered almost exclusively to urban entrepreneurs. However, one unique characteristic of microfinance services in Nicaragua is that they have the highest percentage of loans for agriculture and livestock, in comparison to their counterparts in Central America. Total regional portfolio for agriculture and livestock as of June 2005 was $52.4 million among all non-regulated microfinance organizations in Central America, meaning that loans for agriculture and livestock by Nicaraguan organizations represented 75.4% of the total, followed by Guatemala with11%.
Looking at more current data, it is possible to suggest that FDL might have the largest portfolio in agriculture and livestock, as well as the most rural borrowers among all microfinance institutions in Latin America. In fact, as of December 2005, FDL had a rural portfolio of $15.3 million, and 18,906 rural borrowers. Rural lending could be the distinguishing characteristic of Nicaragua in the microfinance field in Latin America. In a future article I will elaborate more on this topic.