83140 FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE BRAZIL FINANCIAL INCLUSION IN BRAZIL: BUILDING ON SUCCESS TECHNICAL NOTE MAY 2013 INTERNATIONAL MONETARY FUND THE WORLD BANK MONETARY AND CAPITAL MARKETS DEPARTMENT FINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY LATIN AMERICA & THE CARIBBEAN REGION VICE PRESIDENCY 2 Glossary ATM Automated Teller Machine BB Banco do Brasil BCB Banco Central do Brasil BM&FBOVESPA Stock Market Exchange BNB Banco Nordeste do Brasil BNDES Banco Nacional de Desenvolvimento CEF Caixa Economica Federal CONEF Financial Education National Committee COREMEC Supervisory and Regulatory Committee of Financial Systems, Capital Markets, Private Insurance and Social Welfare CPL Cadastro Positivo Law DB Doing Business DHS Demographic and Health Surveys ENEF National Strategy for Financial Education FEBRABAN Brazilian Banking Federation FI Financial Institution FINDEX Financial Inclusion Database FSAP Financial Sector Assessment Program LITS Life in Transition Survey LSMS Living Standard Measurement Surveys MFI Microfinance Institution MSMEs Micro, Small, and Medium Enterprises NGO Non-governmental Organization POS Point of Sale PRONAF Program for Strengthening Family Farming SCR Credit Information System SCPC Serviço de Proteção de Credito SME Small and Medium Enterprises 3 Contents Glossary ............................................................................................................................................... 2 Executive Summary ............................................................................................................................. 4 I. The Status of Financial Inclusion in Brazil ................................................................................ 10 A. Financial Access Delivery Channels ...................................................................................... 10 B. Users and Products .................................................................................................................. 13 C. Credit Reporting and Consumer Protection ............................................................................ 18 D. Financial Products Suppliers................................................................................................... 20 E. Laws, Regulations and Government Programs ....................................................................... 24 II. Selected Issues in Financial Inclusion ........................................................................................ 27 A. The Payroll-Guaranteed Loan Program--Crédito Consignado ............................................... 27 B. Credit Reporting–Moving to a Positive Credit Registry “Cadastro Positivo” ........................ 29 C. Mobile Payments, Credit Cards and the Rule of “Sobre Preço”............................................. 33 D. Consumer Protection and Financial Capability / Education ................................................... 36 APPENDIX ........................................................................................................................................ 43 Tables: Table 1. The main recommendations contained in this TN ................................................................. 8 Table 2. General Access Indicators in Leading Emerging Economies .............................................. 13 Table 3. Basic Statistics on Brazil’s Cooperative System, May 2011 ............................................... 23 Table 4. Regulations on Financial Inclusion Issues ........................................................................... 25 Table 5. Payroll Guaranteed Loan Program ...................................................................................... 27 Graphs: Graph 1. Accounts at a Formal Financial Institution in Latin America and G-20 ............................ 12 Graph 2. Accounts at a Formal Financial Institution by Gender ....................................................... 15 Graph 3. Credit Card Access: General vs. Bottom 40% .................................................................... 16 Graph 4. Savings: Total Savings and Savings at a Financial Institution ........................................... 17 Graph 5. Doing Business Index Score ............................................................................................... 18 Graph 6. Consumer Protection-Dispute Resolution and Recourse .................................................... 19 Graph 7. Consumer Protection--Requirements on Periodic Disclosure ............................................ 20 Graph 8. Consumer Protection--Monitoring and Enforcement ......................................................... 20 Graph 9. Share of Cooperatives in the National Financial System .................................................... 22 Graph 10. Interest Rates on Loans by Type, 2004-2011 ................................................................... 28 Graph 11. Average Financial Proficiency Score............................................................................... 40 Graph 12. Average Financial Autonomy Index ................................................................................ 41 Graph 13. Average Percentage of Income Saved .............................................................................. 41 Figures: Figure 1. Types of Financial Providers Involved in Financial Inclusion ........................................... 21 4 Executive Summary 1. Over the past decade Brazil has made significant strides toward financial inclusion. A full 100% of Brazilian municipalities are served by some type of facility provided by a formal financial institution delivering a basic set of financial services 1. Factors contributing to this success include the expansion of a national correspondent banking network, growth in microfinance and cooperatives and increasing incomes at the base of the economic pyramid due in part to well- targeted government transfer programs such as Bolsa Familia. As a result of these policies, Brazil has one of the highest levels of penetration of bank accounts among emerging economies – 56% of adults in Brazil have an account according to recent FINDEX data. This compares very favorably to other countries in the region as well as to other large, advanced developing countries globally such as some of the other BRICs. There is still room for improvement however, to reach the levels of developed countries where coverage levels above 90% are common.2 2. The development of a far reaching correspondent banking network is one of the key factors behind Brazil’s success story in financial inclusion. Between 2005 and 2011, the number of correspondents approximately doubled to more than 160,000. The Central Bank encouraged financial institutions to reach out to more distant consumers and to communities where they had not previously been active, including lower income areas, through partnerships with a variety of retail establishments including some with public ties such as the post office network and lottery agencies. Regulators have gradually reduced restrictions on correspondent banking, such as individual approval processes, in response to early successes with this program. The legal framework also facilitated healthy expansion by putting the onus on regulated institutions to train and monitor their correspondents. 3. A variety of government programs have also played a pivotal role in financial inclusion efforts. In terms of Bolsa Familia, not only have incomes been raised--thus indirectly encouraging access to finance--but the program itself has also been used as an instrument of financial inclusion. All Bolsa Familia recipients receive their benefits through electronic cards from Caixa and more than 2 million of the 13 million beneficiaries have opened a Caixa bank account. In terms of microfinance, the vast majority (about 75%) of customers are served by the Crediamigo program at Banco Nordeste do Brasil (BNB) which today has nearly 1 million active loan accounts. In terms of rural credit, PRONAF, distributed in part by the Agroamigo program at BNB, is responsible for providing access to finance for family farmers / producers – about R$ 12 billion in agricultural credit was provided in both 2010 and 2011. Other government programs also have promoted access to credit including notably the crédito consignado programs provided through government funded pensions or through salaries of government employees. 4. While much has been accomplished, the financial inclusion agenda is far from complete. Handling payments, including those related to paying utility bills and the monthly government benefit, remains the primary service performed by many correspondent banks. The range of financial services that people need beyond payments– including savings, credit and insurance--is still not readily available for many low income consumers. Progress has also been unbalanced along other dimensions. Credit products have expanded more rapidly and become more 1 Data on access points are available on the Brazilian Central Bank website: http://www.bcb.gov.br/?MICROFIN 2 See map of bank account coverage by country in Appendix, Figure A1. 5 widespread than savings products, creating a potential for unhealthy levels of indebtedness. The expansion of access has also been tilted toward higher income regions–the South and Southeast– especially in terms of numbers of correspondents and the growth of financial cooperatives. Microinsurance, while growing, is still relatively underdeveloped and focused on a few limited markets such as funeral insurance. 5. Increased attention should be given to developing savings habits to further strengthen financial inclusion while buttressing financial stability, According to 2011 Findex data, only one-fifth of adults in Brazil reported saving any money in the previous year, and only one-tenth saved money in a formal financial institution. As a result, 90% of savings in Brazil are generated by the corporate sector. This situation is striking, especially given Brazil’s income level. Among upper middle income countries more than twice as many adults usually have formal savings. Brazil’s comparatively generous pension system is likely one factor behind low levels of personal savings, together with widespread access to retail consumption credit and possibly still some behaviors linked with price instability of years past. On the supply side, traditional disincentives for promoting small savings accounts (relatively high costs) as well as high reserve requirements on deposit accounts and access to alternative sources of financing have limited expansion of savings products. Addressing the savings issue is thus at the heart of a number of fundamental financial sector and fiscal reforms. 6. Rapid expansion of credit over the past four years has created the potential for unhealthy levels of debt, especially in lower income households. Aggressive promotion of low cost loans through Crediamigo (now even more affordable due to the Crescer program), PRONAF, and crédito consignado programs have increased access to credit and, correspondingly, the levels of debt. In the private sector, many low income consumers in economic class “C” have also gained access to ubiquitous store-credits which largely finance consumption, and for those with slightly higher incomes, to auto loans. These factors have raised concerns that some low income consumers are getting “in over their heads” in debt and are vulnerable to a negative financial shock to the household (e.g., loss of employment, health problem, death in the family) or to the broader economy (e.g., recession, interest rate spike). Fully analyzing the extent of over-indebtedness is not readily possible, as comprehensive data on the level of debt among low income consumers in Brazil is not available. However, the rapid growth of credit programs, especially in the past 2-4 years, and concerns among many stakeholders in the financial inclusion arena would suggest that increased attention be given to this potential problem. 7. The regulation of the recently enacted positive credit histories law has the potential to greatly improve market intelligence, and competition and efficiency in financial markets. Properly implemented, the so-called Cadastro Positivo Law (CPL) should improve risk analysis and increase competition for good borrowers, putting downward pressure on interest rates. However, the CPL requires consumers to “opt in” to the system by authorizing their participation in writing. This will make the positive data registry harder and more costly to construct and there will be a greater lag in creating a comprehensive positive credit history than if the “opt out” approach had been adopted.3 In this scenario there is a risk that the benefits of the CPL will not materialize quickly and 3 Through an “opt out” approach, consumers would be included in the database unless they took the initiative to have their data removed (i.e. through an online process, writing a letter, signing a form at their bank or some other mechanisms which should be fairly easy for consumers to access). 6 public perceptions will be that it has had no effect further reducing willingness to participate. How the law is regulated and the development of a public information campaign supporting the reform will significantly affect its impact. The addition of positive credit histories also increases the need for an enhanced supervisory and regulatory framework for credit bureaus to strengthen public confidence in the system and thus participation. 8. Clarifying the roles the Central Bank’s credit registry SCR could play is highly relevant to the CPL discussions. The SCR has a very granular and extensive coverage of banking loans with both positive and negative information, but only regulated financial institutions have access to these data. Further, the Central Bank is not in a position to develop commercial credit scoring models based on the SCR–one of the key offshoots/tools that such databases typically provide to a financial market. In any case, there is a need to clearly define the SCR’s roles in the financial system including its contribution to the supervision of regulated institutions, its direct use for credit risk analysis by lenders, and its potential for strengthening the credit reporting industry while fostering competition and transparency in the financial system. Other countries in the region, for example, share some data from the public registry with private credit bureaus who meet certain criteria such as licensing or other regulatory requirements.4 9. There has been progress in the regulation of the payment card processing industry recently but further reforms are needed. A 2010 government report identified multiple issues on competition in this industry.5 Some of the recommendations from this report have been implemented, but the industry remains highly concentrated with two acquirers – Cielo and Redecard – occupying more than 80% of the market. Market dynamics have resulted in high merchant fees as well as very high interest rates for those consumers who carry balances. A potential area for reform, which could put some downward pressure on card costs and reduce consumers’ incentives to use cards, relates to restrictions on price differentiation by type of payment instrument (the so-called no- surcharge-rule). However, the Department for Protection and Defense of Consumers understands that allowing such price-differentiation would not be in line with the Consumer Defense Code. Since lower income consumers are less likely to use payment cards, they are in effect cross subsidizing consumers who are using credit cards, including high income consumers that receive benefits through loyalty programs. This rule also reduces the ability of merchants to negotiate the fees charged, further enhancing the market power of the large card processors. While there are many good reasons to promote electronic payment systems on costs, efficiency, informality reduction, and tax evasion grounds these systems should be competitive – and if they are not may require further policy action. The development of mobile payment solutions which do not need to be processed through the card companies and legal clarity on the use of post-dated checks would also help stimulate competition and reduce costs in the payment and broader financial systems. 10. Virtually every financial inclusion stakeholder identified financial education as a priority to help address issues of over-indebtedness, lack of savings, financial products selection, and insurance products consumption. The first major financial education project undertaken by CONEF (the national partnership for financial education) has focused on developing financial 4 Examples include Argentina and Ecuador. 5 “Report on the Brazilian Payment Card Industry 2010” by the Central Bank of Brazil, the Secretariat of Economic Law of the Ministry of Justice (SDE), and the Secretariat for Economic Monitoring of the Ministry of Finance (SEAE). http://www.bcb.gov.br/Pom/Spb/Ing/Payment_Cards_Report.pdf 7 capability in high schools, and has just completed its pilot phase. The rigorous impact evaluation of the program recently completed found statistically significant increases in financial autonomy, financial proficiency and savings behavior. Efforts are in the early stages to develop adult financial education but these are not yet being implemented (likely roll out in late 2012 or 2013). Mapping existing financial education priorities and gaps and linking these findings to the upcoming adult education initiatives should be given priority. 11. Strengthening financial consumer protection would support sustainable access to finance. There are a relatively high number of complaints about financial services providers registered with the Ministry of Justice. Unlike the case of financial education, which was championed by the committee of financial market regulators (COREMEC), responsibility for consumer protection is mainly with a unit at the Ministry of Justice which has very limited resources and no staff dedicated solely to financial market issues. To be sure, there have been some recent efforts to strengthen consumer protection—e.g., this unit became a Secretary level unit in May 2012—but more is needed, especially when it comes to new financial consumers. 12. Going forward, identifying ways to encourage innovation and competition in financial markets – such as through mobile banking and mobile payment - will help expand inclusion and contribute to improved product and service quality. In the specific case of mobile banking, providing regulatory flexibility/space for more experimentation or pilots would be a useful way to promote this channel which could be especially important for access in less populated and less well served rural communities. Identifying ways to use public policies to create more competition in financial products and services rather than further concentrating activities with the major state- owned financial institutions would also help promote more efficient targeting of government funds. 13. Modest investments in more systematic, rigorous, and independent impact evaluations of financial inclusion government programs and policies would pay large dividends in terms of efficiency and effectiveness of the use of public funds. Some programs and policies have been reviewed for impact, such as the aforementioned school-based financial education program. However, external sources are typically needed to fund such evaluations. Creating even a small fund for impact evaluation, perhaps supported by external donors who are active in this space, could provide valuable information for better targeting limited public resources. 14. This Technical Note (TN) does not include an analysis of the causes underlying Brazil’s continued high credit cost but many of the issues discussed here may be contributing factors. These include the lack of savings and related dependence on credit which may reduce price elasticity in credit markets; information asymmetries which add to the cost of credit evaluation and increase risk for lenders; and competition issues (as with mobile payments and the so-called no- surcharge-rule on payment methods). The Aide Memoire for the FSAP Mission provides further discussion of these important issues. 8 Table 1--Technical Note: Main Recommendations Summary of Issues and Recommendations Issue Observations and Recommendations Credit Incentives Numerous government programs provide highly subsidized credit for low income consumers (microfinance, agricultural credit, housing credit, etc.) or facilitate credit access (so called “payroll loans” backed by public sector wages or pensions). In the case of subsidized programs, sustainability is an issue as well as market distortions which discourage new entrants or competition. For the payroll loan program, the very limited default risk faced by lenders creates incentives issues including the possibility for overselling these loans to consumers who may not need them or fully understand the cost. As a first step, further rigorous impact evaluation of these programs and their costs and benefits would be useful in determining next steps including more narrowly targeting subsidies, identifying other needed policies or programs and if necessary regulatory reforms. Savings Promotion Regulatory barriers and a generous pension system, together with increased access to unsecured credit for consumption purchases, create a disincentive for mobilizing savings on both the supply and demand sides. Addressing both macro and micro level factors will be necessary to substantially increase savings in Brazil. In terms of financial inclusion policies, actions could include strengthening basic accounts which offer savings instruments (and determining why they have or have not worked to promote savings in the past), identifying ways to promote and encourage savings (such as through lotteries which are already popular), increasing financial education efforts and enhancing disclosure on credit (so comparisons with the cost of credit vs. saving for consumption are clearer). Cadastro Positivo The new CPL would promote greater transparency and competition in financial Law (CPL) markets and contribute to efforts to reduce the cost of credit. However, the way this law is implemented will affect its impact. Since it requires consumers to “opt in” or authorize their participation in writing, the public outreach campaign will be very important as well as the specific requirements on how permission is collected and how it relates to existing credit bureaus. Establishing a clear legal and regulatory framework, including effective supervision/enforcement for credit reporting will be critical for increasing consumer confidence and participation. Mobile Payments Efforts are already underway involving the Central Bank and the Ministry of Communications to develop regulations for mobile payments. This should help create the clarity needed as well as the regulatory flexibility/space for more experimentation and investments in this channel which could be especially important for access in less populated and less well served rural communities. A related issue is the merchants’ so- called no-surcharge-rule that prevents them from charging different prices for different payment methods. This should be reviewed as it likely is resulting in increased market power for leading card processors vis-à-vis merchants (especially small ones) and transfers from low-income cash using consumers toward higher-income card using 9 consumers; market power of card processors may also be affecting the development of alternative channels such as mobile payments. Consumer Consumer protection and financial education are gaining increasing attention as part of Protection and Brazil’s financial inclusion strategy. The government has been active in developing a Financial thoughtful approach to financial education through a school-based financial education Education program which is a global model of good practice in terms of how it was designed, piloted and evaluated. Future work is to extend financial education to adult populations. On the financial consumer protection front, there remains ambiguity on roles and responsibilities. The Ministry of Justice has jurisdiction on this topic but limited capacity or specialized knowledge. Thus far the approach has been to create committees between Justice and the Central Bank to overcome these limitations. An independent evaluation of the framework for financial consumer protection in Brazil could help identify key issues and gaps and help further strengthen these efforts. 10 I. The Status of Financial Inclusion in Brazil6 15. This section compares progress on financial inclusion in Brazil with regional comparators as well as with some nations outside Latin America with similar or higher levels of income. Data are taken from a variety of sources7 including: o The Global Financial Inclusion (Findex) Database which provides the first internationally comparable survey-based demand side data on access and use of financial products, services and infrastructure; o Financial Access 2010 which has supply side data including detailed information on financial consumer protection worldwide; and o Doing Business for data related to credit information. 16. Brazil has made great strides in financial inclusion over the past decade and now leads the region in terms of percent of population with an account in a formal financial institution (Graph 1 and Table 2). In Brazil, 56% of the population has an account with a formal financial institution, compared to a regional average in Latin America of only 39%. This figure is above other middle income countries in the region which have per capita incomes significantly higher than Brazil’s – by about 50% or more – such as Argentina (33%), Chile (42%) and Uruguay (24%). When compared with other G-20 countries, however, Brazil still trails developed country experiences which are typically in excess of 90% coverage (and in several cases nearly universal at 100%). Brazil is also behind China which reports 64% of the adult population is “banked”. A. Financial Access Delivery Channels 17. Gaining access to bank accounts in Brazil has been greatly facilitated by the correspondent banking network which numbers approximately 152,000 locations throughout the country.8 This network complements the much smaller number of traditional bank branches (approximately 20,000) reducing the costs and increasing the convenience of performing basic bank transactions including opening accounts, making deposits and withdrawals, and applying for small loans. Financial inclusion statistics on bank branches in Brazil, estimated at 12.7 per 100,000 adults, do not capture this vast correspondent network which is unique in its size and scope. 18. In terms of access to Automated Teller Machines (ATMs) Brazil is also far ahead of other countries in Latin America, and globally, with 121 ATMs per 100,000 adults. Comparator countries in the region – including several with higher per capita incomes - have only a fraction as many ATMs per 100,000 adults including Argentina (42), Chile (63) and Uruguay (30). The ATM network in Brazil is unusual in its size even by high income country standards and exceeds those in Germany (117), France (110), Italy (99) and the U.K. (65). Only a few countries have larger networks including the U.S. (174), Canada (220) and Korea (250). One possible explanation for the Brazilian numbers is the fact that in the country most ATM networks are not shared and so there is a lack of interoperability. A low level of interoperability implies a lower average number of transactions per terminal, overlapping of ATMs, (which reduces the capillarity of the network) and higher costs of development and maintenance. 6 This Technical Note (TN) was prepared under the March 2011 FSAP Update for Brazil by Margaret Miller (World Bank). 7 Additional country specific data on market/financial intermediary structure are available in the FSAP Aide Memoire, Chapter 2 and in the Appendixes. 8 Data as of June 2010, from Central Bank of Brazil website: http://www.bcb.gov.br/?MICROFIN. 11 19. Brazil also stands head and shoulders above other countries in Latin America in terms of the spread of Point of Sale (POS) technology, with 1,471 terminals per 100,000 adults. Penetration is much higher than in other countries in the region--Chile (450), Panama (427) or Uruguay (275). The spread of POS technology in Brazil has not reached high income country levels, however, which often exceed 2,000 per 100,000 adults (examples include Italy, France, the U.K., U.S. and Canada) and in a few instances even 3,000+ per 100,000 adults (Australia, Turkey). Similarly to the ATM network, POSs do not have full interoperability which results in a high level for the merchant discount rate compared to other countries. 20. Mobile payments via cell phones in Brazil have just barely begun to develop and are reportedly used by only about 1% of the population. The figure for online electronic payments is significantly higher with 6% of low income consumers using this method.9 Checks are another common form of payment among higher income Brazilians but are less frequently available to low income consumers – according to FINDEX data only 2% of low income Brazilians use this payment channel. 21. While this report focuses primarily on consumer or personal finance, not enterprise finance, it is useful to briefly review some basic statistics on finance available to micro and small enterprises.10 Approximately two-thirds of firms in Brazil indicate that they have a bank loan or line of credit according to data collected through the World Bank’s Enterprise Surveys (Brazilian data from 2009). This is a relatively high share compared to other emerging economies such as Mexico (32%), South Africa (30%) or Turkey (59%). Virtually all Brazilian firms (99.4%) also report having a checking or savings account and almost half (48%) say that they are using banks to finance investments. 9 Data cited are from FINDEX 2011. 10 A focus on consumer / personal finance was agreed with the Brazilian Government for this FSAP Update Financial Inclusion TN. 12 Graph 1. Accounts at a Formal Financial Institution in Latin America and G-20 Accounts at a Formal Institution Accounts at a Formal Institution Latin America G-20 Australia Brazil Germany Costa Rica United Kingdom Venezuela, RB France Chile Canada LAC Japan Dominican Republic Ecuador Korea, Rep. Argentina United States Colombia Italy Bolivia China Mexico Turkey Panama Brazil Uruguay South Africa Paraguay Russian Federation Guatemala Saudi Arabia Honduras India Peru Argentina Nicaragua Mexico El Salvador Indonesia 0 10 20 30 40 50 60 0 20 40 60 80 100 120 Account at a formal financial institution, income, bottom 40% Account at a formal financial institution, income, bottom (% age 15+) 40% (% age 15+) Account at a formal financial institution (% age 15+) Account at a formal financial institution (% age 15+) Source: FINDEX 2011 13 Table 2. General Access Indicators in Leading Emerging Economies South Brazil Mexico India Africa Turkey 1. General Access Indicators Type of Indicator Institution Account at a formal financial 56 27 35 54 58 institution (% of population age 15+) Commercial 533.49 … 137.46 … 360.67 banks Loan Accounts per 1,000 Adults Cooperatives 18.61 … 10.15 … … SSFIs 2.20 … … … 0.02 MFIs 0.04 8.37 … … … Commercial 1,065.35 1,096.76 747.29 839.13 1,661.21 banks Deposit Accounts per 1,000 Adults Cooperatives 3.79 7.24 68.9 … … SSFIs 0.56 63.20 … … … MFIs 1.09 30.24 … … … Commercial 12.71 14.67 10.11 8 17.77 banks Branches per 100,000 Adults Cooperatives 3.06 1.58 2.78 … … SSFIs 1.49 0.75 … … 0.04 MFIs 0.03 1.05 … … … 2. Access to Basic Payment Services ATMs per 100,000 Adults 112.06 44.80 7.29 52.41 44.25 POS per 100,000 Adults 2,247.41 592.14 67.06 8,908.68 3,232.79 3. Access to Credit and Other Sources of Financing Percent of firms identifying access 55.5 29.6 15.8 15.5 14.3 to finance as a major constraint Percent of firms with a bank 65.3 32 … 30.1 56.8 loan/line of credit Sources: FINDEX and World Bank Enterprise Survey 22. At the same time, a relatively high share of firms in Brazil (55%) also reports that access to finance is a major constraint. This may seem contradictory given the high levels of participation and use of formal finance mechanisms discussed above. One possible explanation is the hitherto high cost of credit in Brazil which is especially binding for small businesses that lack access to capital markets and which may have more difficulty than larger firms securing subsidized credits through official channels.11 B. Users and Products 23. Notwithstanding significant progress there are still important gaps in the financial inclusion landscape. This is logical given the country’s size and economic diversity and the complexity of the issue. This section of the TN provides some 11 The Technical Note on BNDES provides further insights and information on this point. 14 additional analysis of both the accomplishments and the challenges facing Brazil as it moves toward more inclusive financial markets with discussion on who holds accounts as well as on use of credit, savings, and insurance. 24. Brazil has made particular progress in access to accounts in formal financial institutions. 41% of adults at the base of the economic pyramid (bottom 40%) in Brazil have accounts compared to only 25% on average in Latin America (see Graph 1). In general, access to accounts among the poor is limited in the region and as low as 15% for Colombia, 12% in Mexico and 11% in Uruguay. 25. When compared against higher income countries in the G-20, however, Brazil still has room for improvement in access to formal accounts. Graph 1 also contrasts access to accounts in formal financial institutions for people at the bottom of the income distribution with the average for each G-20 country. Brazil outperforms most emerging markets in the group (with the exceptions of China and Turkey) but is still far from the near-universal coverage (generally above 90%) of high income nations. Further, the difference in coverage by income levels is relatively large in Brazil – 15% - when compared with many members of the group including all of the high income countries and many middle income countries as well such as Indonesia, India, Argentina, Russia and Turkey. Only China (17%) and Mexico (15%) have spreads in account access between income levels as high as Brazil. 26. There is also an important gender gap in Brazil when it comes to access (Graph 2). The 10 percentage point gender gap is similar to the regional average of 9 percentage point gap in favor of men but it is outside the norm for Mercosur countries where the gap is very small (2% in Chile; 3% in Argentina; and 2% more women than men covered in Paraguay). Within the G-20, Brazil generally fares better than its developing country peers, and is in line with the G-20 average of a roughly 10 point gap. 27. Brazil leads Latin America in the percentage of adults with a credit card at 29%, more than double the rate of most countries in the region and near the G-20 average of 33% (Graph 3). Brazil still has room to grow this market, as penetration levels in high income countries are closer to two-thirds of the adult population; in the U.S. for example, cards are used for approximately half of all purchases. Penetration levels of credit card use vary significantly across the Brazilian population, reflecting the fact that credit cards continue to be a product focused in more urban and higher income communities. For example, 40% of higher income consumers (top 60% of incomes) have a credit card in Brazil compared to 14% for those at the bottom of the economic pyramid (bottom 40%). The urban / rural divide is 37% vs. 21% - the highest absolute gap in the region. 15 Graph 2. Accounts at a Formal Financial Institution by Gender Accounts at a Formal Financial Institution Brazil Costa Rica Venezuela, RB LAC Chile Ecuador Dominican Republic Colombia Argentina Mexico Accounts held by women Bolivia Accounts held by men Guatemala Panama Honduras Uruguay Peru Paraguay El Salvador Nicaragua 0 10 20 30 40 50 60 70 Source: FINDEX 2011 28. In terms of gender equity, Brazil is exactly at the Latin American average, with 5% more males than females owning a credit card. Brazil thus does slightly better than the regional average of a 7% male-female gap, and does better in gender equity than many of the world’s most developed economies including France, Germany and the United States (see Figure A2 in the Appendix). 29. Widespread access to credit cards, however, does not necessarily translate into access to mainstream sources of formal credit. First of all, Brazilians tend not to carry balances on their credit cards due to exorbitant interest rates which can exceed 200% on an annualized basis. Second, according to FINDEX data, Brazilian consumers are not getting other kinds of loans from formal lenders. Figure A3 in the Appendix shows the sources of loans taken by consumers in Latin America. Only 6% of Brazilians indicated they had a bank loan and only 1% had loans from other private lenders, but Brazil has one of the highest percentages of loans from family and friends at 16%. These figures likely understate access to credit as they may not reflect retail credits (i.e., buying on installment plans) even when backed by banks which is widespread among lower 16 income consumers, or use of subsidized or government-supported credit programs such as the microcredit program Crediamigo or payroll loans. However, the statistics seem to indicate that access to credit in Brazil, even among lower income consumers, is increasingly likely to be coming through credit cards rather than other types of loan products. Graph 3. Credit Card Access: General vs. Bottom 40% Credit Card Access Brazil Uruguay Chile Argentina Credit card, LAC income, bottom 40% (% age Mexico 15+) Dominican Republic Costa Rica Panama Venezuela, RB Peru Credit card (% age 15+) Ecuador Colombia Paraguay Guatemala Honduras El Salvador Bolivia Nicaragua 0 10 20 30 40 Source: FINDEX 2011 30. In comparison with both Latin America and the G-20, Brazil’s savings rate is low (Graph 4). Only 21% of adults in Brazil report saving any income in the past year, a low rate when compared to Mexico (27%), Colombia (33%) or Bolivia (44%). Brazil is at the LAC average, however, in terms of savings at a financial institution at 10% - an indication of the success the country has had in moving consumers toward formal accounts. Brazil also sees generally low gaps in savings along education, income and urban/rural lines. Along educational lines for example, there is just a 10 point gap in 17 savings among those with secondary education or more and those with just primary education or less. This is in contrast to 28 points in Costa Rica and the Latin American average of a 16 point gap. Within the G-20, Brazil has the lowest savings rates except for Turkey. However, it also has one of the lowest gaps in savings by income brackets, doing better than many of its more developed peers including France, China and the United States. See Figure A4 in the Appendix. 31. The insurance market in Brazil is small but growing among low income consumers. Reportedly, the greatest market penetration is related to health, and life and funeral insurance to help protect against illness and loss of life. There are no official statistics on microinsurance or on the percent of policies purchased by low income consumers but some rough estimates exist. A frequently cited study by Neri at FGV from 2009 estimates that only about 8% of consumers in economic classes C, D and E have health insurance and only 2.6% have life or funeral coverage. Recent FINDEX data seem to confirm these estimates and indicate that only 10% of all Brazilians purchase health insurance and that this figure is even lower for the poor (lowest 40% by income) at about 3%. FINDEX does not have data on life or funeral policies. However other sources project higher levels of coverage. A 2010 study by CENFRI cites estimates from private industry of approximately 20 million funeral policies in Brazil – a figure also provided to the FSAP Update mission by private insurers - which would indicate a significantly higher level of coverage than Neri’s 2.6%. Survey research in low income communities in Rio and Sao Paulo in 2009 obtained estimates of approximately 25% for insurance coverage related to health and life/funeral. Graph 4. Savings: Total Savings and Savings at a Financial Institution Savings in Latin America Bolivia Costa Rica Dominican Republic Panama Colombia Ecuador Peru Venezuela, RB Mexico Saved at a Chile financial Nicaragua institution in the LAC past year (% age El Salvador 15+) Guatemala Argentina Saved any money Honduras in the past year Brazil (% age 15+) Paraguay Uruguay 0 10 20 30 40 Source: FINDEX 2011 18 C. Credit Reporting and Consumer Protection 32. Brazil has a strong credit reporting system but relative progress vis-à-vis other countries in the region has slowed down recently. Brazil was an early standout in terms of the quality and availability of credit information, making it possible for some products, like cheques, to prosper decades ago. However, while many countries in Latin America have adopted reforms providing for more efficient and comprehensive credit reporting system. Brazil is only now undertaking the fundamental reform of including positive data in credit reports. 33. Twelve 12 Latin American countries have a perfect score of “6” in the Doing Business (DB) credit information index but Brazil is not among them due to lack of positive data.12 Since 2006, 7 countries in Latin America have moved from lower scores to reach a score of “6” in the 2012 DB report (Graph 5). The seven reformers are Bolivia, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras and Uruguay. Other countries in the region which fulfill all the DB good practice criteria and score “6” are Argentina, Mexico, Panama, Paraguay and Peru. While this index, as is the case with any such device, captures only some of the aspects of quality and coverage of a credit reporting system, it does provide a good first approximation of the strength of a country’s financial information infrastructure and helps track reforms. More detail on credit reporting in Brazil is provided in the Focus Section of this TN (see below). Graph 5. Doing Business Index Score Doing Business Index 6 5 4 3 2 1 DB2006 0 DB2012 Antigua and… St. Vincent and… Trinidad and… Dominican… Grenada Panama St. Lucia Dominica Brazil Chile Costa Rica Jamaica Paraguay Bahamas, The Bolivia Guyana Nicaragua Belize Colombia Mexico Peru Uruguay Argentina El Salvador Guatemala Honduras Ecuador Puerto Rico (U.S.) Suriname Venezuela, RB Haiti St. Kitts and Nevis Source: Doing Business 12 The components of the DB Depth of Credit Information Index, which are equally weighted, are: (1) Both positive credit information (for example, outstanding loan amounts and pattern of on-time repayments) and negative information (for example, late payments, and number and amount of defaults and bankruptcies) are distributed; (2) Data on both firms and individuals are distributed; (3) Data from retailers and utility companies as well as financial institutions are distributed; (4) More than 2 years of historical data are distributed. Credit registries and bureaus that erase data on defaults as soon as they are repaid obtain a score of 0 for this indicator; (5) Data on loan amounts below 1% of income per capita are distributed. Note that a credit registry or bureau must have a minimum coverage of 1% of the adult population to score a 1 on this indicator; (6) By law, borrowers have the right to access their data in the largest credit registry or bureau in the economy. 19 34. Financial consumer protection in Brazil is relatively strong in terms of the rules on dispute resolution (Graph 6) but less advanced in terms of disclosure requirements (Graph 7) or monitoring and enforcement (Graph 8).13 The lower score on monitoring and enforcement may be influenced by the lack of a clear institutional framework for financial consumer protection with responsibilities currently shared by a variety of regulators and the Ministry of Justice. On disclosure requirements it is interesting to note that the lower score is largely due to the lack of disclosure on deposit (savings) products. The lack of consistency in transparency and disclosure on issues such as method of interest compounding, penalties for early withdrawal and even interest rates paid may be contributing to underperformance in savings. And while Brazil has one of the more comprehensive dispute resolution frameworks, it also has a relatively high level of complaints related to finance products which are registered by consumer protection authorities (Procons). This may indicate that the dispute resolution mechanisms which are intended to work at the level of the financial institution require additional attention – perhaps including more aggressive supervision. Graph 6. Consumer Protection-Dispute Resolution and Recourse Dispute Resolution and Recourse Peru Mexico Brazil Chile LAC average Uruguay Colombia Argentina Costa Rica Bolivia 0 2 4 6 8 10 Source: Financial Access 2010, CGAP 13 These data are from Financial Access 2010, CGAP. 20 Graph 7. Consumer Protection--Requirements on Periodic Disclosure Requirements on Periodic Disclosure Mexico Uruguay Colombia Chile Argentina LAC… Peru Bolivia Brazil Costa… 0 5 10 15 Source: Financial Access 2010, CGAP Graph 8. Consumer Protection--Monitoring and Enforcement Monitoring and Enforcement Chile Colombia Mexico Uruguay Peru Argentina Brazil LAC Average Bolivia Costa Rica 0 5 10 15 Source: Financial Access 2010, CGAP D. Financial Products Suppliers 35. Four main types of financial products providers-–commercial banks, state owned banks, cooperatives and microfinance institutions--are involved in financial inclusion efforts. Figure 1 below identifies some of the leading institutions in each of these categories. In addition some data was obtained on microinsurance activities by leading private insurers. 21 Figure 1. Types of Financial Providers Involved in Financial Inclusion Cooperatives Commercial State Owned (associations Microfinance Banks Banks listed below) Caixa Economica Banco Nordeste Domestic Capital Federal SICOOB do Brasil Banco do Brasil SICREDI Santander Foreign owned Banco Nordeste Others do Brasil UNICRED BNDES Source: Author 36. Leading commercial banks, including Bradesco, Santander, and BMG, are pursuing different financial inclusion strategies. Bradesco is the second largest commercial bank in Brazil by both assets and deposits (US$355 billion and $US 116 billion, respectively, as of December 2011). The focus of Bradesco’s efforts has been to establish an extensive network to facilitate access through a variety of channels-- correspondents, branches and ATMs--with emphasis on credit and insurance products.14 In partnership with Caixa Economica Federal (CEF) and BB, it launched the Elo card brand which includes both debit and credit cards with a focus on lower income clients. The goal is to reach a 15% market share in the medium term. Santander has taken a different approach, with investment in a dedicated microcredit institution which ranks as one of the largest microfinance institution (MFI) operations in the country after Banco do Nordeste do Brasil’s (BNB) programs. In 2010, according to MIX data, Santander Microcredit had more than 95,000 active clients and a loan portfolio in excess of US$75 million. Yet another approach is a focus on payroll loans exemplified by BMG, a market leader in this segment. It focuses almost exclusively on loans to public employees and pensioners. 37. Three state-owned banks continue to be the main source for financial products and services targeting low income consumers. Two of these, BB and CEF, rank among the 5 largest banks by assets, with BB leading the nation’s banks not only in assets but also deposits, number of branches and number of employees. The third institution is BNB. While these institutions have a broad customer base reaching both middle and low income consumers, they also have mandates related to financial inclusion. BB, which is now administering the postal bank correspondents’ network, is pursuing a multi-pronged effort on financial inclusion. BB activities include a partnership on mobile banking with the telco firm Oi, and the launch of a microinsurance product 14 In terms of bank branches, Bradesco is second only to Banco do Brasil (BB) with 4,643 nationwide. Between 2002 and January 2012, Bradesco managed the correspondent banks run through Banco Postal – more than 6,000 in number. Bradesco Expresso correspondent banks number more than 38,000 nationally. 22 with insurance leader Mapfre to be sold through the postal bank network. CEF has a focus on housing finance and is the institution behind the Minha Casa Minha Vida program directed at low income consumers. This bank, which boasts the largest correspondent banking network in the country, is also the channel for payment of Bolsa Familia payments via cards. BNB is by far the largest microcredit provider in the country, with more than 1 million active clients in the Crediamigo program and more than 650,000 in the Agroamigo program. In addition, the Banco Nacional de Desenvolvimento Economico e Social (BNDES) provides financial services for small and micro enterprises, especially through its Visa card program linked to pre-approved vendors with purchases handled through a dedicated website. 38. Cooperative banks have also made important contributions to financial inclusion in Brazil over the past decade, especially in the south and southeast regions of the country. Graph 9 below shows the increasing presence of cooperatives in the Brazilian financial system between 2000 and 2010 in terms of not only credit, but also deposits and net worth. Table 3 reports basic data on cooperatives. Graph 9. Share of Cooperatives in the National Financial System 4 3.5 3 2.5 % Net Worth 2 % Assets 1.5 % Deposits 1 % Credit Operations 0.5 0 23 Table 3. Basic Statistics on Brazil’s Cooperative System, May 2011 Cooperative System Central CAC Members Deposits Average cooperatives (‘000s) (billions deposit R$) (‘000s R$) Sicoob 14 573 1,921 12.2 6.4 Sicredi 5 121 1,756 10.3 5.9 Unicred 9 112 238 5.1 21.4 Ancosol 5 161 254 0.6 2.4 Central Coops (not 5 55 1,006 2.3 2.3 confederated) CAC - 293 (non-afiliated) TOTAL 38 1,315 5,170 30.5 5.9 Source: Central Bank of Brasil 39. A variety of credit and loan products are available for low income consumers in Brazil including: - Payroll loans (credito consignado): Available to employees through salary deductions or to retirees through deductions from their pensions. There are some limits on these loans – no more than 30% of one’s income or pension payment can be committed through these loans and the maturity cannot exceed 60 months. While employees of private firms are legally eligible for these loans, they tend to be available only to government employees where job tenure / protections are strongest so unemployment and consequent lack of salary for deductions is considered a minimal risk by lenders. - Credit cards: Credit cards are increasingly used in Brazil by consumers. Due to high interest rates on cards – often in excess of 200% per year – most Brazilian consumers (about 75% of card holders) pay bills in full each month. This is significantly more than is the case in many countries, such as the U.S., where most consumers (about 70%) carry balances. For those Brazilian consumers who do carry balances, monthly minimum payments are at least 15% of the balance by Central Bank regulation. Credit cards may be issued by banks or through/in association with major retailers. The two main brands are Visa and Mastercard with newer entrants such as the aforementioned Elo and Hipercard focusing on lower income segments. Loyalty programs are common, especially for higher income card holders and are used to compete for customers. - Microfinance loans: These loans are mainly provided by BNB which has a market share exceeding 70%, mostly in the North and Northeast regions of the country. The BNB program is for productive microcredit which requires funds to be invested in a revenue generating activity. In terms of size, the loans are small – ranging from as low as R$100 to R$ 1,000 on average, with the maximum loan size at about R$15,000. Most loans are for relatively short periods of time- 6 or 12 months – with a maximum maturity 24 of 36 months. Interest rates are also significantly below market levels and now are as low as 0.64% per month thanks to the Crescer program. Santander Microcredit is a distant second in the market for microfinance, with an average loan size of about $700 USD. - Prepaid cards: Prepaid cards enable unbanked consumers to have access to card technology for payment. Single use prepaid cards, such as store gift cards, were joined by general purpose reloadable (GPR) cards in 2011. The main providers are PanAmericano Mastercard, Ourocard Visa (with BB) and Mundo Livre Visa (Banco Rendimento). These cards may have fees for issuance, maintenance (only Mundo Livre), for adding value and for withdrawals. - Savings accounts: Savings accounts have traditionally been a popular investment vehicle in Brazil because they paid a guaranteed, tax-free rate of return even during periods of economic instability. This policy was shifted recently, however, when the Government announced in May 2012 that the rate would drop to 70% of the SELIC reference rate, if that rate went below 8.5%, on new deposits. Savings accounts are commonplace – more than 100 million exist – but represent a relatively small share of total savings in the country. E. Laws, Regulations and Government Programs 40. The authorities have taken a strategic and forceful approach to financial inclusion underpinned by a multi-agency “architecture”. The Central Bank sits at the top of this architecture and established a dedicated unit for Financial Inclusion in April 2010 as part of its Financial System Regulation Department (DENOR). The Central Bank has hosted an annual Forum for Financial Inclusion since 2009 and publishes an annual report on the topic. Other agencies which play key roles in various aspects of the financial inclusion strategy include the other main financial sector regulators who form part of COREMEC (in addition to the Central Bank, CVM (securities regulator), SUSEP (private insurance regulator) and PREVIC (pension regulator), Treasury (Fazenda), the Ministry of Justice (especially related to consumer protection), the Ministry of Social Development (related to financial inclusion via transfer payments through the Bolsa Familia program), Ministry of Communications (for mobile payments) and SEBRAE which provides support to SMEs. 41. Brazil’s approach to financial inclusion has evolved over time establishing new programs and products and strengthening market conduct. More than a decade ago, initial efforts to extend access to finance relied on microcredit, followed by payroll guaranteed loans. Over time the focus broadened to include non-credit financial products and services including microinsurance (regulations pending) and payments (especially related to social transfers to the poor (G2P)). There is also a growing attention given to market conduct and transparency to create incentives for innovation and competition at the base of the pyramid. Table 4 lists some of the most important regulatory measures taken in the last ten years. 42. In May 2012 Brazil published the “Action Plan to Strengthen the Institutional Environment” as part of the National Partnership for Financial 25 Inclusion (Box 1).15 This document identifies eight actions for 2012-2014 to enhance and strengthen the opportunities for financial inclusion in Brazil. These eight action items are listed in Box 1 below together with the key agencies to be involved. Several of these actions relate to reforms in the legal and regulatory framework for financial inclusion to support microfinance, mobile payments and enhanced consumer protection. 43. Brazil is also an active participant in the G20 Financial Inclusion Experts Group (FIEG) where they co-lead with Australia the Access Through Innovation Sub-Group (ATISG). The principles for innovation in financial inclusion are in line with the approach taken by Brazil, focusing on government leadership together with a coordinated approach involving public and private sector bodies, diverse service offerings and effective consumer protection and financial education. Table 4. Regulations on Financial Inclusion Issues Law / Regulation Number of Law / Link to Law / Regulation Regulation National Program LEI Nº 11.110, DE 25 http://www.planalto.gov.br/ccivil_03/_ato2004 of DE ABRIL DE 2005. -2006/2005/Lei/L11110.htm Oriented Productive Microcredit - PNMPO Crescer MPV 543 2011 http://www.planalto.gov.br/ccivil_03/_Ato201 1-2014/2011/Mpv/543impressao.htm Simplified Accounts Resolução nº 3.211, http://www.bcb.gov.br/pre/normativos/res/200 de 30 de junho de 4/pdf/res_3211_v2_P.pdf 2004 LEI No 10.953, DE 27 http://www.planalto.gov.br/ccivil_03/_Ato200 Credito consignado DE SETEMBRO DE 4-2006/2004/Lei/L10.953.htm#art6§5 2004. http://www.planalto.gov.br/ccivil_03/LEIS/20 LEI No 10.820, DE 17 03/L10.820.htm#art6 DE DEZEMBRO DE 2003. http://www.cade.gov.br/Default.aspx?40f3021 7ee24f83acc7ad26fc6 Processo: 08700.003070/2010- 14 (end of exclusivity) Microinsurance Pending – coming 2012 from SUSEP Minha Casa Minha LEI Nº 12.424, DE 16 http://www.planalto.gov.br/ccivil_03/_Ato201 Vida DE JUNHO DE 2011. 1-2014/2011/Lei/L12424.htm#art1 15 http://www.bcb.gov.br/nor/relincfin/Plano_de_Acao_PNIF.pdf 26 Cooperatives Resolução nº 3.859, de 27 de maio de 2010 Correspondents Res. 3954/11 Portability Portabilidade (de cadastro – Res. 2835/2001, de crédito - Res. 3401/2006 e de salário Res. 3.402/2006 e Res. 3.424/2006), Cadastro Positivo LEI Nº 12.414, DE 9 http://www.planalto.gov.br/ccivil_03/_Ato201 DE JUNHO DE 2011. 1-2014/2011/Lei/L12414.htm Custo total efetivo Res. 3517/07 e Res. 3909/10 Box 1--Action Plan Items for National Partnership for Financial Inclusion 1. Improve the regulatory framework for microcredit, including for institutions specialized in microfinance, to adequately support microentrepreneurs, as well as micro and small enterprises (Central Bank, Treasury, Justice) 2. Encourage diversification and improvement of financial services, making them more responsive to the needs of the population (Central Bank, Treasury, PREVIC (pension regulator), SUSEP (private insurance regulator) 3. Define the legal and regulatory framework for mobile payments (Central Bank, Ministry of Communications) 4. Strengthen the network of financial services delivery channels serving the population (Central Bank, Treasury) 5. Contribute to the promotion of financial education (COREMEC members, Justice, Social Development, SEBRAE) 6. Accelerate dissemination of consumer protections afforded to financial services consumers including dispute resolution mechanisms (COREMEC members, Treasury, Justice) 7. Improve the methodology used to study financial inclusion and incorporate quality indicators (Central Bank, SUSEP, PREVIC) 8. Conduct research on the behavior and perceptions of the population in regard to the use of financial services (COREMEC members, Justice, IBGE (Brazilian Institute of Geography and Statistics, SAE, Social Development, SEBRAE) 27 II. Selected Issues in Financial Inclusion A. The Payroll-Guaranteed Loan Program--Crédito Consignado 44. Payroll-guaranteed loans represented nearly 60% of the personal loan market segment in Brazil at the end of 2011. Growth rates for the program have averaged more than 30% per annum in the period 2004-2011, since the legal framework was clarified and extended to cover not only government workers and retirees, but also private sector employees and pensioners under INSS (the National Institute of Social Security).16 In the same period non-consigned personal loans grew by approximately 13.5% per year. See Table 5 below for more detailed information on the evolution of the program. Table 5. Payroll Guaranteed Loan Program End Year Consigned loans Non Total % Public Private Total consigned personal consigned sector sector personal loans loans 2004 19,997 3,479 23,476 46,205 69,681 33.7 2005 37,272 5,079 42,351 52,143 94,493 44.8 2006 54,556 7,802 62,358 52,531 114,889 54.3 2007 69,654 10,546 80,200 59,242 139,443 57.5 2008 79,846 12,514 92,360 75,862 168,222 54.9 2009 104,335 16,748 121,083 83,781 204,864 59.1 2010 125,299 21,198 146,497 93,734 240,231 61.0 2011* 135,957 22,591 158,548 111,949 270,497 58.6 45. By reducing the risk to lenders, crédito consignado have resulted in a significant reduction in the interest rates charged. According to data from the Central Bank, the average interest rate on loans obtained through the crédito consignado program was 27.2% per year in November 2011 compared to more than 70% per year for non- consigned personal loans (Figure 10 below.) This significant differential in rates, which was present from the beginning of the program, allowed some borrowers to substitute loans obtained through the crédito consignado program for more expensive credits they were previously holding. The shift from high cost to lower cost credit provides an unambiguous welfare improvement for consumers and there is both anecdotal evidence and recent research which suggests that this occurred during the early years of the program (through 2007). 17 At the same time, by creating a solid guarantee credit became available to some low income workers or pensioners who were previously unable to obtain a loan. A 2005 survey by the Brazilian Federation of Banks (FEBRABAN) found that 51% of people taking a crédito consignado had never borrowed before. Research by 16 The relevant laws are 10,820 of September 2003 (medida provisoria / temporary measure) and 10,953 of September 2004. 17 Gigliucci 2011. 28 Madeira, et al. (2010) also indicates that borrowers in the crédito consignado program were more likely to have a small business as financial constraints to entrepreneurship were reduced. 46. The hallmark characteristic of the crédito consignado program is the drastic reduction in default risk due to the automatic deduction from stable (government) sources of income-–government pensions and government salaries. For a time public banks enforced exclusivity rules for access to crédito consignado. For example, government employees whose payroll was administered through BB were only able to request a crédito consignado through BB, limiting competition in this market and contributing to higher prices. In 2012, the Administrative Council for Economic Defense (CADE) ended the ability of public banks, such as BB, to have exclusive rights to the crédito consignado business of government employees whose payroll they administer or pensioners who receive benefits through a particular public bank. Graph 10. Interest Rates on Loans by Type, 2004-2011 (Percent per year) 47. The risk of non-payment may be so low that it may be creating perverse incentives for -sometimes aggressive- overselling of crédito consignado loans. For a bank granting a crédito consignado, the only credit risk is whether or not the borrower has reached his/her maximum salary allocation for debt payments–set by law in 2010 at 30% of the total benefit / salary. To further control levels of indebtedness, loan maturity is also limited-to 5 years for retired private sector employees. The lender does not need to review the borrower’s credit history in the credit bureau system, and total levels of indebtedness will neither affect the consumer’s ability to get approved for a crédito consignado or their ability to repay. 48. For many borrowers the crédito consignado looks like a great opportunity as interest rates are far lower than on other unsecured loans but these rates remain 29 high in real terms. Price inflation in Brazil has only hovered between 3 and 7 percent per annum since 2007. According to information provided by INSS (the National Institute for Social Security), a higher share of pensioners take these loans in lower income states, such as those in the North and Northeast, while they are less popular in the Federal District or south. Further, pensioners typically are taking the maximum loan amount and carrying this positive balance indefinitely, thus reducing their income level by as much as 30%. 49. Going forward attention should be paid to how government workers and pensioners are marketed these loans and the impact on their welfare should be evaluated. Efforts to reduce overly aggressive sales techniques have begun including be setting training requirements for agents. However, given the incentive structure in the industry, where agents are only paid for loans they make, these steps may not be sufficient. Looking at ways to involve the banks making the loans in the risk of non- payment would help to curb over-selling but would also likely increase the rate charged and reduce the access to credit for some borrowers. Impact evaluation of the program should also be prioritized to see whether borrowers are benefiting from access to credit – improved health outcomes, investments in productive investments or education for family members, etc. B. Credit Reporting–Moving to a Positive Credit Registry “Cadastro Positivo” 50. Brazil has traditionally had a strong credit information culture in terms of negative data. SERASA is the country’s leading private credit bureau and was originally founded in 1968 by Brazil’s domestic banks, decades before many other Latin American countries established private bureaus. SERASA began operations focusing on the collection of negative credit data from its members, but over time extended its scope to include data from other public and private data sources. The other main source of credit information in Brazil historically was the SCPC (Serviço Central de Proteção ao Crédito), a service run by the Sao Paulo Chamber of Commerce which links to data from retailers across the country. The Central Bank has also played an important role in credit information. For example, the wide use of post-dated checks in Brazil was possible because of easy and low-cost access to information on bounced checks provided by the Central Bank. This service made it possible to use post-dated checks as a type of retail credit as well as a payment mechanism. Major changes in credit reporting in Brazil—From 2007 to the present 51. SERASA was the fourth largest bureau globally (trailing only the “Big Three” international bureaus Experian, TransUnion and Equifax) when it was a acquired by Experian in 2007. Experian is the majority shareholder, with two of Brazil’s largest banks – Itaú Unibanco and Bradesco - holding the remaining minority shares. The acquisition was important for several reasons. It provided access to international capital as well as to Experian’s global technology for data management and analytical solutions. The new ownership structure also put the firm in line with global good practices for the industry by removing the banks (the primary providers and users of 30 data) from management of the firm. Third party ownership of credit reporting firms helps to align incentives toward expansion of the database and its use by a broader set of financial and commercial firms. On a related point, it also is likely to increase the quantity and quality of decision tools offered by the bureau, creating a more level playing field for credit analytics. (When banks own a credit bureau they may try to limit the data collected to client segments that are of greatest interest or limit access and use of the data – including the spread of credit scores and other analytical tools - by potential competitors who are not owners of the bureau.) 52. The other main private bureau today is Boa Vista/Equifax which is significantly smaller than SERASA, but growing. Boa Vista / Equifax was created in 2010 through a partnership between the Chambers of Commerce of Sao Paulo, Rio de Janeiro, Paraná and Porto Alegre, together with the investment fund TMG Capital and the international credit bureau firm Equifax. In addition to collecting data from banks, firms and other sources, Boa Vista commercializes data from the SCPC. This is an important strategic advantage for the firm as it seeks to build market share. It also brings investment capital and technical know-how to the management and distribution of this rich dataset, increasing its value to financial providers through decision tools and analytics.18 53. There is also a public credit registry managed by the Central Bank of Brasil. Known as the SCR or Credit Information System, it includes both positive and negative data on all customers with loans in excess of R$ 1,000 at regulated financial institutions. The lower bound on loans reported was recently changed to R$ 1,000 from R$ 5,000 to include more small borrowers in the public registry. The main objective behind this change was to make it easier for both lenders and regulators to accurately measure indebtedness levels for a larger share of the population, so as to promote wiser use of credit. In addition to loan amount, lenders provide information on the status of the loan, indicating whether payments are on time, late or in default. Since private bureaus only collect negative data at this time (i.e. information on loans where there are late payments or defaults), this is the only source of reliable information on levels of credit exposure (i.e. total indebtedness which includes loans in good standing). Only regulated financial institutions can access these data through their dedicated communication lines with the Central Bank, and they pay a very small fee for this access. Private credit bureaus and other private firms providing credit analysis and credit decision tools do not have access to the data in the SCR. The CPL allows the sharing of details of the credit transactions with other sectors of the economy. Seizing the opportunity --Cadastro Positivo 54. Recent changes in the credit reporting industry in Brazil have created a solid foundation for growth and for the sector to play an increasingly strategic role in financial markets. These include the aforementioned change in ownership of the dominant bureau SERASA; the strengthening of the secondary credit bureau BoaVista 18 Some of the local retailer associations under CNDL did not join the BoaVista partnership and have since entered into a partnership with SERASA to disseminate their data. 31 Equifax through a partnerships with leading Chambers of Commerce and the commercialization of SCPC data through Boa Vista (offering a more technologically advanced platform and credit tools); and the expansion of the SCR to include small loans to a minimum size of R$ 1,000. The next major reform, which is poised to take effect in mid-2012, is the development of the “cadastro positivo” or positive credit data in Brazil. 55. Brazil has lagged behind the global trend--and internationally recognized good practice--of collecting and distributing both positive and negative credit data. The lack of positive credit information is the reason that Brazil scores 5 out of 6 on the Doing Business “Depth of Credit Information” index – below the regional average of 5.4. 56. Legal challenges to sharing positive credit data have impeded the development of more comprehensive reporting. It is also possible that the dominant financial institutions have resisted the cadastro positivo reform. Sharing positive credit data helps to level the playing field, increasing competition in credit markets and thereby removing some of the information rents that the largest institutions enjoy from their market share and proprietary databases. Once the reforms are implemented, experience in other countries suggests that even the largest financial institutions become enthusiastic advocates of comprehensive reporting for the improvements it offers in risk management and new business development opportunities. 57. The Cadastro Positivo Law (CPL), No. 12.414, was passed in June 2011. It was regulated in October 2012 through Decree No. 7,829 and Resolution No. 4,172 of December 20, 2012. The FSAP mission, which took place in March 2012, identified several important issues to be addressed through regulation including the following: -Defining the mechanism for consumers to authorize their participation in the cadastro positivo; -Strengthening the regulatory framework for the credit reporting industry including issues of supervision and enforcement; and -Clarifying the relative roles of the public and private registries and potential mechanisms for cooperation – for example, related to the use of public data for decision tools such as credit scoring 58. The Law which provides the basis for the cadastro positivo states that consumers must authorize their participation (i.e., the collection of their positive credit data) in the credit reporting system. This provision of the law means that the cadastro positivo is an “opt in” system where consumers must take an action (authorize their participation) in order to participate. This provides consumers with more control over their data but it also increases the cost of creating positive credit histories and almost certainly will reduce the extent of coverage of the cadastro positivo. Behavioral economics provides many examples of the influence that the type of default options have on behavior and here the default (no action taken) will be to remain outside the cadastro positivo. 19 When reforms to the law are considered in the future, this provision – 19 See the article “Do Defaults Save Lives?” in Science by Johnson and Goldstein, November 2 003, Vol. 302, pages 1338-1339. 32 requiring special express consent for participation in the positive credit history database – should be reviewed to determine if it can be eliminated or streamlined within the notification provided to borrowers and potential borrowers when they apply for a loan. 59. Since the law requires specific authorization to participate in the cadastro positivo, the process should be made as simple and easy as possible. Ideally this would be a short, plain language text (ideally just a few hundred words) which defines the cadastro positivo, how it will be used by lenders and mechanisms for redress. The consumer would simply sign and date the document if they agreed to participate. An early version of the authorization document reviewed by the FSAP mission was several pages long and included multiple clauses which had to be marked. Depending on the way they were answered, it appeared that the document could lead to ambiguous answers on the customer’s willingness to participate. The authorization form which was ultimately included in Decree No. 7,829 is a single page document which also includes multiple fields to be marked, related to the sharing of information across databases and the collection of information from utility bill payments. Regulators should closely monitor consumer behavior regarding data sharing obtained through this form including whether the way in which authorizations are requested (order, phrasing used, instructions provided) affects levels of participation. 60. Another outstanding question is whether one signed document authorizing participation in the cadastro positivo is adequate for participation throughout the system or applies only to a specific financial or credit reporting relationship. For example, if Bank A provides their credit customers with the authorization form for the cadastro positivo, does this apply only to the customer’s dealings with Bank A or to all their activities where positive data could be generated (i.e. with other banks, with retailers, with utilities and service providers, etc.)? There are many reasons for supporting a “blanket” authorization procedure where consumers are approving the development of a positive credit history across all their financial and commercial relationships when they agree to participate. Imagine the potential complexity – for both consumers and for the credit reporting firms - if each of Brazil’s more than 100 million economically active consumers had to authorize the collection of positive data in each and every economic relationship they had. It is likely that some but not all financial dealings would be approved for participation in the cadastro positivo under this scenario. This would reduce the impact of the reform because coverage would be less than complete, even for those customers who had approved their participation with a lender in the system. It would also add a significant layer of complexity to the data management at the credit bureau, adding to the cost of creating and maintaining these data. The authorization form which was ultimately approved through the regulation automatically covers all financial and commercial relationships except for utilities which consumers can also opt into for data sharing. 61. There is also a question as to whether separate authorizations will be needed for each credit reporting firm or whether the authorization should cover all approved / legally recognized credit bureaus. In order to maximize the availability of positive credit data and reduce the costs of constructing these databases, authorizations 33 should clearly indicate that they cover data collected by any legally recognized credit reporting firm. If each credit bureau would be asked to separately collect authorizations this would not only be confusing for many consumers, but would also likely favor the market leader, SERASA, which would likely negatively affect competition in the market for credit information. The authorization form that was approved requires consumers to explicitly approve participation for each credit bureau but this can be done on one form. Authorities should monitor closely whether consumers are approving data sharing for all bureaus or only for one, as this has direct implications for competition in the credit reporting industry. 62. The move to collect positive credit data has also increased the need for a more comprehensive regulatory regime for credit reporting in Brazil. Reporting on a consumer’s negative credit history is often viewed as a public service – alerting others to instances of bad faith – and expectations of data privacy are less binding as the goal is to compel payment by sharing the negative credit information. The context changes substantially when positive data are collected. Consumers have a reasonable expectation of confidentiality for their positive data, with exceptions allowed by law or by their agreement – as when a consumer applies for a loan. The central role played by credit bureaus in financial market decisions, together with the data privacy issues relevant to consumers, are reasons for adopting a more explicit and rigorous supervisory framework for credit reporting, which should include some kind of licensing procedure. 63. Today, the cadastro positivo is not a popular or well understood reform, particularly on consumer protection issues. There are lingering doubts whether there are adequate consumer protection mechanisms in place –related to issues of access to the data by both the data subject (borrower) for his/her own information and by financial providers and other businesses and recourse mechanisms available when the data is inaccurate. Consumer protection groups have criticized the law including IDEC (Brazilian Consumer Protection Institute) which sent a letter to the President asking that the law be revoked and the Sao Paulo PROCON (Program for Consumer Protection). Clarifying the consumer protection framework and developing a public outreach campaign which involves a variety of stakeholders and not only the credit bureaus, banks and MOF/BCB will be important for establishing broader public understanding and support for this important reform. C. Mobile Payments, Credit Cards and the Rule of “Sobre Preço” 64. Mobile payments have yet to develop in Latin America and Brazil is no exception. According to FINDEX data, only one percent of Brazilians surveyed had used mobile banking to send or receive money – below, but similar, to the regional average of just 2%. While mobile payments have not developed to any extent, the telecom infrastructure which would enable them is well advanced. Anatel, Brazil’s National Telecommunications Agency, reported in May 2012 that there are now more than 250 million active cell phone lines in the country resulting in a coverage ratio of 130 lines per 34 100 inhabitants.20 65. There are some mobile payments initiatives underway in Brazil, all of which currently relate to merchant payments. One of these is Paggo which is a joint venture involving the credit card processing firm Cielo and the mobile operator Oi. The primary business model for Paggo is to facilitate payments for credit card users through a bank centric model. Paggo thus complements the existing business of Cielo – one of the firm’s owners. To date, however, the service has had limited growth. According to a 2011 IFC study, the venture is not yet profitable and has only 250,000 users, of which 100,000 use the service only for bill payment of their cell phone account. 66. There are other ventures including one which the mission visited involving the other large card processor, Redecard and the credit card company MasterCard, together with the mobile operator Vivo and Caixa. This partnership has a pilot with Banco Palmas, a community bank in Fortaleza. At the time of the mission in March 2012, this pilot remained very small, with only 40 Banco Palmas customers participating (this figure corresponded to those members who had installed the chip in their phone necessary for effecting mobile payments) and only 5 to 6 businesses. Banco Palmas officials stated that it was difficult to get people interested in the program because the design of the pilot provided few tangible benefits – being able to use a cell phone to pay in just a handful of stores. It was noted that early in the pilot the partners had wanted to require / link the mobile payment to use of MasterCard credit cards but this was deemed infeasible due to the low income of the Banco Palmas customer base and subsequent limited use of credit cards. 67. The model for mobile payments in Brazil is clearly bank centric to date, rather than led by telecom firms as was the case in Kenya with M-Pesa or in the Philippines with G-Cash. Banks in Brazil have incentives to go slowly with mobile payments including the fact that they have invested in a large POS network, they earn high fees from credit card transactions, and they are still working on increasing acceptance of credit cards among lower income consumers and do not want to add further complexity or confusion with another new payment channel. 68. The IFC’s report on mobile payments in Brazil analyzes this issue as follows: “It is unclear whether a business case for m-payment of bills could be made for banks, as they are currently being paid approximately R$0.90–R$1.20 (US$0.51– US$0.68) for accepting bill payments by the payee. Thus, along with the fee from companies to issue and process boletos, revenue from each bill payment is currently approximately R$2 (about US$1). Reducing their own revenue is clearly not in the interest of the banks, though one bank could try to take away market share from others by offering lower costs. Mobile operators (or a third party) may 20 Slightly more than 20% (54 million) have 3G connections enabling internet access and this share is expected to continue to grow rapidly, as Brazil is seen as one of the strongest markets globally for smartphone expansion. While mobile payments can be built on a 2G infrastructure, as in Kenya with the M- Pesa network, 3G provides options for more sophisticated consumer interfaces for providers and for a greater variety of tools and resources to support financial education, comparison shopping, etc. 35 have a potential business case in capturing part of the bill payment market. As an illustration, Net’s annual bill payment requirements could represent potential revenue of approximately R$96 million (about US$55 million). Utilities and other companies may have an interest in reducing the costs of bill payment, but this alone is not a powerful driver; for example, Net’s typical bill is above R$100 (US$57), so an extra R$2 (US$1.14) for bill payment processing is not significant. Both mobile operators and the utilities face the powerful banks, which seem to control the billing system in Brazil.”21 69. Policy reforms in recent years have addressed some of the price and competition issues related to card payments. In particular, in July 2010 the Central Bank issued regulations ending the exclusivity arrangements existing between Visa and MasterCard and their merchant acquirers – Cielo and Redecard. This ushered in a period of competition during which the average of Merchant Discount Rates fell by about 5%. However, the market for acquirers remains highly concentrated with more than 90% market share held by Cielo and Redecard and merchant fees remain high by international standards. 70. The high cost of credit cards remains a policy concern, especially given the expansion of these products in recent years to lower income segments including to “C” class consumers. On an annualized basis interest rates for balances held are frequently in excess of 200%. The cost of loyalty programs to attract premium consumers and the fact that relatively few card customers carry balances (about 70% pay in full each month – about twice the level in many other countries) puts upward pressure on interest rates for those customers who do use cards for credit. If there is an economic slowdown, lower income consumers- and especially those who are new to credit cards - are at risk of using the card to cover basic expenses and falling into a rapid spiral of debt. The behavior of these consumers should be closely monitored and efforts made to further educate people on the cost of credit, through both targeted outreach efforts and enhanced disclosure at the time of purchase and on the regular billing cycle. The Government also recently reduced the rate charged on personal loans by the largest state owned financial institutions – BB and CEF – a move to put further downward pressure on private sector lending rates. 71. A pending item on the reform agenda is the ability of merchants and others to differentiate the price consumers are charged based on the payment channel used. This is commonly known as the rule on over pricing or “sobre preço” – a term that is, in itself, misleading. As the rule stands now, merchants must charge a single price whether clients pay in cash or use their credit or debit card or another means of payment such as mobile payments. This has a positive impact from the standpoint of formality as it encourages increased use of cards (both debit and credit) for payment. But it also has 21 IFC Mobile Money Study Brazil 2011, page 8. http://www.ifc.org/ifcext/globalfm.nsf/AttachmentsByTitle/MobileMoneyReport- Brazil/$FILE/MobileMoneyReport-Brazil.pdf 36 several potentially negative consequences listed here: i) Customers using cash are subsidizing customers using higher cost—from the retailers’ perspective--payment channels such as cards. This is a particular concern since consumers with lower incomes are less likely to qualify for credit cards and more likely to buy with cash. If merchants cannot discriminate between different payment channels then the price charged must take card fees charged to retailers into account and spread them over both card and cash customers. ii) Consumers are misled about the costs related to both payments and credit and are told that there is “no interest” charged on the installment loans – known as “creditos parcelados”. This is not accurate as there is an implicit interest rate in the price of goods (covering the credit which is essentially being provided in the installment plan) which is borne by all consumers. iii) The procedure encourages people to buy on credit as there is no difference in the nominal price between paying today or in the future (as through the popular installment plan), making credit a more attractive, lower cost, option than might otherwise be the case. iv) Retailers and other firms have less bargaining power with the banks and card processors since the rule states that they must charge a single price in the marketplace and cannot differentiate by channel such as by offering lower prices for consumers paying with cash – or with lower cost alternatives which might include mobile banking solutions. 72. Mobile payment solutions which do not involve the major acquirers, Cielo and Redecard, could bring competition to the retail payments market. These solutions would likely promote person to person transfers as well as payments to merchants, utilities and other service providers. Thus they could provide competitive pressure on the existing POS/ card infrastructure supported by the banking sector and further help to reduce costs over time. D. Consumer Protection and Financial Capability / Education 73. Consumer protection and financial capability and education are core components of responsible financial inclusion and Brazil has made important strides on both of these fronts.22 In the case of consumer protection, financial sector authorities have addressed a number of issues through regulations and Brazil compares favorably with other nations on basic legal protections afforded to consumers. However, responsibility for financial consumer protection is divided among a variety of government regulators and agencies which poses problems related to developing a common agenda and shared priorities as well as for effective oversight and enforcement. In terms of financial capability, the government and the private sector collaborated on a 22 For a good overview of these issues in the context of financial inclusion see CGAP Focus Note No. 73: “Responsible Finance: Putting Principles to Work”. http://www.cgap.org/gm/document- 1.9.54128/FN73.pdf 37 highly successful pilot financial education program for high schools. Future challenges relate to expanding the program nationwide and developing a strategy for the adult population. Financial Consumer Protection 74. The Ministry of Justice in Brazil has primary responsibility for consumer protection across all economic sectors as per Law Number 8.078/90. A recent complement to this law, Decree, No. 7.738, from May 2012, establishes the National Secretary for Consumers Protection within that Ministry to supervise and coordinate national consumer protection policies. This raises the stature of this unit which was previously only a department within the Ministry of Justice.23 It is not clear to what extent this change would actually increase staff or resources available for consumer protection. At the time of the mission there were only about 25 staff assigned to this unit. 75. While the National Secretary for Consumers Protection has responsibility for all economic sectors, a few of them account for the bulk of the complaints and finance is in second place. Statistics developed by the Ministry of Justice indicate that there were more than 26,000 complaints related to finance in 2010, representing 22% of the total, second behind a broad category termed “Products” with more than 68,000 complaints (56%).24 However, other 2010 data from this same source suggest that financial products and services are responsible for an even higher percent of complaints. The combined categories of “bank services”, “credit card services” and “other financial services” *are together responsible for more than 39% of all complaints - second only to cell phones which occupy more than 45%.25 76. The consumer protection unit in the Ministry of Justice has limited resources for its mandate, and does not have even one staff member working full time on financial products and services.26 There are several ways that they seek to compensate for this including working closely with the Central Bank and other financial regulators (CNBV, SUSEP, PREVIC) on financial consumer protection issues. In some instances, regulators directly affect consumer protection through regulations they issue. In other instances regulators work with the consumer protection unit in Justice on studies and to draft new laws. One example of this is the comprehensive review of the Brazilian payment card industry report published jointly by the Ministry of Justice, Ministry of Finance and the Central Bank in 2010 which is discussed in the next section of this report.27 However, these kind of one-off arrangements appear to be less structured or clearly defined than is warranted given the size of the Brazilian financial system. 23 This unit was commonly referred to as “DPDC” shorthand for the Department of Consumer Protection and Defense. 24 These data are presented in the Ministry of Justice webpage: http://portal.mj.gov.br/data/Pages/MJ5E563276ITEMIDBB35096A2A7B47CA83C3CACF4C19EA87PTB RIE.htm 25 Cadastro Nacional de Reclamações Fundamentadas 2010, Relatório Analítico, page 29. 26 As per the interviews at the Ministry of Justice with the DPDC during the March 2012 FSAP mission. 27 See: http://www.bcb.gov.br/Pom/Spb/Ing/Payment_Cards_Report.pdf 38 77. Procons provide an accessible point of contact for consumers but they too lack staff with financial sector expertise. At the state and local level, consumer protection bureaus known as “Procons” provide services directly to citizens across all product and service categories and through a variety of means (in-person at offices; by phone; even through mobile “Procon” vans). 78. On several key consumer protection issues leading Procons have taken positions against those supported by financial regulators and arguably detrimental to the better interests of consumers. For example, Procons have criticized the CPL on the basis of concerns over data protection – which are valid - but have not balanced this by discussing the potential gains from the cadastro from more transparent and competitive credit markets. In the case of the payment card industry, Procons defend the “one price” or “nao sobre preco” rule arguing that consumers should not be subject to higher costs for goods purchased with credit cards instead of cash. However, this is a position which further strengthens the hand of card processors in their dealings with retailers and may contribute to higher prices – clearly not in consumers’ interest. 79. An in-depth review of the institutional framework for financial consumer protection in Brazil should be undertaken with a view to both identify existing gaps and future challenges rising from innovation such as an increasing role for mobile money. Experiences of other countries could provide useful input including efforts in the U.S. and Mexico to create a single dedicated agency for financial consumer protection. The review should also pay attention to the demand side and consumer preferences related to consumer protection in order to identify ways to simplify processes, increase transparency and enhance satisfaction with effective protection and recourse mechanisms. Financial Capability / Financial Education 80. Financial capability and financial education relate to many public policy objectives, financial inclusion being one of these. A myriad of stakeholders in Brazil (including various federal ministries, financial sector industries, entrepreneurship associations, credit cooperatives, etc) are interested in preparing consumers at all income levels for the increasingly complex financial decisions that they are required to make. For example, helping consumers to avoid financial frauds and use insurance and other financial products to mitigate risks, as well as to use finance to support business development and entrepreneurship and increase the levels of citizen empowerment and engagement. Financial education objectives thus extend beyond financial inclusion to issues of financial stability, healthy competition in the financial sector, economic development and long-term savings promotion. 81. Financial education is one of the three pillars of Brazil’s financial inclusion strategy. The other two are: data gathering, compilation, and diagnostics to measure both supply and demand sides of financial access; and the legal and regulatory framework necessary to support financial inclusion including financial innovation. The objective of financial education efforts is to help consumers – especially those who are new to formal financial markets - use financial services to improve their economic and social wellbeing. 39 82. The groundwork for a multi-agency partnership on financial education was laid in 2006 with the formation of the Supervisory and Regulatory Committee of Financial Systems, Capital Markets, Private Insurance and Social Welfare, known by its much easier to remember acronym, COREMEC. In 2007 financial education became one of the early topics the group addressed in a joint manner, through the creation of a Financial Education Working Group (FEWG). Whereas consumer protection responsibilities are defined in part by law, which affects roles that different public bodies can take, financial education lacks such strictures and this allowed policymakers to try new modes of cooperation. 83. A fundamental objective of the FEWG was to develop partnerships beyond the four core members, and external partners were invited to join the group soon after it was created. Partners included other government bodies such as the Education and Justice Ministries, private sector organizations such as the FEBRABAN and the stock market exchange (BM&FBOVESPA), and academics. 84. The national strategy for financial education known by its acronym, ENEF, was created by a Presidential Decree in December 2010 and was developed concurrently with a school-based financial education program. The national strategy also includes a focus on monitoring and evaluation of programs – an approach which was followed in the pilot program and independent evaluation conducted on the school-based program. ENEF basically codified and formalized the working arrangements that had been developed over several years among a number of public and private entities around financial education. 85. The first major initiative to be developed under Brazil’s National Financial Education Strategy was a school-based program for public high schools. The focus on youth reflects the Government’s long-term commitment to strengthening financial capability in the population. The goal is to shift financial attitudes and behaviors among young people and instill positive financial habits that will last into adulthood. 86. The goals of the financial education program mirror those of the national strategy. They are: (1) development of personal finance skills; (2) promotion of savings and avoidance of over-indebtedness; and (3) promotion of financial inclusion. Among these three objectives the emphasis is on the first item - developing personal financial skills that empower youth to make responsible and autonomous financial decisions. CONEF has carefully avoided using a judgmental tone or heavy-handed approach in the school curriculum on issues such as savings, consumption and debt. Consumption goods may contribute to income generation (such as appliances that save time spent on domestic chores or that can be used in home based businesses), education and access to information (computers are a key example) or increased security for oneself or one’s family (televisions or videogames that keep teens off the street and away from danger). At the same time, there is a valid concern that exists about the wisdom of some of this spending especially when consumers enter into debt for their purchase. For this reason the curriculum also stresses the importance of saving and planning and distinguishing between needs and wants. 40 87. Results from the final evaluation indicate sizeable increases in the average level of financial proficiency of students in the treatment group and in their savings behavior (i.e. those receiving the financial education curriculum). 28 For example, students’ financial proficiency, or knowledge of financial products and how to use them, increased by 5% more for those in the treatment group compared to those in the control group. Similarly financial autonomy, a metric developed to measure reflexive, emotional and function autonomy, increased in both groups, but gained 3% more among students in the financial education program.29 In terms of savings, students in the course were more likely to express an intention to save as well as have higher levels of actual savings. Graphs 11 and12 present some of these key findings. 88. The financial education course for high school students also included a successful outreach to parents. The impact evaluation also found that students in the program whose parents also received some financial education had significantly higher levels of savings than those whose parents had not received this training (Graph 13). Further, the evaluation showed that the parents themselves improved their behaviors, for example by developing financial planning behaviors such as listing expenses. The experience with the school-based financial education project is providing valuable input to the planning of outreach programs for adults, which will use a similar methodology and approach. Graph 111. Average Financial Proficiency Score Control Treatment 62 60 59 56 50 50 Baseline Mid-term End-line 28 Evaluation results were presented to the public on June 11, 2012 at the Workshop on Financial Education Impact Evaluation at the Bovespa’s offices in Sao Paulo. The graphs in this section are based on that presentation. The final paper by Bruhn, Legovini, Zia, et.al. was issued early this year. Results were already discussed in the Brazilian press: http://m.g1.globo.com/economia/noticia/2012/06/bird-aprova-projeto-de-educacao-financeira-a-adolescente.html 29 Reflexive autonomy is defined as the extent to which one thinks and plans before making a purchase; emotional autonomy refers to one’s comfort in thinking and talking about financial issues; functional autonomy refers to one’s actual saving practices and ability to save. 41 Graph 122. Average Financial Autonomy Index Control Treatment 52 51 51 49 49 49 Baseline Midterm Endline Graph 133. Average Percentage of Income Saved Parent control Parent treatment 20.5 16.5 Endline 42 References Getting Credit Report, Doing Business 2012 http://www.doingbusiness.org/data/exploretopics/~/media/FPDKM/Doing%20Business/ Documents/Annual-Reports/English/DB12-Chapters/getting-credit.pdf Bold, Chris, Porteous, David and Rotman, Sarah. (2012). “Social Cash Transfers and Financial Inclusion: Evidence from Four Countries.” Consultative Group to Assist the Poor Focus Note. (2011) “BRIC Spotlight, Brazil Banking: Retail Segment Driving Growth.” Thomas White Global Investing Cadastro Nacional de Reclamações Fundamentadas 2010, Relatório Analítico. Published by SINDEC, Ministry of Justice, Brazil. Coelho, Christiano, Funchal, Bruno, and Pinho de Mello, Joao Manoel. “The Brazilian Payroll Lending Experiment.” Departmento de Economica Texto para Discussao no. 573 (2005) “Credit and Loan Reporting Systems in Brazil.” Western Hemisphere Credit and Loan Reporting Initiative, Center for Latin American Monetary Studies, First Initiative, The World Bank. (2012) “Doing Business.” The World Bank and the International Finance Corporation. Machado, L., M. Araujo Parreiras, and V. Rodrigues Peçanha (2011). Avaliação de Impacto do Uso do Cartão BNDES Sobre o Emprego nas Empresas de Menor Porte. BNDES Working Paper 36. Rodrigues, Eduardo A.S., et. Al. (2006) “O Efeito da Consignacao em Folha nas Taxas de Juros dos Emprestimos Pessoais.” Banco Central do Brasil Trabalhos para Discussao 108. Pereira, R. (2007). Ação do BNDES sobre o Emprego Formal: Efeito nas Empresas Financiadas. Revista do BNDES 14: pp 27-42. Pinheiro, Arman do Castelar and Cabral, Celia (1999). Credit Markets in Brazil: The Role of Judicial Enforcement and Other Institutions. Banco Interamericano de Desarollo Documento de Trabajo R-368 (2010) “Relatorio Sobre a Industria de Cartoes de Pagamentoes.” Banco Central do Brasil- Departamento de Operacoes de Bancarias e de Sistema de Pagamentos. Torres, Babatz Guillermo, et. Al. (2009) “Financial Inclusion Report.” Comision Nacional Bancaria Y De Valores. 43 APPENDIX Figure A1 Share of Population with Accounts at a Formal Financial Institution 2011 44 Figure A2—G20 Gender gap in Credit Cards (Male-Female) Canada -6 Australia -6 Korea, Rep. -6 India 1 Indonesia 1 China 2 South Africa 2 Japan 3 Russian Federation 3 Argentina 4 Brazil 5 United Kingdom 7 Mexico 8 France 10 United States 12 Germany 12 Italy 17 Saudi Arabia 20 Turkey 38 Source: FINDEX 2011 45 Figure A3—Loan in the past year by source Dominican Republic Colombia Paraguay Mexico Peru Panama Ecuador Bolivia Latin America & Caribbean Loan from a (developing only) financial Uruguay institution Loan from a Guatemala private lender Brazil Loan from an Chile employer Costa Rica Loan from family Honduras or friends Argentina Nicaragua Venezuela, RB El Salvador 0 20 40 60 Source: FINDEX 2011. 46 Figure A4—Savings Income Disparity 1/ United States Canada Korea, Rep. China Australia Mexico Japan France Brazil South Africa Indonesia Italy Argentina Saudi Arabia Turkey India Russian Federation United Kingdom Germany 0 5 10 15 20 25 30 35 Source: FINDEX 2011. 1/This graph shows the percent difference in households who state they are saving between the top 60% and bottom 40% by income. In the case of Brazil, for example, 27% of high earners state they are saving but only 12% of lower income workers for a 15 point difference.