INTERNATIONALBANK FOR WORLD BANK R E T C N O E N STRUCTION PM AND DEVELO August 2002 No.7 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region BRINGING MICROFINANCE SERVICES TO THE POOR: CREDIAMIGO IN BRAZIL Susana M. Sánchez, Sophie Sirtaine, and Rita Valente Among policymakers and economists, there is a widely- micro and small enterprises. These products typically held perception that microenterprises1face severe financ- carry very high interest rates and require collateral. ing shortages that limit their growth opportunities. Re- Banking networks also leave many areas, particularly solving the problems of access to finance as well as the poor and remote regions in the Northeast and North of high cost of financing has become the main objective of Brazil, underserved. About 57 percent of all munici- many government programs. palities in these regions have no access to a bank branch, compared to a national average of around 30 With a view to increasing access to credit for percent. Although in many other Latin American coun- microenterprises in the Northeast Region of Brazil, the tries, microfinance institutions have been able to par- World Bank has supported Banco do Nordeste's tially fill the gap left by larger institutions, in Brazil, CrediAmigo microfinance program since 1997. This note only a small fraction of the potential demand for describes how Banco do Nordeste initiated CrediAmigo microfinance appears to be satisfied by the current as part of its restructuring strategy and how the program supply. has expanded to become the largest microfinance pro- vider in Brazil. To date, many lessons have emerged, Momentum to Expand Microfinance both from CrediAmigo and the World Bank project that Services supports the program. Until 1997, the development of microfinance services Unsatisfied Demand for Microfinance in Brazil lagged substantially behind other Latin Services American countries. This was due in part to, (i) the long period of high inflation which prevailed before Brazilian private banks and non-bank financial the Real Plan pegged the currency to the dollar, (ii) institutions offer a variety of credit products targeted to restrictions on the ability of NGOs to serve as CrediAmigo : A success story Valcenira Araújo do Nascimento. When boutique owner Nirinha (as she is known) applied to CrediAmigo, her goal was to stop paying for goods on credit and to expand her business. With monthly sales of aound R$2,000, working capi- tal of R$1,200 (not counting R$3,800 in receivables), she suffered when her customers didn't pay their bills on time. With the help of her husband, the couple dedicated all their time to the boutique. Net profit was about R$620, the prin- ciple source of the household's income. Today, Nirinha is on her 11th loan, and has renovated the boutique and hired a nephew to better serve the growing number of customers. In addition, she opened a videogame shop, providing the household with a second source of income. Working capital has increased to R$12,662, with the store making on aver- age R$3,200 per month, and R$8,000 in the busiest months. Net profit has also increased to R$1,300. With the help of CrediAmigo, Nirinha was able to take the risk necessary to achieve success in her business. 1 financial intermediaries and mobilize external financing, due to deterioration in the quality of the portfolio, the and (iii) a strict usury law limiting interest rates charged management team learned not to underestimate the by NGOs to unsustainably low levels. complexity of microfinance operations. With a renewed commitment to focus on portfolio quality and Three significant events prompted the emergence of the productivity, in May 2000, the World Bank provided a CrediAmigo initiative. First, in November 1996, the US$50 million loan to strengthen CrediAmigo's capacity World Bank met with the senior management of Banco to grow sustainably and to extend a line of credit for on- do Nordeste to discuss access to finance in the lending to microenterprises. The project's objective was Northeast and review microfinance experiences in other to improve the access of micro-enterprises throughout the countries. After agreeing on operating principles for a Northeast Region of Brazil to sustainable, formal sustainable microfinance programs, the Bank supported financial services. Banco do Nordeste's efforts to initiate a microfinance program through an existing loan for technical Results on the Ground assistance and training. Second, in 1997, Comunidade Solidária, a public body created in 1995 to strengthen Today, CrediAmigo distributes its products through civil society initiatives in Brazil, organized a large 164 of Banco do Nordeste's 174 branch network and political debate on the potential role that micro-credit through 56 one-stop sales points. It offers loans to could play in Brazil. The meeting concluded that micro- established micro-entrepreneurs for the financing of credit could play a strategic role in terms of their working capital and fixed asset needs. Loans are employment and income distribution, but that its collateral-free, but are extended using the solidarity expansion required a different approach from that group technique to small groups of three to five typically associated with credit operations. Third, Banco borrowers who cross-guarantee each other's loan. do Nordeste's objective to achieve its regional Solidarity loans usually have a three-month duration. development mandate fostered interest in seeking viable First loans are limited to 300 to 700 Reais (about ways to reach microenterprises without relying on US$130 ­ 300), but repeat loans can be up to 4,000 subsidized credit lines. Reais (US$1,700). Interest rates are higher than those charged by Banco do Nordeste on larger loans, but A Northeast Microfinance Development substantially lower than those charged by informal Project money lenders. The program began with a 5 percent flat monthly rate, but this interest rate has decreased to In 1997, and emerging from a major period of reform, 3.5 percent. The program encourages timely repayment Banco do Nordeste, led by a new president with by offering a 15 percent discount on interest payments extensive experience in the private sector, was looking if all installments are paid on time. To cater to the for ways to satisfy its regional development mandate evolving demands of its clients, CrediAmigo has also more efficiently. introduced individual and investment loans. Following the successful model of the Bank Rakyat As of May 2002, after only four years of operation, Indonesia's (BRI) Unit Desas in Indonesia, CrediAmigo CrediAmigo is already among the top microfinance was established as an autonomous unit within Banco do institutions in Latin America in terms of geographical Nordeste. Banco do Nordeste sought technical advice penetration, numbers of clients and depth of outreach. from ACCION International, a group with considerable The program has about 100,000 active clients and an experience in solidarity group lending. With ACCION's outstanding loan portfolio of 56 million Reais assistance, Banco do Nordeste surveyed (US$24.2 million), making it the largest microfinance microenterprises and developed pilot loan products institution in Brazil, well ahead of the second player, adapted to their needs. ACCION also helped prepare CEAPE established in 1987, which had 26,368 active training material and selection criteria for Banco do clients in June 2001 and an outstanding loan portfolio Nordeste's future (outsourced) microfinance lending of US$7.4 million. CrediAmigo is active in 702 officers. municipalities of the Northeast giving it wide geographical reach that also acts to reduce transaction After a four-month pilot project, Banco do Nordeste's costs to borrowers. Its average loan size is only 560 management supported an expanded program, which Reais (US$240), confirming the institution's focus on grew rapidly from 5 to 52 branches. Although this fast- the really poor. Forty-eight percent of its clients are track experiment was costly for Banco do Nordeste, women. 2 Aside from Banco do Nordeste's initiative, few public or of administering small loans and their risks, (v) start private banks in Brazil have been active in microfinance. small and learn by doing, and (vi) develop staff The foreign-owned bank ABN AMRO is developing a incentives that encourage efficiency and high loan small pilot project, but most others are completely absent. recovery. Next to CrediAmigo, the market relies primarily on specialized microfinance institutions. There are about 50 Second, it demonstrates that, when these conditions are to 60 such institutions in Brazil today, of which more met, a "downscaling" strategy (consisting of targeting than 80 percent have been in existence for less than two lower income individuals or smaller businesses) may be a years. Most of these institutions are very limited in size. profitable commercial banking line of business. In fact, less than ten cater to more than 2,000 clients. Third, CrediAmigo's success demonstrates that a As a result of the late development of microfinance in down-segment strategy may help revitalize public Brazil and of the very small size of most institutions, the banks with decreasing profitability or increase that of rapid expansion of CrediAmigo has allowed it to unprofitable rural branch networks, provided that the increasingly dominate the market. At the end of 2001, it conditions listed above are met. In many countries served nearly 60 percent of those micro-entrepreneurs public banks have extensive branch networks which with access to microfinance services, and held about 45 cannot be made profitable based on their current percent of their outstanding micro-loans (Figure 1). activities, putting a serious drain on on what are often weak parent institutions. Microfinance requires Figure 1 - Average Loan Size specific skills that these banks do not always possess, but may nevertheless be an interesting business opportunity for them providing that adequate training is offered and "self-competition" from their own subsidized lines of credit is avoided. A microfinance strategy may also help restore, at least partially, the profitability of ailing development banks. That said, a microfinance program cannot be seen as a panacea for all financial difficulties, especially when it accounts for a small share of assets. Fourth, it confirms the potential benefits arising from the use of a large pre-existing branch network to dis- tribute products and that this allows a much faster roll- To assess the impact of CrediAmigo on microenterprise out of microfinance services. This suggests that banks dynamics and household welfare, Banco do Nordeste with similar networks are potentially good candidates plans to carry out an impact study. However, anecdotal to develop large-scale microfinance services, provided evidence provided by CrediAmigo's clients indicates that they also have the right management incentives and making credit available to microenterprises may have controls. An alternative, developing partnerships that positive effects on their sales volume, employment, and allow microfinance specialists to distribute their prod- profitability. ucts via bank networks, may also be an option worth examining. Lessons Learned Finally, the program demonstrates that development of a world class microfinance program requires a contin- The success of CrediAmigo allows microfinance ued commitment through conceptualization, design, pi- practitioners to reach a number of interesting conclusions: loting, and initial expansion, with a continued focus on risk management. External financing is required to First, it highlights several key conditions for success in develop the appropriate infrastructure and systems if microfinance, namely, the necessity to, (i) maintain a these are not available beforehand and also to permit commitment for profitability and sustainability, (ii) expansion of outreach. However, it is also clear that implement a high-productivity model with low costs, (iii) financing is best used where strong commitment exists develop strict control mechanisms and performing and where throughout preparation has laid a solid management information systems to control loan losses, foundation for the program. (iv) maintain interest rates high enough to cover the cost 3 Conclusions In this regard, Banco do Nordeste has established institutional structures consistent with increasing the managerial, financial, and legal independence of The success of CrediAmigo is not limited to its CrediAmigo and is investigating viable alternatives expansion. Its portfolio quality and staff productivity are with the Central Bank. also at levels normally associated with international best practice. Only 3.7 percent of its loans are overdue, using ******** a strict 30-day portfolio-at-risk measure. Its annualized loan loss rate is also 2.7 percent, even after fully provisioning all loans with payments 90 days or more Notes overdue. As to productivity, loan officers with nine months or more of experience are each handling an 1 The Brazilian Geographic and Statistic Institute average of 313 clients. (IBGE) defines a micro-enterprise as an industry with up to 19 employees or service-related or commercial Profitability is also progressing well, despite the program not benefiting from any direct subsidy.2 concerns with up to 9 employees, and a small enter- prise as those with up to 99 employees in industry and Salary expenses as a percentage of the loan portfolio decreased from 68 percent in December 1998 to 19 49 employees in services and commerce. percent in May 2001. CrediAmigo's effective yield on 2 the loan portfolio (interest income to average loan CrediAmigo only benefits from "in-kind" subsidies portfolio) dropped to 63 percent in May 2001 from 78 from Banco do Nordeste, all stemming from its right to percent in December 1998. About 85 percent of use Banco do Nordeste's network, know-how and in- CrediAmigo's 164 branches are operationally frastructure. These "in-kind" subsidies are registered as sustainable, and the program as a whole is expected to costs in CrediAmigo's program. reach full financial sustainability in 2002.3 3Operational self-sufficiency refers to the ability of the Overall, clients appear to be extremely satisfied with institution to cover via its operating revenues all its op- CrediAmigo's services despite high interest- rates4. erating costs, except financial costs. Its financial self- CrediAmigo presents a high loan renewal rate (about sufficiency refers to its ability to cover all operating 85 percent), and there are an increasing number of expenses including the cost of funds. new clients per loan officer, indicating that continued 4 access to microfinance is both essential and sought according to the 1999 survey by the Technical Office after. Quick turnaround on loan decisions and for Economic Studies of the Northeast (ETENE) associated low transaction costs for borrowers may partially explain the high degree of client satisfaction. Surveys of client satisfaction confirm that clients rate About the Authors CrediAmigo's services as very good: about 93 percent are satisfied with the program Susana M. Sánchez and Sophie Sirtaine are Financial These factors support the view that the program can Specialist in the Finance Cluster of the Latin America achieve long-term sustainability. In the near future, and the Caribbean Region of the World Bank. Rita the challenge for CrediAmigo is to gain legal Valente is the Chief of Staff of Banco do Nordeste, institutional independence from Banco do Nordeste. Brazil. 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