Microfinance in Brazil, Bolivia and Bangladesh: 3 Complementary Models

Guilherme Malamut About the Cover: “Milho Verde Vendor” and “Sidestreet,” Trancoso, Bahia, Brazil, March 2006. © 2007 Giorg27 Images.

Used by permission.

The objectives of this text are to present, analyze, and recommend the specific endeavors, initiatives, and programs designed to allow these so-called “havenots” to perhaps someday have a bit more, not via the various mechanisms of charity, but rather, through a dignifying empowerment guided by the careful planning of the members of the banking and financial industries. This book represents an investigation of how public institutions, especially public banks, can make a huge difference in improving the ability of microfinance programs to reach the poor.

Microfinance in Brazil, Bolivia, and Bangladesh: Three Complementary Models

Guilherme Malamut

Located in the southeastern section of Bahia on the eastern coast of Brazil, Trancoso is a small fishing village that is resplendent with white sands, the emerald sea, and the lush foliage of the surrounding untouched tropical forests.

Described as perhaps the “world’s sexiest and most exclusive vacation spot” (Food & Wine magazine, February 2006, p.

109), Trancoso is a representative study in contrast that is symbolically appropriate for the cover of this book. Nestled alongside exclusive resorts, very obvious examples of abject poverty abound: Those who struggle on a daily basis to merely survive.

Microfinance in Brazil, Bolivia, and Bangladesh:

Three Complementary Models

Three Complementary Models

Microfinance in Brazil, Bolivia, and Bangladesh:

R P M P ri nt

Guilherme Malamut

Microfinance in Brazil, Bolivia, and Bangladesh: Three Complementary Models

Guilherme Malamut

N EW Y ORK

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

This material is protected under all copyright laws as they currently exist. No portion of this material may be reproduced, in any form or by any means, without permission in writing from the publisher. For information regarding permission(s), write to: rpm_print@yahoo.com

Libr ar y of Congr ess Cat aloging-i n-P ublic ation Dat a on file.

Malamut, Guilherme, 1963Microfinance in Brazil, Bolivia, and Bangladesh: three complementary models / Guilherme Malamut p.

cm.

ISBN 1-4243-2899-3 1. Community Development - South America and Bangladesh. 2. Economic Development. 3. Finance Industry – Microfinance.

I. Title

Editorial and Production Supervision: David George Cover Design: Daniel Sandin Formatting: Scott Disanno

About the Cover: “Milho Verde Vendor” and “Sidestreet,” Trancoso, Bahia, Brazil, March 2006. © 2007 Giorg27 Images. Used by permission.

Copyright © 2007 Guilherme Malamut.

Published by the RPM Print™ Group, New York, NY 10021.

All rights reserved. No parts of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the publisher.

Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

ISBN 1-4243-2899-3

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PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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For Irene, Aron, Tiago, Júlia, Sara, and Layla

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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iii

Contents Preface..................................................................................................... ix Introduction............................................................................................. xi Abbreviations.......................................................................................... xiii

1. Transformation Model of Microfinance in Bolivia......... 1 Promotion and Development of Microenterprises (PRODEM): The Start of the Microfinance Industry in Bolivia ........................... 1 The Bolivian Transformation Model ..................................................... 1 Private Financial Funds (FFPs): Legal Structure in Microfinancial Services ............................................................................................. 2 Caja Los Andes S.A. FFP: From an Unregulated Non-Governmental Organization (NGOs) to a Commercial Bank ................................... 3 The Center for the Development of Economic Initiatives (FIE) S.A.: A Successful Regulated Microfinance Institution in Bolivia............ 5 FFP PRODEM S.A.: A Regulated, Private Financial Fund ................... 5 Eco Futuro FFP (Eco Futuro Fondo Financiero Privado) ..................... 6 AgroCapital (Fundación AgroCapital): Coca-Growing Substitution..... 7 The Complex Bolivian Microfinance Market ....................................... 8 Bolivian NGOs: Poverty-Oriented with a Rural Focus ......................... 9 ProMujer (Programs for Women) .......................................................... 9 CRECER (Credit with Rural Education): Village Banking Methodology 10 Private-Sector Ownership: Banco Económico ...................................... 12 Banco Econômico ................................................................................... 12 The Largest Microfinance Institutions (MFIs) Investors: Public Development Agencies and NGOs ........................................ 13 Microfinance and the Economic Liberalization in Bolivia ................... 14 The New Economic Model and the Advent of Microfinance in Bolivia ........................................................................................... 15 1993 Banking Legislation: Financial Reform and the Growth of Microfinance ................................................................................ 16

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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iv

The Bolivian Government in Microfinance: NAFIBO, FONDESIF, and the Vice-Minister for Microenterprise in the Ministry of Labor………………………………………………………………..19 Foundation for Alternatives in Development (FADES) ........................ 20 Fund for Communal Development (FONDECO) ................................. 21 Banco Solidario (BancoSol) S.A.: A New Trend in Institutional Development ..................................................................................... 22 The Dynamics of Over-Lending: Commercialization and Crisis in Bolivia Microfinance .................................................................... 22 Delinquency and Response..................................................................... 23 Reflections on the Commercialization of Microfinance ........................ 24

2. The Group-Approach Targeted Credit: The Evolution of Microcredit Programs in Bangladesh .................................................................... 27 Economic Overview ............................................................................... 27 Microcredit Programs to Alleviate Poverty in Bangladesh ................... 27 Bangladesh Rural Development Board (BRDB).................................... 28 Other Bangladesh Microfinance Institutions (MFIs) ............................. 29 Association for Social Development (ASA): “Self-Reliant Development Model” ................................................. 31 PROSHIKA: Training, Education, and Action ..................................... 33 Targeted Credit Programs ...................................................................... 35 Grameen Bank ....................................................................................... 36 The International Fund for Agricultural Development (IFAD) ............ 36 Bangladesh Rural Advancement Committee (BRAC) .......................... 38 BRAC: Providing Other Support Services ............................................ 40 The Grameen Family of Companies ...................................................... 41 The Bangladesh Rural Development Board (BRDB): The Project BRDB (RD-12) ............................................................. 42 Women’s Microcredit Programs............................................................. 43 The Roles of Formal, Informal, and Microfinance Institutions in Bangladesh .................................................................................... 44 Comparison of the Performance of Agricultural Development Banks and MFIs ........................................................................................... 44 Rural Credit Market in Bangladesh ....................................................... 47 Microcredit Growth Potential for Rural Non-Farm Activities .............. 48 Economic Viability: Foreign Donor Resources ..................................... 49 PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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v

Access to Market Resources .................................................................. 50 Outreach Evaluation .............................................................................. 53 The Group-Approach Targeted Credit ................................................... 54 Central Units in the Three Programs ..................................................... 55 Instruments to Reduce the Risk of Microloan Defaults: Savings Mobilization 56 Drawbacks in the Bangladesh Microfinance Industry ........................... 56 Conclusion ............................................................................................. 57

3 Brazil: State-Owned Commercial Banks in Microfinance .................................................................. 59 Introduction ............................................................................................ 59 State Banks ............................................................................................. 59 New Entities in the Third Sector: OSCIPs and SCMs ........................... 60 General Approach to Regulating ........................................................... 62 Brazilian Microfinance Sector—Institutional Overview ....................... 65 Brazilian Public Sector in Microfinance ................................................ 59 Government’s Economic and Legal Measures: Building the Stage for the Advent Brazilian Microfinance Industry .............................. 68 The Real Plan ......................................................................................... 69 Changes in Legal Structure Governing the Regulation of Brazil's Banks 69 Brazilian Microcredit Industry ............................................................... 71 Brazil’s First Major Microcredit Program: The Small Productive Loan Program (PCPP) ................................... 74 PMC (National Microcredit Program)—BNDES .................................. 75 Credimicro Program ............................................................................... 77 CrediAmigo Program—Banco do Nordeste (BN).................................. 77 Large Commercial Banks in the Microfinance Industry: Downscaling Private Banks .............................................................. 82 ABN AMRO Real Microcrédito ............................................................ 83 Brazilian Credit Unions .......................................................................... 86 CRESOL—Cooperativa de Crédito Solidário (Mutual Credit Cooperative) 88 SICREDI ................................................................................................ 88 Federations ............................................................................................. 90 Service Offered ....................................................................................... 78

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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vi

Conclusion ............................................................................. 93 References............................................................................... 95 Online References .................................................................. 98 Additional Online Resources…………………………………………..100

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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vii

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: viii Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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Preface This book presents a synthesis of a body of literature that has grown around the topic of microfinance in Bolivia and Bangladesh. The literature related to microfinance in Brazil is significantly smaller. Therefore, this book has the goal of compiling different sources of information regarding the microfinance industry in Brazil and its relation to the more established Bolivian and Bangladeshi microfinance industries.

This is a first step in investigating how public institutions, especially public banks, can make a huge difference in improving the ability of microfinance programs to reach the poor.

This book will be followed by another book: Bank Rakyat Indonesia (BRI) & Banco do Nordeste: Two Successful Government-Owned Banks in Microfinance. This study will compare the Banco do Nordeste and the Bank Rakyat Indonesia, presenting evidence that, in a deregulated policy environment, a government-owned development bank can (a) be transformed into a highly profitable, self-reliant financial intermediary, and (b) turn into a major microfinance provider, offering carefully crafted microsavings and microcredit products to low-income people at market rates of interest.

I am also grateful for the editorial assistance of partners Dennis Malone and David George.

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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ix

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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x

Introduction Successful microfinance in Bolivia, Bangladesh and, more recently, in Brazil have led to a great deal of interest among practitioners, donors, and other supporters in the potential of microfinance institutions as an instrument of public policy aimed to fight poverty.

The Transformation Model of Microfinance in Bolivia has propelled legislators and regulators in various countries to create new legislation that facilitates the transformation of microfinance nongovernmental organizations (NGOs) into a completely new class of financial intermediaries dedicated to serving the poor.

Bangladesh’s Targeted Credit Programs introduced an experimental project, the solidarity groups, that destroyed three commonly held myths in rural finance which state that (1) the poor are not creditworthy, (2) women represent a greater credit risks than men and (3) the poor do not save.

Impressively, this was accomplished by providing loans without physical collateral.

State-owned commercial banks are the main channels of the federally subsidized microcredit program aimed at developing Brazil’s small and micro-agribusiness. Brazil has shifted, in less than a decade, from a being an unproductive participant in the microfinance industry into becoming an innovator.

Each of the three countries’ microfinance programs, in spite of having several common features, such as Bangladesh Rural Advancement Committee (BRAC) in Bangladesh and ProMujer in Bolivia or Private Financial Funds (FFPs) in Bolivia and Microcredit Societies (SCMs) in Brazil, lead towards different directions.

Which one is the best? How would it be possible to take advantage of each model’s strengths to help the poor in terms of microfinance?

In Bolivia the problem of borrowers’ overindebtedness during the end of 1990s suggests that free competition within a sound regulatory framework is the most effective way of avoiding overindebtedness, promoting customer service and providing sustainable access to credit.

Is it possible to balance business and sustainable development in the microfinance industry?

In Bangladesh, microcredit programs could reduce their subsidy dependence by raising interest rates, but because of the nature of their clients, they have to rely on subsidized resources to develop institutionally.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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xi

Is it possible for a Microfinance Institution (MFI) to help the poor and still be financially independent?

In Brazil, the state banks’ ability to grow programs rapidly through an extensive branch network, as shown by CrediAmigo of Banco do Nordeste (BN), makes them particularly attractive. Is it possible for a public development bank to implement long-standing microfinance programs for the poor while remaining efficient and independent of political changes in the government?

On the supply side, donors such as US Agency for International Development (USAID), International Fund for Agricultural Development (IFAD), Norwegian Agency for International Development (NORAD), Canadian International Development Agency (CIDA), and Swedish International Development Authority (SIDA) are playing major roles in the development of microcredit institutions in many countries. However, funds are unequally allocated throughout the continents: Why? Africa 3%

Latin American 21%

Asia 76%

Graph A. Microfinance Funding: Total Loans Disburse in 2004 Source: World Bank.

Finally, the main question is how can we fight poverty with microfinance since poverty is caused by many factors, including lack of skills, undeveloped entrepreneurship, and untapped human capital. Certainly, only providing credit for generating self-employment cannot solve the multiple causes of poverty.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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xii

Abbreviations ABMD Brazilian Association of Microcredit Development ABN AMRO Real Real Microcredito ACCION Gateway Fund ACCION Gateway Fund ACCION International/AITEC American-Based NGO Specializing in Microfinance Services ACDI Agricultural Cooperative Development International ADN Accion Democratica Nacionalista AF Annesha Foundation AgroCapital Fundación AgroCapital ALTERFIN Alterfin ANED Asociacion Nacional Ecumenica de Desarrollo ANF ASN-Novib Fonds Annesa Annesa Somaj Unnayan Songstha As Associations ASA Association for Social Development ASED Association for Sanitation and Economic Development ASOD Assistance for Social Organization and Development ASPADA Agroforestry Seed Production Development and Association BAAC Bank for Agriculture and Agricultural Cooperatives BACEN Central Bank of Brazil Banco da Mulher Women’s Bank Banco do Povo de Sergipe Popular Credit Fund of Sergipe Banco Solidario S.A BancoSol BANCOOB Cooperative Bank of Brasil Bancos do Povo Popular Credit Fund BANESE State Bank of Sergipe Banglapedia National Encyclopedia of Bangladesh BANSICREDI Banco Cooperativo SICREDI BASA BASA BDS Bangladesh Development Society BEES Bangladesh Extension Education Services BIO Belgian Investment Company-Belgian Government BKB Bangladesh Krishi Bank BKK Badan Kredit Kecamatan BN Banco do Nordeste PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: xiii Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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BNDES National Bank for Economic and Social Development BRAC Bangladesh Rural Advancement Committee BRDB Bangladesh Rural Development Board BRI Bank Rukyat Indonesia BURO Tangaill BURO Tangail Caja Los Andes S.A. FFP Caja Los Andes S.A. FFP CCDA Centre for Community Development Assistance CEAPE Center of Support to the Small Entrepreneur CECREJ Central Cooperative of Mutual Credit of the State of Rio de Janeiro CECREMGE Central Cooperative of Mutual Credit of the State of Minas Gerais CECRESP Central Cooperative of Mutual Credit of the State of São Paulo CECREST Central Cooperative of Mutual Credit of the State of Espírito Santo CIDA Canadian International Development Agency Citigroup Foundation Citigroup Foundation CMAC - Arequipa Caja Municipal de Ahorro y Crédito—Arequipa CMN National Monetary Council COAST Trust Coastal Association for Social Transformation Trust CODEC Community Development Centre Compartamos Financiera Compartamos, S.A. de C.V., SFOL Consorzio Etimos Consorzio Etimos S.c.a r.l.

CORDAID Catholic Organization for Relief and Development AID CRECER Credit with Rural Education CRESOL Mutual Credit Cooperative CSS Christian Service Society CUNA Credit Union National Association DBMDF Deutsche Bank Microcredit Development Fund DDJ Dak Diye Jai DESHA DESHA Dexia Dexia Microcredit Fund DIP Center for Development Innovation and Practices DOEN DOEN Foundation ECLOF Ecumenical Church Loan Fund Eco Futuro FFP Eco Futuro Fondo Financiero Privado EDPYME EDYFICAR EDPYME Edyficar S.A. EWA Eskander Welfare Association FADES Foundation for Alternatives in Development Fassil FASSIL Private Financial Funds FAT Fund for Worker's Assistance PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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xiv

FECOCES Federation of Credit Cooperatives of the State of Espírito Santo FECOCRERJ Federation of Credit Cooperatives of the State of Rio de Janeiro FECRESP Federation of Credit Cooperatives of the State of São Paulo FELEME Southern East Federation of Credit Cooperatives FEMICOOP Federation of Credit Cooperatives of the Minas Gerais FENACRED National Federation of Mutual Credit Cooperatives FFPs Private Financial Funds FIE Center for the Development of Economic Initiatives FINAME Special Agency for Industry Financing FinamericaVisión Financiera América FMO The Netherlands Development Finance Company- Dutch Government FONDECO Microfinance Development Found FONDESIF Fund of Development of the Financing System and of Support to the Productive Sector FUNBODEM National Bolivian Foundation for Women Development FUNDASAL Foundation of Development and Basic Housing of San Salvador GDP Gross Domestic Product GJUS Grameen Jano Unnayan Sangstha Gray Ghost Gray Ghost Microfinance Fund LLC GTZ Deutshe Gesellschaft für Technische Zusammenarbeit GUP Gono Unnayan Prochesta HEED HEED Bangladesh HFSKS Hilful Fuzul Samaj Kallyan Sangstha HTF The Hivos-Triodos Fund IADB Inter-American Development Bank IBGE Brazilian Institute of Geography and Statistics ICCO Interchurch Organization for Development Co-operation ICDA Integrated Community Development Association IDEPRO Small Production Unit Development Institute IDF Integrated Development Foundation IFAD International Fund for Agricultural Development IFC International Finance Corporation IGVGD Income Generation for Vulnerable Group Development Program IMI AG International Micro Investitionen AG Impulse (Incofin) Impulse (Incofin) In Individual lender IPC Invest Internationale Projekt Consult JCF Jagorani Chakra Foundation PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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xv

KFW y DEG KFW y DEG Banking Group - German Government Lloyds Lloyds Bank Luxmint - ADA Luxmint - ADA MFIs Microfinance Institutions MicroVest I MicroVest I L.P. MIF Multilateral Investment Fund MNR Nationalist Revolutionary Movement MTE Ministry of Labor and Employment NAFIBO Bolivian Government Nacional Financing in Microfinance NGF Nowabenki Gonomukhi Foundation NGO Nongovernmental Organization NSB National Superintendence of Banks NUSA Naria Unnayan Samity OCB Brazil Cooperative Organization OECD: Organization for Economic Co-operation and Development Oikocredit Oikocredit OSCIPS Civil Society Organizations OSS Operational Self Sufficiency PBK Pally Bikash Kendra PCH AG ProCredit Holding Aktiengesellschaft PCH Rabobank NOVIB PCPP Small Productive Loan Program PDIM Participatory Development Initiatives of the Masses PIB Gross Domestic Product PKSF Palli Karma-Sahayak Foundation PMC National Microcredit Program PMK Palli Mongal Karmosuchi PMUK Padakhep Manabik Unnayan Kendra PNMPO National Program for Guided and Productive Microcredit POPI People's Oriented Program Implementation Portal do Microcrédito Brazilian Microcredit Gateway PPSS Palli Progoti Shahayak Samity PRODEM Promotion and Development of Microenterprises PROFUND ProFund International, S.A. PROGER Employment and Income Generation Program ProMujer Programs for Women PRONAF National Program of Familiar Agriculture PROPASTO National Program of Recovery of Degraded Pastures PROSHIKA Acronym of three Bangla Words: Training, Education, and Action PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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xvi

PROSOLO Program of Incentive for the Use of Soil Products Rabobank RaboBank Foundation RAKUB Rajshani-Krishi-Bank RDRS RDRS Bangladesh ResponsAbility Fund ResponsAbility Global Microfinance Fund RIC Resource Integration Centre RRF Rural Reconstruction Foundation Saint Saint Bangladesh Santander (Banespa) Santander Bank ( State Bank of São Paulo) Sartawi Sartawi(Bolivia) SBD Swanirvar Bangladesh SCMs Microcredit Societies SDC Society Development Committee SDS Shariatpur Development Society SEBRAE Brazilian Services to Support Micro and Small Enterprises SG Solidarity Group ShoreCap Intl. ShoreCap International, Ltd. SICOOB Brazilian Credit Cooperative System SICREDI Credit Cooperative System SIDI International Solidarity for Development and Investment SSS Society for Social Services ST Sangkalpa Trust StreetNet International Alliance of Street vendors TBCCSs Thana Bittaheen Central Cooperatives Societies TFSF Triodos Fair Share Fund TMSS Thengamara Mohila Sabuj Sangha Triodos-Doen Foundation Triodos-Doen Foundation TrujilloCMAC - Trujillo TSB HSBC Brasil TSB HSBC Brazil UDDIPAN United Development Initiatives for Programmed Actions UDPS Uttara Development Program Society Unibanco Unibanco Bank UNITAS National Union of Institutions for Social Work Action UNO Northeastern Union to Support Small Organizations USAID US Agency for International Development Credit Guarantees United States Agency for International Development/ Credit Guarantees USDA United States Department of Agriculture VARD Voluntary Association for Rural Development VB Village Bank PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: xvii Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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Wave Wave Foundation WBWorld Bank WOCCU World Council of Credit Unions, Inc.

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: xviii Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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xix

1 Transformation Model of Microfinance in Bolivia Promotion and Development of Microenterprises (PRODEM): The Start of the Microfinance Industry in Bolivia The start of microfinance industry in Bolivia could be associated with the first 20 loans to four market women in La Paz made by PRODEM in 1985.

In fact, before that time cooperatives had already been lending to small businesses, but the PRODEM model went to a scale level. PRODEM’s solidarity-group loan model is the same as that adopted by Grameen Bank in Bangladesh and Banco do Nordeste in Brazil.

Microfinance in Bolivia originated with donor support to nongovernmental organizations (NGOs) that later transformed into formal financial institutions. This process of transformation has been one of the major contributions of Bolivian microfinance to international experience in microfinance. The term transformation is used generally here to reflect the institutional process of change that occurs when microfinance NGOs create or spin off regulated microfinance institutions (MFIs). Common objectives of NGOs that have created privately owned MFIs to date include access to commercial capital, the ability to mobilize local savings, improved customer service, and expanded outreach. In general, the institutions thus far have shown success in meeting their principal objectives, although not to the extent previously expected [1].

The Bolivian Transformation Model The transformation model was introduced over a decade ago in Bolivia when PRODEM, the leading microfinance NGO in the country, required and obtained a bank license. The early success of that bank, Banco Solidario S.A (BancoSol), considered from its inception to be one of the best performing banks in Bolivia, gave credibility to the notion that microfinance NGOs could become part of the regulated financial landscape. The desire to join the financial system is a sign of the twin goals of many microfinance NGOs: to reduce donor dependence and exponentially increase the number of clients with access to microfinance [1].

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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1

The Bolivian success has led to a great deal of interest among practitioners, donors, and other supporters in the potential of microfinance NGOs to grow and become part of the regulated financial sector. This enthusiasm has compelled legislators and regulators in various countries to create new legislation that facilitates the transformation of microfinance NGOs and generates a completely new class of financial intermediaries dedicated to serving the poor. Regulatory windows have been established in some countries within the agency that supervise financial institutions to oversee specifically these newly regulated MFIs. The National Superintendence of Banks (NSB) in Bolivia introduced legislation that created private financial funds or Fondos Financieros Privados (FFPs), in the mid-1990s. The FFP's structure was specifically created to provide an adequate legal structure for institutions offering financial services to microand small enterprises [1]. (See Table I.) As unregulated microfinance institutions, NGOs in general have not been successful at leveraging their equity base. Without some form of guaranty facility, commercial banks are reluctant to lend amounts much greater than the net worth of the unregulated MFI. As a regulated financial institution, however, the MFI is subject to ongoing supervision by a regulatory authority, providing depositors, commercial investors, and other banks a greater sense of security. As such, the MFI has the potential to leverage its equity up to 11 times, the limit prescribed by the Basel Convention, the international capital adequacy standard for regulated financial institutions.

However, most regulated MFIs have not obtained such high leverage due to the higher risk typically associated with a microloan portfolio. BancoSol, which obtained its banking license in 1992, has maintained its leverage ratio between 5:1 and 6:1 since 1994 (www.mixmarket.org 1).

Private Financial Funds (FFPs): Legal Structure in Microfinancial Services Private Financial Funds (FFPs) are formal financial institutions licensed to engage in a wide range of lending and some savings activities. Their minimum capital requirements are lower than those for commercial banks, and they are not allowed to provide certain services that banks provide.

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The global information exchange for the microfinance industry: The MIX Market strives to facilitate exchange and investments flow, promote transparency, and improve reporting standards in the microfinance industry.

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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2

TABLE I MFI TRANSFORMATION PROCESS

MFI-NGO

FFP

COMMERCIAL BANK

FFPs are an intermediary legal form between the NGO and the fully licensed bank, the main difference being the interdiction of offering site deposits. The National Superintendence of Banks (NSB) and Financial Entities supervise FFPs. The Bolivian FFPs are considered non-bank financial entities because they cannot directly offer current accounts or foreign exchange services and therefore do not participate in the process of expansion of the money supply. FFPs, like other non-bank financial entities, lie between fully regulated banks and microfinance NGOs on the spectrum of financial institutions providing microfinance services (www.mixmarket.org). Much of the work to create the regulations for FFPs revolved around ProCrédito, an NGO that became the first FFP, Caja Los Andes.

Caja Los Andes S.A. FFP: From an Unregulated NGO to a Commercial Bank Caja Los Andes S.A. FFP is the result of the complete transfer of all financial activities from the not-for-profit Association Pro-Crédito originally created in 1992 by a group of Bolivian professionals. Pro-Crédito remains the most important shareholder controlling 46.95% of the new company, which incorporated in 1995. GTZ (Deutshe Gesellschaft für Technische Zusammenarbeit), from Germany, has been one of the main technical assistance providers throughout the history of Pro-Crédito and Caja Los Andes. Caja Los Andes’ main challenge is to maintain the nation’s leading position in terms of economic efficiency, return, and assets quality in an increasingly competitive environment. Caja Los Andes’ most important funding organizations are BIO (Belgische Investeringsmaatschappij voor Ontwikkelingslanden N.V), CORDAID (Catholic Organization for Relief and Development Aid), MicroVest I (MicroVest I L.P.), PCH AG (ProCredit Holding Aktiengesellschaft), and PROFUND (ProFund International, S.A.).

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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Group ProCredit is a network of financial institutions that includes 18 members in Europe, Latin America and Africa. The most important shareholders of ProCredit Holding AG are international institutions such as IFC (International Finance Corporation—World Bank), KFW y DEG (Banking Group—German Government), FMO (The Netherlands Development Finance CompanyDutch Government), BIO (Belgian Investment Company—Belgian Government); and private institutions such as IPC-Invest (Germany), Fundación Doën (Holland), Asociación ProCrédito (Bolivia), Fundación Fundasal (El Salvador), and others.

MicroEnterprise Americas 2002, a technical publication with a sample of the most relevant MFIs in the Latin America region, included BancoSol, Caja do Andes, and FIE (Center for the Development of Economic Initiatives) from Bolivia among the best microfinance institutions in the region in terms of portfolio quality, efficiency, and profitability. The source of this data is MicroRate, a rating agency that specializes in evaluating Latin American and African MFIs, which tracked the performance of these Latin American MFIs (MicroEnterprise Americas 2002: www.iadb.org). (See Table II.) TABLE II LATIN AMERICAN MFIS: 2002 PERFORMANCE Institutions BancoSol Caja Los Andes Caja Municipal Arequipa Calpiá FIE Caja Municipal Trujillo Compartamos Edyficar Caja Municipal Sullana Visión Finamerica

Country Bolivia Bolivia Peru El Salvador Bolivia Peru Mexico Peru Peru Paraguay Colombia

Gross Portfolio* 81.0 52.6 50.1 31.8 27.5 27.4 25.4 20.0 19.9 19.3 18.8

Number of Borrowers 61,368 45,530 50,209 36,318 22,613 46,967 92,773 20,452 45,258* 35,057 16,468

Legend: Gross portfolio shown in millions US $.

Source: MicroRate 29.

Caja de Los Andes is an example of the total transformation of an NGO into a bank. However, several other private and non-private microfinance NGOs have since become FFPs, such as FIE and PRODEM. They remain FFPs, not intending to become commercial banks.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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The Center for the Development of Economic Initiatives (FIE) S.A.: A Successful Regulated Microfinance Institution in Bolivia FIE S.A. is a successful regulated microfinance institution in Bolivia aimed toward microentrepreneurs working in small workshops, in the trades or in services in the urban areas. In 2004, FIE S.A was capable of realizing considerable growth in its loan portfolio and in local deposits. FIE S.A. has a partnership with the NGO ProMujer that gives women with low incomes the chance to save with a regulated financial institution.

FIE S.A. is the result of the pioneering effort of FIE, a private non-profit organization, founded in 1985 to support small, productive economic activities of families and groups living in poverty and with limited access to formal sources of credit and skills training. FIE S.A. remains loyal to its service vocation of supporting microenterprises. As always, it is this sector’s special capacity to employ a substantial amount of local labor and its significant role in providing goods and services for the needs of this country’s popular markets that made the existence of FIE S.A. necessary.

FIE offers short-, medium-, and long-term loans through personal guarantees, mortgages, and loans based on liens on personal property. It also offers money remittances to its clients between the different cities where it operates as well as the payment of utility bills. Furthermore, FIE accepts savings from the public in the form of time deposits, savings accounts, and programmed savings products. Finally, it accepts loans from banking and financial entities, locally and internationally. FIE’s main clients are microentrepreneurs, most of them women. Important amounts of funds come from CORDAID (Catholic Organization for Relief and Development AID), HTF (The Hivos–Triodos Fund), ICCO (Interchurch Organization for Development Co-operation), IFC (International Finance Corporation), Luxmint–ADA, MIF (Multilateral Investment Fund), Oikocredit and TFSF (Triodos Fair Share Fund), and the Triodos–Doen Foundation (www.mixmarket.org).

FFP PRODEM S.A.: A Regulated, Private Financial Fund PRODEM was created in 1986 as a non-profit financial institution with the vision of introducing microfinancial services in the urban and rural areas of Bolivia. In 1992, PRODEM created BancoSol, the first commercial bank in the world to offer financial services in the microentrepreneurial sector.

In 1988, PRODEM, which managed a solid portfolio of more than US $24 million, 47,000 clients, and a network of branches throughout the country, recognized the need to create another regulated financial institution PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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5

to offer a wider spectrum of financial services in rural areas. Hence, in 1999, PRODEM successfully constituted a regulated, privately held financial fund, registered under the name of FFP PRODEM S.A., responding to the demand and need to share its know-how and technical expertise. FFP PRODEM S.A. formed a consulting group to assist microfinancial institutions around the world. Products PRODEM applies are both individual and solidarity group lending methodologies. Individual loans are usually offered to good and successful clients for whom group lending has ceased to provide a satisfactory financial solution. Loans are used for working capital and investments, although, with the exception of the largest amounts, there is no strict loan-use control. An in-depth economic appraisal of the whole family unit is carried out within a week of initial request by credit officers who adapt amounts, terms, and repayment schedules according to their observations. Individual loans are guaranteed by mortgages or pledges of assets while group lending guarantees reside in their solidarity. The consulting group has a team of microfinancial expert operators that provide on-site technical training and transfer of its microfinancial expertise and software. The most important FFP PRODEM S.A.’s funding organizations are HTF IFC, TFSF, and the Triodos–Doen Foundation (www.mixmarket.org). (See Graph 1.)

(No. Personnel ( 10x

Units

90 60

(%)Woman Borrowers

30 No. Active Borrowers (Millions)

0 1996

1997

1998

1999

2000

2001

2002

2003

2004

Graph 1. PRODEM: Outreach indicators.

Source: www.mixmarket.org.

Eco Futuro FFP (Eco Futuro Fondo Financiero Privado) Eco Futuro FFP is another example of a transformed MFI. Eco Futuro was created in 1999 by a group of financial NGOs (ANED, FADES, IDEPRO, and UNITAS), together with a group of businessmen and with the help of the Swiss Government. Today, Eco Futuro provides most of the financial services authorized for FFP. Eco Futuro's main challenge is to expand its operations to Oruro, Cochabamba, and after Sucre, Potosi and Tarija.

Eco Futuro offers loans to individuals and groups, as well as microcredit for housing and special loans for associations and cooperatives. 75% are PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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6

group loans and only 25% are individual loans (www.mixmarket.org). Eco Futuro also plans to develop new financial products and will diversify its offering of financial services by, for instance, introducing a payment facility for taxes, energy, and water. The most important funding institutions are ICCO (Interchurch Organization for Development Cooperation) and Oikocredit. (See Graph 2.)

18,000,000 Gross Loan Portfolio

16,000,000

Total Assets

14,000,000

10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 1999

2000

2004

Graph 2. Eco Futuro: Financial Information (US $). Exchange rate used for Conversion: 8.032BOB/US $6.361BOB/US $5.921BOB/US $.

Source: www.mixmarket.org.

AgroCapital (Fundación AgroCapital): Coca-Growing Substitution AgroCapital was created in 1992 through the joint efforts of the Bolivian government and USAID, with technical assistance provided by the Agricultural Cooperative Development International (ACDI). Originally intended to support farmers going through coca-growing substitution, AgroCapital is now going far beyond its original focus. AgroCapital's objective is to become an FFP, supervised by the Superintendence of Banks, and is already complying with all formal reporting requirements.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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7

Millions

12,000,000

Savings

AgroCapital's mission is to help the rural productive sector through the provision of short- and medium-term credit for rural production, processing, transportation, and distribution, as well as for other complementary services targeted at micro-enterprises. AgroCapital deals with three rural subsegments: the primary producers, the processors, and the service providers, and essentially offers two types of loans: investment and microlines.

Investment loans are targeted at experienced microentrepreneurs with successfully developing businesses, generally requiring higher loan amounts (US $13,800 average). Such loans have maturities ranging from 1.5 to 5 years (3.2 years average) and annual interest rates between 12.5 and 27% according to the amount of the loan. Microlines are usually smaller loans (US $1700 average). They bear an annual interest rate of 21 to 42% and terms range from 60 to 730 days (356 days average). Funding sources are Luxmint–ADA and Oikocredit (www.mixmarket.org).

The Complex Bolivian Microfinance Market The microfinance institutions existing in Bolivia make for a more complex microfinance market than comparable markets in any other country, with the possible exception of Indonesia. Services are provided by NGOs, commercial banks, cooperatives, mutual funds (housing sector), and a special category of institutions, FFPs. They can function as a Village Bank (VB), a Solidarity Group (SG), Individual lender (In), and Associations (As) [1]. See Table III. TABLE III BOLIVIAN MICROFINANCE INSTITUTIONS NGOs

NGOs becomin g FFPs

ProMujer (VB)

Crescer* (VB)

Sartawi* (SG, In)

Diaconia (N/A)

FUNBODEM (In)

Prodem*

Idepro (EcoFuturo)* (SG, In)

ANED (EcoFuturo)* (As, SG, In)

CIDRE (EcoFuturo)ª (In, As)

AgroCapital ª*

(SG, In)

FFPs

FIE (In)

Banks

Caja Los Andes (In)

EcoFuturoª² (N/A)

FONDECO* (SG, In)

(In, As)

Fassilª³ (SG, In, As)

BancoSol (SG, In) 2

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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8

Notes: VB= Village Banking; As=Associations; SG=Solidarity Groups; In=Individual. * = Primarly rural lenders. n/a = not available. ªSmall business lenders with no microloans. ª² Just starting as an FFP. Will absorb much of the portfolio Idepro, Fades, ANED, and CIDRE. ª³ Includes both consumers and microloans.

Source: Asofin, Cipame, and Finrural, Microfinanzas: Boletin Financero, no. 4, June, 1999.

Bolivian NGOs: Poverty-Oriented with a Rural Focus Bolivia's microfinance sector also includes strong NGOs that do not intend to become regulated institutions. The NGOs tend to have a more povertyoriented and rural focus than do their commercial counterparts. Although the NGOs make up only 17% of the total microloan portfolio, several NGOs are growing rapidly, and together they account for 38% of active microfinance clients [2]. In fact, most of them are likely to remain NGOs. They are deeply affected by the commercialization around them [1].

ProMujer (Programs for Women) ProMujer is a non-profit international development organization whose mission is to help women lift themselves and their families out of poverty.

ProMujer provides training and small loans so women can initiate or improve small businesses and increase their income. In 1990, Lynne Patterson and Carmen Velasco began developing training programs in empowerment, health, family planning, and child development for groups of Bolivian women who were receiving donated food. After the women requested help in increasing their incomes, they also designed a training program in business development. In 1991, USAID and the Bolivian Government's Social Investment Fund provided grants that enabled ProMujer to continue training and providing credit through communal banks to the women of El Alto, Bolivia. By the end of 1993, some 3,000 Bolivian women living in El Alto had received training in all the programs, but only 24 communal banks had been established. From 1997 to 2004, the number of clients grew from 14,226 to 48,496 (Graph 3). During the same period, the Gross Loan Portfolio grew from US $2,336,307 to US $7,150,439 and the total assets from the US grew from US $2,686,054 to US $10,094,652 (Graph 4).

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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9

No. Active Borrowers - ProMujer

23,866 16,669

31,353 27,481

48,496 38,380

18,916

14,226

1997

Graph 3

1998

1999

2000

2001

2002

2003

2004

Source: www.mixmarket.org

Graph 3. Number of active borrowers: ProMujer.

Source: www.mixmarket.org.

ProMujer - Financial Portfolio[in US$*]

Graph 4

12,000,000

10,000,000

8,000,000

Gross Loan Portfolio T t lA t

6,000,000

4,000,000

2,000,000

0 1997

1998

1999

2000

2001

2002

2003

2004

Graph 4. ProMujer: Financial Portfolio [in US $]. Exchange Rate used for Conversion: 8.032BOB/US $ 6.361BOB/US $ 5.921BOB/US $.

Source: www.mixmarket.org.

CRECER (Credit with Rural Education): Village Banking Methodology CRECER is a private non-for-profit organization established in 1990, which exclusively provides its credit services to women to whom the access to quality financial and educational services allows them to develop their human potential. From 1999 to 2004, the number of clients grew from 19,327 to 55,617 (Graph 5). During the same period, the gross loan portfolio grew over 167% and the total assets grew over 280% (Graph 6).

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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10

No. Active Borrowers - CRECER

Graph 5

55,617 40,142 24,684

44,886

30,989

19,327

1999

2000

2001

2002

2003

2004

Source;wwwmixmarket.org

Graph 5. Number of active borrowers: ProMujer.

Source: www.mixmarket.org.

CRECER - FINANCIAL PORTFOLIO

(US$*)

Graph 6

8 6 4

Gross Loan Portfolio Total Assets

Million

12 10

2 0 1999

2000

2001

2002

2003

2004

*Exchange Rate used for Conversion(BOB/USD) 1999[5.9]2000[6.3]2001[6.5]2002[7.2]2003[7.6]2004[8.0] Source: www.mixmarket.org

Graph 6. CRECER: Financial Portfolio [in US $]. Exchange rate used for Conversion: (BOB/US) 1999 [5.9], 2000 [6.3], 2001 [6.5], 2002 [7.2], 2003 [7.6], 2004 [8.0].

Source: www.mixmarket.org.

CRECER has succeeded in uniting both credit and education so that they reinforce each other reciprocally. The credit allows them to improve their productive capacity while increasing their self-esteem and incorporating nutrition knowledge, preventive health awareness, family planning, and basic literacy training. CRECER’s Credit with Education product is based on a village banking methodology. These village banks consist of savings and credit associations, which are managed by organized lenders with a common base of interests. These village banks basically serve poor women, who for various reasons do not have access to formal financial services. CRECER’s challenge is to reach a client level of 140,000 by 2011 while covering the nine districts of Bolivia. Currently, CRECER works in seven districts.

CRECER’s main sources of funds are Consorzio Etimos (Consorzio Etimos S.c.a r.l.) and Oikocredit (www.mixmarket.org).

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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11

Private-Sector Ownership: Banco Económico To date, institutional transformation has only attracted a small amount of private-sector ownership in MFIs. While all of the transformed NGOs in this study involve some form of private-sector investment, this has typically represented only a small part of the overall ownership structure of the transformed institutions.

Banco Económico In 1991, 18 private business people launched Banco Económico, a commercial bank dedicated to serving small- and medium-sized enterprises in Santa Cruz. In 1997, Banco Económico opened its Presto division specifically for micro- and consumer credit. Two years later, the crisis in the Bolivian microfinance and consumer credit led Banco Económico to close Presto and remove itself from the microcredit market.

Económico was established as a commercial bank in 1990 in Santa Cruz de La Sierra, Bolivia. It entered and then quickly exited the microlending market when it appeared that the product would not produce the bottom line that is so necessary to a commercial bank. The target population of Banco Económico since its creation has been the small- and medium-sized enterprise sectors of Santa Cruz. In its early years of existence, Banco Económico was very profitable, generating an average annual rate of return on equity of 26.2% between 1993 and 1997 [3]. The bank continues to be an important player in the Bolivian financial system as the eighth largest bank in Bolivia in terms of loan portfolios at year-end 2000. During the first year of Presto’s operations, the quality of the loan portfolio was strong. However, the past-due portfolio increased rapidly in 1999. The declining portfolio quality was due not only to the economic recession and client overindebtedness, which were affecting all Bolivian microfinance institutions, but also to changes in tax requirements aimed at reducing the amount of contraband goods entering Bolivia at the borders, especially the Brazilian and Argentinian borders. Many of Banco Económico’s clients relied on the sale of such goods, and thus the increased taxes greatly damaged their repayment capabilities, which in turn affected Banco Económico’s portfolio quality. By October 1999, the Presto division was closed down, and all outstanding operations were consolidated within the bank at large. The bank decided to stop disbursing loans to microenterprises; such loans were seen as very risky, given the increasing problems many microfinance institutions throughout Bolivia were encountering [2].

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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12

The Largest Microfinance Institutions (MFIs) Investors: Public Development Agencies and Nonprofit Organizations Public development agencies and nonprofit organizations remain the largest investors in most transformed MFIs. Specialized equity funds, such as ProFund, the ACCION Gateway Fund, and IMI AG (International Micro Investitionen AG) are not pure private investors, yet they play an important role in the transition toward increased commercial investment in microfinance [4]. While primarily capitalized by the public sector, these funds demonstrate that investing in MFIs is viable and will divest MFIs’ holdings to pure private investors. See Table IV. TABLE IV Fund Name PCH Oikocredit DOEN Dexia Microcr Fund CORDAID Triodos-Doen Foundation HTF MicroVest I ACCION Investments ResponsAbility Fund PROFUND Rabobank ANF Impulse (Incofin) Accion Gateway Fund SIDI ICCO Gray Ghost ALTERFIN DBMDF Luxmint - ADA TFSF DEG NOVIB IFC MIF USAID Credit Guarantees BIO

Country Fund AGGermany Netherlands Netherlands Luxemburg Netherlands Netherlands Netherlands USA Cayman Islands Luxemburg Costa Rica Netherlands Netherlands Belgium USA France Netherlands USA Belgium USA Luxemburg Netherlands Germany Netherlands USA USA USA Belgium

US $ Invested in MFIs: 2004 88,735,200 82,258,740 61,440,300 46,503,000 34,910,700 30,644,240 20,502,300 13,536,000 12,451,200 11,449,977 11,404,098 9,500.400 9,378,930 5,413,875 5,100,000 4,807,760 4,742,080 4,061,000 3,546,880 2,836,200 2,175,710 676,620 NA NA NA NA NA NA

Source: www.mixmarket.org.

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13

Microfinance and the Economic Liberalization in Bolivia The story of microfinance in Bolivia is closely linked with the quest for a stable democracy and the economic liberalization, which was initiated in 1985. The new political and the economic environment coincide with and begin the Transformation Model of Microfinance in Bolivia.

Bolivia, named after independence fighter Simon Bolivar, broke away from Spanish rule in 1825; much of its subsequent history has consisted of a series coups and counter-coups. Comparatively democratic civilian rule was established in the 1980s, but leaders have faced difficult problems of deepseated poverty, social unrest, drug production, and hyperinflation (CIA World Factbook 2004: https://www.cia.gov). The economic reasons for the hyperinflation crisis could be related to the debt crisis, the overvalued exchange rate, and the printing of money. However, the political system that was instituted in the 1952 Revolution transformed Bolivia into a borrowing economy that ultimately went bankrupt. The populist coalition that controlled the Bolivian nation since the 1952 Revolution intended to open the Bolivian economy and political power to the broader population, primarily the emerging urban middle class and, to a lesser extent, the poor lower class. The Nationalist Revolutionary Movement (MNR), the party revolution, nationalized the three largest tin-mining companies. MNR promoted an agrarian reform to distribute the land of haciendas (properties) to small farmers and to enfranchise the majority of the population.

Throughout the next three decades, the Bolivian government pursued state capitalism.

Bolivia has had more than 190 revolutions and coups since it became independent in 1825. The latest constitution was adopted in 1967 (www.factmonster.com). It provides for a president to be elected to a fouryear term and a bicameral legislature consisting of an upper chamber of senators and a lower chamber of deputies. Administratively, Bolivia is divided into nine departments. Civilian rule and democratic government were restored in 1982, when Siles Zuazo again became president. He served from 1982 to 1985, when Victor Paz Estenssoro succeeded him. The new government took charge and dismantled the Bolivian state capitalist system that had existed since the 1952 revolution. During the 1980s, international institutions such as the World Bank and other experts have considered Bolivia a model of economic reform. However, microfinance, never having been a government initiative in Bolivia before, also had an impact on the political and economic reforms there. The Bolivian Microfinance Model became a point of reference in the microfinance industry. The emergence of PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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14

microfinance in Bolivia is intimately related to these political and economic changes. Therefore, it is no coincidence that the Bolivian microfinance industry started in 1985 [5].

Within Bolivia’s political history is the contradictory fact that the MNR, now led by Paz Estenssoro, implemented the New Economic Policy to defeat hyperinflation and the same corrupt state capitalism that the same MNR had established decades before. However, the New Economic Policy differed dramatically from the MNR ideals of the 1958 Bolivian National Revolution. The government team was made up of neo-liberal economists including specialists educated at the University of Chicago and Yale University. In summary, the New Economic Policy represented nothing more than an intent to dismantle the system of social capitalism established during the last previous decades of the Bolivian government.

The structural adjustments of the Paz Estenssoro administration included a long-term decrease of state-owned enterprises that would gradually be replaced by initiatives from the private sector. The government would give the support to the growth of the private sector. These adjustments continued for MNR administrations succeeding that of Estenssoro and even survived a change to the ADN (Accion Democratica Nacionalista) party. Although the hyperinflation was extinguished immediately, Bolivia’s economic growth was still slow.

The New Economic Model and the Advent of Microfinance in Bolivia There are several relationships between the new economic model and the advent of Bolivian microfinance. However, the existence of hyperinflation seriously affected the informal sector and the microfinance business.

Hyperinflation: • impaired any microfinance business because of the high level of interest rates associated with inflation, • provoked enormous growth of the informal sector and created the perfect environment for microfinance, and • undermined all financial institutions, not just those serving the poor.

The weak Bolivian financial system was based on a common structure in the developing countries: The commercial banks were just the financial arms of private corporate groups owned by families or organized groups of rich PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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15

men. These banks did not offer many services to the public and were not effectively supervised: The government only controlled interest rates. The development banks dealt with the middle and poorer class, but they operated at a loss. A credit cooperative in La Paz, for instance, survived for several years by running a sauna and a health spa. The credit programs of NGOs and government development banks operated at a loss because of the gap between hyperinflation rates and the interest rates they charged, which turned their loan into a kind of grant. During populist times, the Bolivian government gave out wage benefits that were unsustainable. During conservative times, it printed money as was necessary. In the early 1980s, bankers worldwide did not consider Bolivia creditworthy [5].

1993 Banking Legislation: Financial Reform and the Growth of Microfinance The New Economic Policy controlled the hyperinflation and decontrolled interest rates, creating the preconditions for the growth of microfinance.

Liberalization of interest rates allowed lenders to charge competitive rates that were necessary to cover the higher operational costs of small loans.

Another measure that was significant in the financial reform was the closure of inefficient state development banks. Microfinance filled the gap created by the extinction of the state development banks and the effects of hyperinflation because it supplied financial services to the poor. The reforms in Bolivia’s economy culminated in the 1993 banking legislation that has since transformed the oligopolistic Bolivian banking sector into a modern industry. The Superintendence of Banks was created to help organize a sound financial system framework.

The reforms have boosted economic performance. In 1998, output grew by over 4.7%, achieving the greatest economic growth in all of South America, while domestic savings were the equivalent of 12.1% of the gross domestic product (GDP), while private investment amounted to 14.1% of the GDP [6]. This performance was achieved thanks to higher levels of domestic and foreign investment, increased exports, and a rapid growth in agroindustry, mining, manufacturing, and services. The steadfast implementation of structural reforms contributed to a surge in direct foreign investment [6].

Growth would have been even higher had not Bolivia faced various natural disasters and a significant deterioration in its trade, estimated at 38% down for the decade. Gross official international reserves rose to the equivalent of nearly seven months of imports by year-end, and a competitive exchange rate was maintained. However, preliminary indicators of economic PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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16

activity in 1999 signaled growth of 1%, reflecting the effects of the international crisis that year, in addition to inflation of 3% and a fiscal deficit of 4.1%, due almost exclusively to pension reform. These statistics reveal that the domestic economy continues to be highly vulnerable to international economic shocks resulting from Bolivia’s high degree of dependence on exports of raw materials from it’s primary sectors (agriculture, mining, and hydrocarbons) [6]. See Table V and Graph 7.

Even through the improved macroeconomic performance, a large part of the population still depends on precarious jobs, bad health conditions, low levels of education, and low levels of labor productivity in both urban and rural areas. This partly explains why approximately 38 % of all Bolivians live in extreme poverty (www.tradeport.org).

TABLE V BOLIVIAN PRODUCTS BY SECTOR Agriculture: Soybeans, coffee, coca, cotton, corn, sugarcane, rice, potatoes, timber

Exports—Commodities: Soybeans, natural gas, zinc, gold, wood

Imports—Commodities: Capital goods, raw materials and semi-manufactures, chemicals, petroleum, food Source: www.tradeport.org

NOT POOR 30% POOR 70%

Graph 7. Bolivian population: The poor by percentage.

Source: www.tradeport.org.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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17

The problem of the revolutionary state economy approach was beyond governmental control. International prices for Bolivia’s tin exports, which constitute a major component of its economy, declined drastically, affecting the economy and, consequently, Bolivians’ savings. Tin is by far its most important product, but silver was once the chief metal mined; tungsten, copper, wolframite (iron manganese tungstate), bismuth, antimony, zinc, lead, iron, and gold are also mined. The names of some mining towns, notably Potosi and Oruro, are world famous. The tin industry has received increasing competition from Southeast Asia and, as a result, several tin mines have closed. The United States, Japan, the United Kingdom, and Brazil are its chief trading partners. Bolivia became an associate member of the Southern Cone Common Market in 1996 (http://www.infoplease.com).

Despite the importance of its mines and its large reserves of natural gas and crude oil, Bolivia is one of the poorest nations in Latin America and still lives on a subsistence economy. A large part of the population makes its living from the illegal growing of coca, the source of cocaine. A government eradication program that began in the late 1990s has depressed the economy in those areas where coca growing was important. Bolivia is the world's third-largest cultivator of coca (after Colombia and Peru). Bolivia is an intermediate partner of coca products and cocaine exported to or transported through Colombia, Brazil, Argentina, and Chile to the US and other international drug markets. However, coca eradication and alternative crop programs under the Sanchez de Lozada 3 administration have been unable to keep pace with farmers' attempts to increase cultivation after the significant crop reductions of 1998 and 1999 (www.tradeport.org). (See Graph 8.)

Coffee, cotton, and Bolivia's mineral wealth furnish the bulk of its exports, although soybeans and jewelry are also important.

Afterward, because of a lack of resources and a declining economy, the Bolivian government was led into a bargaining battle among different sectors of the society struggling for political power and a share in the evershrinking pie into which Bolivia’s economy transformed after the tin industry crisis. For example, between 1979 and 1985, there have been three elections, six presidents, three coups that succeeded and twice as many that failed [7].

3

Gonzalo Sánchez de Lozada is born on July 1, 1930 in La Paz , Bolivia. He served as President of Bolivia from 1993 until 1997 and again from 2002 until 2003.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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18

25000

23,109

Hectares

20000 15000

18,788

10000 5000 0

2001

2002

Graph 8. Hectares under cocaine cultivation: Bolivia.

Source: www.tradeport.org.

Brazil 20%

Others 37%

Colombia 19%

Peru 9%

Argentina 15%

Graph 9. Bolivia's Exports: 2001.

Source: www.tradeport.org.

The Bolivian Government in Microfinance: NAFIBO, FONDESIF, and the Vice-Minister for Microenterprise in the Ministry of Labor Through most of the period when microfinance was developing in Bolivia, the Bolivian government was not heavily involved. By the late 1990s, however, things had changed. Microfinance was visible and the government wanted a share in the success. At the same time, the Acción Democrática Nacionalista (Nationalist Democratic Action or ADN) was not as engaged in PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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19

liberal ideals as was the Movimiento Nacionalista Revolucionario (Revolutionary Nationalist Movement or MNR). The ADN government was more interested in an active role in the Bolivia’s economy. The microfinance industry appeared as an excellent opportunity to engage in a poverty alleviation project with a good promise of success. Based on this idea, the ADN government launched a microenterprise initiative with three arms: Nacional Financiera Boliviana (NAFIBO), Fund of Development of the Financing System and of Support to the Productive Sector (FONDESIF), and the creation of the office of the Vice-Minister for Microenterprise in the Ministry of Labor.

NAFIBO, a government financial intermediary, channels lines of donor credits. NAFIBO is considered the least controversial of the three, though it has the most money. It manages lines from the Inter-American Development Bank, the German Kreditanstalt für Wiederaufbau, the Spanish government, and others, in amounts averaging about $10 million each.

Foundation for Alternatives in Development (FADES) The Foundation for Alternatives in Development (Fundación para Alternativas de Desarrollo or FADES) is an NGO created in 1986 to support and contribute to organizations, cooperatives, associations, and small groups of rural and urban sectors through microcredit. FADES started its creditgranting operations in 1988. The foundation was created by seven Bolivian NGOs and, initially, specialized in credit to associations. Two additional programs were created in 1994, under the structure of an auto-evaluation, serving joint microcredit and individual credit (www.developmentgateway.org/).

FADES´s funding comes from various countries and institutions such as Canada, Belgium, Switzerland, Holland, Denmark, the European Union, the Inter-American Development Bank, Plan International (Bolivia), and other national financial institutions. This financial support implies an international recognition of its success. FADES’s main objective is to serve microentrepreneurs in areas where no financial services are yet available.

FADES currently offers two types of loans: Credito Asociativo, targeted at micro-, small, and farming enterprises, associations and cooperatives with loan amounts between US $3.000 and US $60.000 and individual loans, targeted at microentrepreneurs with loans sizes that vary from US $50 to US $10,000. FONDESIF—BOLIVIA is the largest funder. Other sources of funding are ALTERFIN (Alterfin), ANF (ASN-Novib Fonds), CORDAID

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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(Catholic Organization for Relief and Development Aid) and Oikocredit (http://www.mixmarket.org).

Fund for Communal Development (FONDECO) The Fund for Communal Development (Fondo de Desarrollo Comunal or FONDECO) is another MFI for which FONDESIF is the largest funding source. FONDECO is non-profit NGO established in 1995 to help farmers and the inhabitants of rural sectors, men and women, to achieve total participation in Bolivian society and the social activities that correspond, facilitating the transferral of financial services. FONDESIF, a government institution, is FONDECO’s largest funding source. Other funding comes from CORDAID (Catholic Organization for Relief and Development Aid) and NOVIB. Banco Solidario (BancoSol) S.A: A New Trend in Institutional Development With the creation of BancoSol in 1992, the microfinance industry witnessed the birth of a new trend in institutional development: the transformation of NGOs into regulated financial institutions [1].

The first transformed institution, BancoSol, is now a licensed commercial bank [8]. BancoSol was founded in 1992. Eight years later, BancoSol had 34 branches in the departments of La Paz, Santa Cruz, Cochabamba, Oruro, and Chuquisaca, and covered 45% of the microentrepreneurs in Bolivia. In September 1997, BancoSol became the first microfinance institution to be listed on a national stock exchange and one of only 12 publicly traded companies on the Bolivian stock exchange. While there is a very little liquidity in the Bolivian market, this listing represents a significant step in the commercialization of microfinance. BancoSol first began preparing for a public offering in the market in 1997, when it issued its first dividends of US $162,857, or US $0.45 per share on its 1996 earnings of US $1.1 million [2].

As of September 2004, the bank had 51,141 active clients and a microfinance portfolio of US $104 million. On the strength of its core product, solidarity-group lending, BancoSol generated performance indicators that placed it at the top of the Bolivian banking industry during the mid-1990s. The Superintendence of Banks publishes data rankings annually on the banking system’s performance. In 1999, as in each of the previous three years, the newspaper headlines stated that "BancoSol was the best local financial entity" [9]. (See Graph 10.)

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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140 120

Millions

100 80

Gross Loan Portfolio

60 Total Assets 40 Savings

20 0 1996

1997

1998

1999

2000

2001

2002

2003

2004

Graph 10. BancoSol: Financial Information (US $). Exchange rate used for conversion: 8.032BOB/US $6.361BOB/US $5.92BOB/US S. Source: www.mixmarket.org.

Throughout the 1990s, Banco Sol consistently topped the list for return on assets (5.2% in 1998), asset quality (0% arrears), and capital adequacy (16.3%) [10]. These are unusual and outstanding figures for a bank in any country. Although BancoSol was never leader in return to shareholders’ equity, not being as highly leveraged as other banks, its 29% return on equity in 1998 placed it among the top performing banks [11]. Most important, BancoSol’s funding institutions are Accion Gateway Fund (Accion Gateway Fund L.L.C), ACCION Investments, IFC (International Finance Corporation), PROFUND (ProFund International, S.A.), and SIDI (Solidarité Internationale pour le Développement et l'Investissement) (www.mixmarket.org).

The Dynamics of Over-Lending: Commercialization and Crisis in Bolivia Microfinance Bolivia is known for its successful MFIs, which have been transformed from their original status as NGOs into regulated commercial institutions, including BancoSol, the first and perhaps the best-known transformed PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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22

microlender. However, Bolivia's experience of commercial microfinance took on a new dimension toward the end the 1990s, caused by the growth of the transformed MFIs to a level that saturated the market. At the same time, Bolivia's economy, like other economies in South America, suffered a major shock and recession, directly affecting microenterprises.

Throughout 1999 and 2000, none of the microlenders grew as they had in the past. BancoSol lost 25% of its clients and PRODEM lost 45% during those 2 years. Much of this reduction possibly represents elimination of clients with loans from multiple institutions. BancoSol’s return on equity dropped from 29% in 1998 to 4% in 2000. FASSIL's profits dropped from 12% in 1998 into the negative range in 2000 [2].

Delinquency and Response Every microfinance lender experienced unprecedented delinquency in 1999 and 2000 as the lenders, in part to keep up with their consumer competitors, had to lend more money to the same clients. (See Graph 11.)

14 12.6%

12

11.2%

%

10 8 6 4 2

2.4%

0 1997

1999

2000

Graph 11. Regulated microlenders: Portfolio overdue rates.

Source: www.mixmarket.org.

Because of that, the MFIs increased emphasis on individual repayment capacity relative to past group performance and collateral information. The authorities also stepped up requirements for formal loan documentation, such as sales receipts.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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23

Increasingly, the differences between microfinance and conventional banking diminished. Perhaps the greatest anxiety about the commercialization of microfinance is the fear that the profit motive will cause microfinance institutions to move up-market, away from the poor.

The starting point for considering this issue in Bolivia is the recognition that the commercially oriented MFIs in Bolivia never served the extremely poor. Data from 1995 show only 2 or 3% of the clients of BancoSol, FIE, and Caja Los Andes were in the categories of indigent or poorest [12]. Only the rural lenders PRODEM and Sartawi primarily served people below the poverty line. On the other hand, poverty-focused lenders like ProMujer face a difficult choice. If ProMujer continues to be exclusively focused on the lowest end, its ability to become financially viable may be threatened.

Reflections on Commercialization of Microfinance It is important to separate the commercialization of microfinance in Bolivia from the crisis brought by saturation in the microfinance market. In Bolivia, commercial microfinance followed one particular path: the transformation of NGOs into financial institutions. Pure private entry into microenterprise lending, while present, has not been dominant [2].

Consumer lending in Bolivia began with the liberalization of interest rates, the elimination of directed credit, and the closing of the state banks in the 1980s. The deregulation of the industry in 1985 was a final break with the feudal banking system. Since the commercial sector was not well developed, the poor were dependent on loan sharks and moneylenders for credit. This created distortions in credit markets, and innovations were few.

The improved regulatory environment set the stage for competition among microlenders, attracting many players who introduced new credit technologies and created a credit bubble. Consumers chose between an overabundance of credit providers jostling for customers.

Aggressive lenders offered loans quickly and flexibly and secured repayment from the borrower’s salary. However, with few formal employers in existence they soon applied this lending methodology to the selfemployed or informally employed. These lenders encouraged missed payments so they could make profits. These practices led to shifts in the repayment culture.

Consumers' attitude toward debt contributed to the crisis. It became a status symbol to hold multiple loans. Delinquency rates were high. In effect, there were no rules for the game. The numbers were right but the fundamentals of lending were unsound. As economic recession struck Latin PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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24

America, borrowers who could not service their debts took to the streets, agitating for debt forgiveness and easier terms. This political pressure from organized groups forced the authorities to reintroduce interest rate restrictions.

Bolivian authorities briefly suspended their tradition of liberalized interest rates by capping rates for a few months in 2002. Caps were removed when it was realized that rates declined in a competitive environment, and that the best option was to strengthen other regulatory aspects such as disclosure. The quick removal of interest caps and the strengthening of regulation ensured a sound framework, which stabilized the market and enabled competitive pressures to improve credit methodologies and eliminate inefficient players.

Free competition within a sound regulatory framework is the most effective way of avoiding overindebtedness, promoting customer service and sustainable access to credit. Deepening and extending the supply network are key factors in long-term success.

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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25

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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26

2 The Group-Approach Targeted Credit: The Evolution of Microcredit Programs in Bangladesh Economic Overview Bangladesh is one of the world's poorest nations, with overpopulation adding to its economic afflictions, and it is heavily reliant on foreign aid.

Bangladesh is one of the world's 10 most populated countries and has one of the highest population densities (about 2,100 people per square mile/810 people per square kilometer). About 88% of the population is Sunni Muslim and over 10% is Hindu (http://www.infoplease.com/). The country's economy is based on agriculture. Despite sustained domestic and international efforts to improve economic and demographic prospects, Bangladesh remains a poor, overpopulated, and ill-governed nation.

Although half of the GDP is generated through the service sector, nearly two-thirds of Bangladeshis are employed in the agricultural sector, with rice as the single most important product. Major impediments to growth include frequent cyclones and floods, inefficient state-owned enterprises, inadequate port facilities, a rapidly growing labor force that cannot be absorbed by agriculture, delays in exploiting energy resources (natural gas), insufficient power supplies, and slow implementation of economic reforms (www.geography.about.com).

Microcredit Programs to Alleviate Poverty in Bangladesh Microcredit programs in Bangladesh have attracted worldwide attention. The programs have been successful in reaching the targeted poor, especially women, who have reduced poverty among borrowers. The effect on the economy as a whole has been small, however, because of the nature of the activities microcredit programs support.

Bangladesh is a leader among low-income countries offering microcredit.

Grameen Bank, founded in 1976 as a project and transformed into a specialized bank in 1983, is the best-known microcredit program both in Bangladesh and in the world. By 2004, it had mobilized more than 3 million PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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27

members (www.mixmarket.org), most of them women. The bank's groupbased lending scheme has two important features that attract the poor: • Borrowers are allowed to deal with a financial institution through a group.

• Members are self-selected in their own group. Group-based lending also reduces Grameen's loan default costs by exerting pressure to repay loans.

The Bangladesh Rural Advancement Committee (BRAC), a nongovernmental organization (NGO) with more than 1 million members, Project RD-12 of the Bangladesh Rural Development Board (BRDB) a government agency providing microcredit to about 500,000 members; and Grameen Bank are the three MFI entities that will be the focus this analysis.

Grameen Bank is an example of a poverty-alleviation microfinance institution that operates under government regulations, like banks, while BRAC and BRDB (RD-12) are not banks and do not operate under strict banking rules. BRAC is an NGO and BRDB is the largest public sector agency in the field of microcredit and social mobilization in Bangladesh.

Bangladesh Rural Development Board (BRDB) Through 2005, BRDB has been implementing eight projects in 14 upazilas (sub-districts) as well as Chittagong 4 city areas (http://financialexpressbd.com/). (See Table VI.) TABLE VI BRDB PROJECTS (2005) Abortak Loan Program Rural Progress Project Project for the Development of Small Farmers Poverty Alleviation Program for Women through Self-Employment Rural Poverty Alleviation Program Insolvent Freedom Fighter Allowance and Training and Self-Employment Program for their Dependants Comprehensive Female Development Program Rural Livelihood Project 4

Chittagong is the major seaport and second largest city of Bangladesh (http://en.wikipedia.org).

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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28

Political in-fighting and corruption at all levels of the Bangladesh government have been undermining the fight against poverty in Bangladesh.

Nevertheless, BRDB, encouraged by the loan recovery rate in past four years, has brought in a huge number of low-income people, including many women, under several types of loan disbursement schemes in the districts.

Since October 2001, BRDB has been trying to achieve its goal of changing the conditions for poor people by providing them with soft-term loans under various types of microcredit programs. The loan recovery rate of 98% is extremely encouraging for a public organization. Beneficiaries were able to return money in due time as they invested the loan-money in suitable sectors. Different micro-credit programs launched by the BRDB with soft interest rates are gaining popularity among the marginal and low-income groups in the remote areas and are making a significant contribution to the generation of self-employment opportunities (http://financialexpressbd.com/).

Other Bangladesh Microfinance Institutions (MFIs) The Association for Social Development (ASA) and PROSHIKA are other important and representative MFIs in Bangladesh. ASA had 2,772,719 active borrowers and a gross loan portfolio of US $201,102,659 in 2004.

PROSHIKA had 997,090 active borrowers and a gross loan portfolio of US $63,657,960 in 2004. Table VII shows the most important MFIs in Bangladesh. All of them operate as NGOS except for Grameen. NGOs and government programs dominate the MF industry in Bangladesh.

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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29

TABLE VII MFIS IN BANGLADESH MFIs ( 2004) BRAC Grameen Bank ASA PROSHIKA RDRS BURO Tangail JCF IDF PMK DIP AF PPSS CSS BDS HFSKS GUP PDIM NUSA ICDA Annesa1

Active Borrowers 3,993,525 3,700,000 2,772,719 997,090 228,930 155,819 95,128 46,725 36,470 25,523 23,647 19,503 18,224 10,129 8,267 6,959 6,226 3,431 2,817 248

Gross Loan Portfolio (US$) 243,146,287 337,700,855 201,102,659 63,657,960 8,825,014 2,593,912 5,136,822 3,314,071 3,886,704 1,500,194 1,301,379 1,197,892 1,579,075 1,270,788 878,579 621,207 494,777 270,393 154,830 1,886

Source: www.mixmarket.org.

There are other MFIs that have a large number of borrowers and a significant loan portfolio, but they are excluded from Table VII because microfinance represents less than 91% of their operations (www.mixmarket.org): ● AF ● ASED ● ASOD ● ASPADA ● BASA ● BEES ● CCDA ● COAST Trust

● CODEC ● DDJ ● DESHA ● EWA ● GJUS ● GUP ● HEED ● NGF

● PBK ● PMUK ● POPI ● RIC ● RRF ● Saint ● SBD ● SDC

● SDS ● SSS ● ST ● TMSS ● UDDIPAN ● UDPS ● VARD ● Wave

Bangladesh stands out as one of the few countries in which microcredit programs have been replicated successfully. Grameen's group-based approach is the guiding principle for more than 750 NGOs operating smallPRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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30

scale microcredit programs in Bangladesh (www.microfinancegateway.org).

Grameen Bank's success in recovering loans and reaching the poor has attracted worldwide attention [12]. The group-based approach to lending has been replicated in more than 45 countries such as Bolivia (BancoSol), Brazil (CrediAmigo of Banco do Nordeste), and the United States [14].

Association for Social Development (ASA): “Self-Reliant Development Model” The Association for Social Development (ASA) originated as an NGO in 1978 and now has become a renowned sustainable MFI globally. ASA planned to reach over 4 million borrowers and over 4 million savings accounts by the year 2005 in Bangladesh alone, and is committed to replicating its successes in other countries. ASA is currently involved in several countries worldwide, providing ASA experts to develop financial sectors elsewhere that are inclusive of low-income groups (www.asabd.org).

ASA has gone through several transitions brought about by the demands of the group members. Development education, primary health, nutrition and sanitation were the main products of this phase. ASA began to focus microcredit program from early 1990s. The focus on micro-credit was based on the concept that access to credit is essential to empower the poor economically, bringing both positive changes to individual lives and greater general social stability. Afterwards the program-specialization phase started in 1992 and has been ongoing. During this phase, ASA focused on providing microfinance services through a low-cost delivery method to make itself self-reliant, sustainable and independent of donor funds. ASA succeeded in avoiding donor's funds and attained self-sustainable status in 2001. With attainment of a financially self-sufficient status ASA could expand its programs and cover a huge number of poverty-affected population. Thus, about three million poor people are included in programs designed to alleviate poverty and increase self-reliance that are closely associated with ASA (ASA Annual Report, 2004: http://www.asabd.org/). (See Graph 12.)

Through December 2004, ASA's Cumulative Loan Disbursement was US $1.9 billion among 2.77 million borrowers. There are loans outstanding in the amount of US $234 million. At the end of 2004, ASA's Operational Self Sufficiency (OSS) was 245%, Financial Self-sufficiency 159%, and its rate of loan recovery is 99.88%. ASA implements its operation through over 1965 branches under 64 administrative areas throughout Bangladesh. ASA continues to perfect the role of financial intermediation by developing a

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31

variety of savings products that are quite successful at generating the necessary funds from local sources. (See Graph 13.)

300,000,000 Gross Loan Portfolio Total Assets

250,000,000

Savings

200,000,000 150,000,000 100,000,000 50,000,000 0 1998

1999

2000

2001

2002

2003

2004

Graph 12. ASA: Financial Portfolio (US $).

Exchange rate used for conversion (BDT/US $): 1998 [48.36], 1999 [50.84], 2000 [53.85], 2001 [54.675] 2002 [55.93], 2003 [57.01], 2004 [59.6].

Sources: www.microfinance.org and ASA Annual Report : Year 2004.

2,7 72,719 2,130,982 1,4 14,931

1,9 76,473

1,0 84,318 1,1 28,693 78 6,492

1998

1999

2000

2001

2002

2003

2004

Graph 13. Number of active borrowers: ASA.

Ultimately, ASA, the Self-Reliant Development Model, is only successful if its beneficiaries become self-reliant. To achieve this, a beneficiary needs to continuously invest and re-invest in small businesses for 10 years or more in order to accumulate adequate funds and to participate PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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32

in group meetings that instill a sense of self-worth. Keeping in mind the long-term impact of ASA's development initiative, the organization concentrates on bringing about changes in the behavioral patterns of the beneficiaries.

PROSHIKA: Training, Education, and Action PROSHIKA is one of the largest NGOs in Bangladesh. The name PROSHIKA is an acronym of three Bangla words, which stand for training, education, and action. Although the PROSHIKA development process started in a few villages of Dhaka and Comilla districts in 1975, the organization formally emerged in October 1976.

PROSHIKA’s central philosophy focuses on human development and the empowerment of the poor, who gradually achieve freedom from poverty through their own initiative. Empowerment means that the poor develop leadership among themselves, mobilize their material resources, increase income and employment, develop capacities to cope with natural disasters, become functionally literate, take better care of their health, become engaged in environmental protection and regeneration, get elected to local government bodies and community institutions, and have better access to public and common property resources.

PROSHIKA's objectives are 1.

2.

3.

4.

5.

structural poverty alleviation, environmental protection and regeneration, improvement of the status of women, increasing people's participation in public institutions, and increasing people's capacity to gain and exercise democratic and human rights.

Spread among 23,475 villages and 2,101 urban slums in 57 districts, PROSHIKA now works with nearly 2.75 million male and female members drawn from rural and urban poor households, and has organized them into 146,798 primary groups averaging 19 members each. The Number of active borrowers reached almost 6,000 units in 2000. (See Graph 14.)

From 1998 to 2000, PROSHIKA’s gross loan portfolio grew from US $46,984,960 to US $63,657,960, its total assets grew from US $54,243,640 to US $74,242,860, and savings grew from US $7,093,240 to US $15,988,770 (Graph 15). PROSHIKA’S objectives are achieved through a broad range of programs in education and training, which lead to income and PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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33

employment generation, health education, building of a healthcare infrastructure, and environmental protection and regeneration. The programs are supported by research activities and advocacy campaigns that increasingly call for cooperation with like-minded development partners at the national and international levels. Thus, the network of activities in which PROSHIKA is involved links the poorest of the poor with like-minded development actors worldwide (http://www.proshika.org).

6,000 5,000

5,710

4,135

4,000 3,000

3,783

2,000 1,000 0 1998

1999

2000

Graph 14. Number of active borrowers: PROSHIKA. Source: http://www.proshika.org

80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 1998

1999

2000

Gross Loan Portfolio Total Assets Savings

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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Graph 15. PROSHIKA: Financial indicators (US $): Gross loan portfolio, total assets, and savings. Exchange rate used for conversion: 53.85 BDT/US $50.84 BDT/US $48.35 BDT/US $.

Source: www.mixmarket.org.

Targeted Credit Programs The exact definition of “target group” has undergone several refinements.

Households owning less than half an acre of land and selling manual labor for survival are now considered BRAC’s target group. More than half of Bangladesh’s 112 million people fall into this category.

These programs have developed a single-product credit-delivery mechanism: group-based lending with a weekly repayment schedule.

Nevertheless, such programs cannot reduce poverty on a large scale. In many cases, the path out of poverty may be constrained by factors that supersede the usefulness of financial services, which may even prevent people from accessing the financial services available. In these cases, there is a strong argument for interventions other than microfinance, or for supplementing financial services with other inputs such as health education, training, market support services, and so forth. BRAC, for example, argues that in their context the poor often cannot productively use credit, and need to be given a jump-start whereby grants are given to get them up to a level where they can operate sustainably in the market [15]. All targeted credit programs emphasize non-economic issues, such as marriage, dowry, kitchen gardening, and children’s education. Each program has its own agenda for social development, which it pursues through these groups. All programs provide human and social development inputs, including skill development, and other types of training such as health, nutrition, and family planning, in order to improve the productive economic capacities of the poor. The extent of training varies from program to program; training is an essential precondition for access to credit for BRAC and, to some extent, BRDB (RD12) members, but is not a requirement for Grameen Bank, which believes that, initially, only training in bank procedures is necessary for a member to have access to credit.

Emphasis on the membership of women is another dimension of the group-based social development model. It is very difficult to reach women individually in rural Bangladesh because of the purdh system, which secludes women in order to uphold societal standards of modesty and morality.

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35

Some institutions create integration by providing microfinance and education as parallel services, delivered to the same groups of clients by different staff, each specializing in one service or another. BRAC in Bangladesh and ProMujer in Bolivia are described as detailed cases to illustrate this parallel service delivery approach. Both institutions depend on revenues other than their financial margin from credit operations to maintain their educational staffs and related expenses, though they can provide some cross-subsidy from microfinance to education [15].

BRAC’s approach has been to combine lending with the delivery of organizational inputs [16]. It has never viewed credit as the central instrument for poverty alleviation. Rather it believes that economic dependency on exploitive economic structures is the cause of persistent poverty [17].

Grameen Bank Targeted credit programs for the poor were first tried in 1976, when Muhammad Yunus, a Bangladeshi economics professor, introduced an experimental project to test whether the poor were creditworthy and whether credit could be provided without physical collateral. With the help of some Bangladesh banks, Yunus conducted an innovative experiment emphasizing group size for effective financial intermediation. The central Bank of Bangladesh later facilitated Yunus’ work arranging for funding from the International Fund for Agricultural Development (IFAD).

The International Fund for Agricultural Development (IFAD) The International Fund for Agricultural Development (IFAD), a specialized agency of the United Nations, was established as an international financial institution in 1977 as one of the major outcomes of the 1974 World Food Conference. The Conference was organized in response to the food crises of the early 1970s that primarily affected the Sahelian countries of Africa.

Sahel is the name applied to the semi-arid region of Africa between the Sahara to the north and the savannas to the south. It extends from Senegal on the west, through Mauritania, Mali, Burkina Faso, Niger, Nigeria, Sudan, to Ethiopia on the east. Beginning in the late 1960s the Sahel was afflicted by a prolonged and devastating drought that further reduced the region's normally meager water supplies, shattered its agricultural economy, contributed to the starvation of an estimated 100,000 people, and forced the mass migration southward of many people. Although rainfall and international relief efforts PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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36

helped, drought and famine affected the Sahel again in the mid-1980s and early 1990s (http://www.wikipedia.com). The conference resolved that IFAD should be established immediately to finance agricultural development projects primarily for food production in the developing countries. One of the most important insights emerging from the conference was that the causes of food insecurity and famine were not so much failures in food production, but structural problems relating to poverty and due to the fact that the majority of the developing world’s poor populations were concentrated in rural areas (http://www.ifad.org). Bangladesh has a predominantly rural population, with over 60% of the workforce engaged in agriculture.

In Yunus’ experiment, group collateral substituted for physical collateral. The group guarantee to repay individual loans became the hallmark of microlending. Using the mechanism, poor with no physical collateral were able to form groups to gain access to institutional credit. The mechanism also allowed credit to reach the poor, especially poor women.

The central premise of this target credit approach is that lack of access to credit is the greatest constraint on the economic advancement of the rural poor. Yunus believes that with appropriate support the poor can be productively employed in income-generating activities, including processing and manufacturing, transport, storage and marketing of agricultural products, and in the raising of poultry and livestock. After almost seven years of experimentation with a variety of group-based mechanisms, his idea took formal shape as a bank with its own charter. With the government holding about 90% of the shares in paid-up capital, Grameen Bank was established in 1983 to work exclusively with poor, defined as individuals owning less than a half an acre of land [17].

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37

600,000,000 500,000,000 400,000,000 300,000,000 200,000,000 100,000,000 0 2002

2003

2004

Gross Loan Portfolio Total Assets Savings

Graph 16. Grameen Bank: Financial Indicators (in US $). Exchange rate used for conversion:59.6 BDT/US $ 57.013 BDT/US $ 55.928 BDT/US $.

Source: www.mixmarket.org.

From 2002 to 2004, Grameen’s gross loan portfolio grew from US $228,139,039 to US $337,700,855, its total assets grew from US $337,448,935to US $514,718,843, while savings grew from US $157,438,698 to US $327,944,005 (Graph 16).

Bangladesh Rural Advancement Committee (BRAC) Where Grameen Bank believes that the immediate need of the poor is credit to create and expand self-employment opportunities, BRAC believes that the poor need development of skills and other organizational inputs.

On November 12, 1970, Bangladesh was struck by one of history’s worst natural disasters. Half a million people lost their lives because of a severe cyclonic storm. A group of Bangladeshis, who worked together in providing relief to the survivors of the 1970 cyclone, got together again to provide relief to the people of Sulla under a new organization called Bangladesh Rehabilitation Assistance Committee, or BRAC. BRAC’s founder, F.H. Abed, soon realized that relief simply maintained the status quo; it was inadequate to alleviate poverty. BRAC’s relief experience helped it to PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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38

understand the causes of rural poverty and to develop a framework for poverty alleviation [15].

After its first year of existence, BRAC shifted its emphasis from addressing an acute crisis to a persistent one. However, whenever a new crisis arose, BRAC responded to it as it had during the famine of 1974, the various floods including those of 1987 and 1988, and the cyclones of 1985 and 1991.

BRAC’s programs are target the poorest of households and to their female members. A small number of specialized microfinance organizations attempt to provide a more holistic range of services, but these, with the notable exception of BRAC in Bangladesh, are rarely financially sustainable [15]. (See Graph 17.)

3,993,525 2,918,341 2,582,016

3,493,129

2,992,674 2,003,789

1998

1999

2000

2002

2003

2004

Graph 17. Outreach indicators. Number of active borrowers: BRAC. Source: www.mixmarket.org.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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39

300,000,000 Gross Loan Portfolio

250,000,000

Total Assets

200,000,000 150,000,000 100,000,000 50,000,000 0 1998

1999

2000

2002

2003

2004

Graph 18. BRAC: Financial Portfolio (US $). Exchange Rate used for Conversion (BDT/US $):1998 [48.36], 1999 [50.84], 2000 [53.85], 2002 [55.93],2003 [57.01], 2004 [59.6].

Source: www.mixmarket.org.

BRAC: Providing Other Support Services Providing support that not only serves to increase the chances of the successful and productive use of a loan but also to decrease the risk of failure occurring can reduce the risk of providing credit to very poor clients.

For example, when credit is extended to very poor clients with little or no previous business experience and without an existing business, the chances of failure due to inexperience or mismanagement are high. Pressure centered on loan payment and supervision regarding the productive use of the loan can help to focus the client on the business. In addition, MFIs need to ensure appropriate support for clients in gaining the skills needed to run their respective businesses. This support can come from other clients through the group structures, from field staff, from formal business skills training, or a combination of the three.

Additional inputs may take over supplement forms of support to the income-generating activity. BRAC’s microfinance program, for example, is notable in its ability to lower the risk of defaulted credit for its borrowers, through the provision of an integrated range of inputs from product ideas, training, veterinary inputs, marketing, and retail outlets. BRAC also provides PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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40

insurance should the enterprise fail [15]. A program such as BRAC’S Income Generation for Vulnerable Group Development Program (IGVGD), for instance, provides grants or food for a fixed period. When carefully managed, these can help stabilize the incomes of clients. IGVGD’s clients are then able to join BRAC’s mainstream program to access credit to establish an income-generating activity, with a much lower risk of poverty leading to economic demands that undermine the viability of the business [15].

The Grameen Family of Companies A generalist or multi-purpose organization (often a grant-mobilizing local, national, or international private development organization) offers microfinance services through a specialist microcredit program staff at the same time as offering other sector services through different program staff of the same organization to the same people in need. If there are few available services in an area and an organization can afford a long-term commitment to provide two or more services with different specialist staff, then it makes sense to deliver a variety of complementary services. BRAC provides a good example of this scenario in action. The Grameen Family of Companies is another good example [18]. In the late 1980s, Grameen Bank staff started to provide training and other support to people from other third world countries TABLE VIII

that wanted to adopt the Grameen methodology. During this time, the Grameen Organization began to establish new organizations. The fisheries project became the Grameen Fisheries Foundation. The irrigation project became the Grameen Krishi Foundation. The international replication and PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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41

health program were put under the Grameen Trust. Independently from Grameen Bank, other initiatives led to the creation the Grameen Family of Organizations (Table VIII).

The Bangladesh Rural Development Board (BRDB): The Project BRDB (RD-12) The Bangladesh Rural Development Board (BRDB) is the largest public sector agency in the field of microcredit and social mobilization in Bangladesh. It organizes the rural poor through cooperatives and informal groups to provide an institutional framework for their development through credit, skill development training, and services in family planning, healthcare, education, and other social development components. Target groups include small farmers who own land up to half an acre, and assetless women and men (http://banglapedia.search.com.).

The project BRDB RD-12 started in 1988 as a five-year project—a continuation and expansion, with some modifications, of a previous phase of the project called RD-2 and funded by Canadian International Development Agency (CIDA). The project was extended to June 1997. Since then, BRDB has maintained an expanding participation in the microfinance sector in Bangladesh through several different projects. The initial purpose of BRDB was to assist rural men and women without assets by providing them with skills, training, and the credit necessary for income generation.

Subsequently, the project moved toward strengthening the capacity of BRDB to plan, implement, and sustain development among the rural poor.

By the end of the initial five-year period ending in June 1994, BRDB RD-12 had mobilized 16,366 village-based Bittaheen Cooperative Societies in 17 districts (six greater districts) of the project area. An estimated 500,000 members of the new bittaheen societies benefit directly and almost 3 million household members benefit indirectly. Three-quarters of the society members have borrowed funds to start income-generating activities or microenterprises, and the average loan recovery rate has been about 94 percent. Between 1990 and 1994, BRDB RD-12 delivered two million person-days of training to the project participants across Bangladesh. BRDB staff received over 70,000 person-days of training during the same period.

The large numbers of people trained in BRDB RD-12 make this project the largest human resource development project that CIDA has ever supported [19].

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42

Over 70% of BRDB RD-12's borrowers were women. More than twothirds of about 11,500 loan societies organized by the project staff are women's societies. The repayment rate for the women's societies outpaces that of the men's groups. Women members also mobilize higher average savings than their male counterparts do.

Furthermore, 1,175 of the 2,500 field staff of the BRDB are women, a percentage that has set a new standard for employment equity in the government of Bangladesh (Grapg 19). BRDB RD-12 has achieved much in terms of promoting the integration of women in the development process but still could do more to facilitate attitudinal change on gender issues among men at all levels of the project [19].

men 53%

women 47%

Graph 19. Field Staff of the BRDB. Source: http://www.brac.net/.

Women’s Microcredit Programs Microcredit programs are particularly important for rural women, who are excluded by social custom from working outside the home. All three of the main programs in Bangladesh target women. (See Graph 20.)

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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43

120 100

6%

22% 30%

%

80 60 40

MEN

94%

88%

WOMEN

70%

20 0 Grameen Bank

BRAC

BRDB RD-12

Graph 20. Microfinance Participants by Gender: 1994.

Source: www.mixmarket.org.

Women have proved to be excellent credit risks, with loan default rates of only 3%, significantly lower than the 10% default rate for men [17].

All three microcredit programs studied are subsidized, although their subsidy dependence has fallen over time. Subsidies in the form of seed capital or institutional development funds may be required for the institutional development of microcredit programs. Although poverty reduction is the highest priority, the goal of self-sustainability within the shortest possible time should be also incorporated into program design from the beginning.

The Roles of Formal, Informal, and Microfinance Institution in Bangladesh Because of inefficiency, the banking sector failed to play an important role in promoting economic growth in Bangladesh. The poor performance of the country’s financial system has reduced investment, productivity, and the growth of savings, thereby diminishing the country’s growth potential and reducing employment opportunities. In fact, Bangladesh’s history of unrealized growth and investment may partly be due to stagnation and inefficiency in the financial sector [20].

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44

TABLE IX

Source: World Bank, 1987 [20].

Comparison of the Performance of Agricultural Development Banks and Microfinance Institutions Comparison of the performance of agricultural development banks and microfinance institutions between 1990 and 1994 reveals several important differences. Agricultural development banks were more productive than microfinance institutions in terms of mobilizing deposits, especially in the early years. This difference clearly reflects the limited target clientele of microfinance institutions. These results hold true despite the fact that agricultural development banks have coverage across all types of rural households. Microfinance institutions cover only households that own less than half an acre of land, and their savings mobilization is limited largely to members. Even with this institutional limitation, deposit mobilization per employee and per branch increased at a higher rate at Grameen Bank than at the agricultural development banks [17].

The major problem facing these Agricultural development banks is their poor loan-recovery rate. The low recovery rate is due to the loan write-off policy of the government and partly to institutional weakness. Against this dismal picture stand the respective high loan-recovery rates of Grameen PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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45

Bank, BRAC, and other microfinance institutions, which report recovery rates of more than 90% on their loans.

Microfinance programs face high agro-climate risks. Agro-climate risk affects both farm and non-farm production and thus affects the loan repayment behavior of borrowers and hence the performance of financial institutions [17]. Analysis of the impact of fixed agro-climatic, locationspecific, and other environment factors on program placement of Grameen Bank, BRAC, BRDB RD-12, commercial and agriculture banks, and government infrastructure investments reveals that while traditional banks and the government respond negatively to agro-climate risk, Grameen Bank does not consider such factors as important determinants of program placement. BRDB RD-12 and BRAC respond only partially to such risk factors [21].

Of course, loan recovery is only one indicator of performance. Other indicators, such as subsidy dependence, profitability, and staff productivity are also critical factors that determine the viability of financial institutions [17]. The rural credit market in Bangladesh is highly segmented. Formal lenders, such as commercial and agricultural development banks, are guided by the rules and regulations of the central bank. Informal lenders are virtually outside the control of the government. Between these two types of lenders are microcredit programs and institutions such as Grameen Bank and BRAC, government cooperative structures such as BRDB, and NGOs, which are involved in financial transactions with minimum financial regulations from the government (Table X and Graph 21).

The presence of microcredit programs increases borrowing from microcredit sources and reduces borrowing from informal sources.

Borrowing from informal sources is 128% lower in Grameen Bank villages, 145% lower in BRAC villages, and 38% lower in BRDB RD-12 villages than in non-program villages. Microcredit, especially from Grameen Bank, also complements formal credit, implying that the reduction in the price of microcredit because of the availability of microcredit programs increases demand for both microcredit and formal credit. Villages with microcredit programs have generated a better credit risk than villages without microcredit programs. Formal lenders may thus supply more credit in villages with microcredit program than in those without them [22].

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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46

TABLE X RURAL CREDIT MARKET IN BANGLADESH

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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Bangladesh Krishi Bank (BKB) 17% Other Informal Source 30%

Commercial Banks 10%

Cooperatives 4% Friends and Relatives 34%

Other MFIs 3% Grameen Bank 2%

Graph 21. Rural Credit Survey of Bangladesh, 1987.

Source: [22].

Despite the growth, institutional finance (both formal and microfinance) plays only a very limited role in the rural economy of Bangladesh. Informal microfinance seems to have played a larger role than formal finance in agriculture in Bangladesh, and its role is growing [17].

Microcredit Growth Potential for Rural Non-Farm Activities Because microcredit supports predominantly rural non-farm activities that may have limited growth potential, it may have a small impact on growth policies, although its immediate impact on poverty reduction may be substantial. With appropriate skills promotion and market development, however, the rural non-farm sector can play an active role in increasing overall growth. Two findings are pertinent in this context. First, village-level production gains in manufacturing are higher in BRAC villages than in villages with other microcredit programs or formal finance, even though both formal finance and Grameen Bank provide more credit than BRAC. Second, returns on capital and labor to activities including manufacturing are higher in villages with better infrastructures. These findings suggest that rural activities led by non-farm activities is possible, provided adequate infrastructure investment, including marketing and skills developments, is made [17].

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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Economic Viability: Foreign Donor Resources Interestingly, some poverty alleviation microfinance institutions operate under government regulations, like banks, while some do not. Grameen Bank is an example of the first category, and its performance can be evaluated in terms of whether it is financially self-sustainable. Moreover, since it is a rural bank, its performance must be judged against the performance of traditional rural financial institutions such as commercial and agricultural development banks. In contrast, programs such as BRAC and BRDB RD-12 are not banks and so do not operate under strict banking rules. Being non-banks, standard financial and economic efficiency criteria may not be strictly applicable. Nevertheless, since they behave like financial intermediaries, they should be subject to conditions similar to those applied to Grameen Bank [4].

Although branches of MFIs operate on a commercial basis, operations at the head-office level are highly subsidized. All three programs receive substantial foreign donor resources, either as grants or concessional funds, although Grameen Bank has increasily drawn on market sources in recent years. Table XI, the market facilitator table, shows the institutions that have some amount of microfinance investments in Bangladesh. The numbers in the Table XI show a worldwide figure, not limited to Bangladesh. All of these institutions have microfinance investments in Bangladesh.

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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TABLE XI MARKET FACILITATORS

Fund Name

PKSF Oikocredit CORDAID Rabobank IFC Dexia Microcredit Fund Citigroup Foundation ResponsAbility USAID Credit Guarantees Fund BIO MicroVest I DOEN Gray Ghost ShoreCap Intl.

ECLOF

Country of Incorporation

Bangladesh Netherlands Netherlands Netherlands USA Luxemburg USA USA Netherlands Belgium USA Netherlands USA UK Switzerland

Number of Active MF Investments

188 169 90 89 52 49 42 — 25 16 16 13 6 4 —

Fund Assets (US $)

Percentage of Fund Assets Allocated to MF Investments

— 304,662,000 63,473,991 12,180,900 — 51,669,512 63,000,000 11,449,977 — — 14,400,000 64,674,337 13,100,000 23,300,000 —

— 26.51% 54.58% 78.20% — 89.67% — 100.00% — — 93.75% 95.25% 30.53% 6.44% —

Source: www.mixmarket.org.

Access to Market Resources For different reasons, however, the access to microcredit programs to market resources is restricted in Bangladesh. When Grameen Bank issued bonds in 1995 to generate market resources at the market interest rate, it had difficulty in mobilizing market resources. In that year all nationalized commercial banks had tremendous liquidity and were eager to buy Grameen bonds, but only with the government’s guarantee. The government had to step in and Grameen Bank was rescued for its shortage of liquidity in that year. BRAC also reportedly failed in several attempts to borrow money from commercial banks. A mechanism needs to be developed to allow linkages between formal banks and microcredit programs without direct government involvement [23]. In order to be fully self-sustainable, microfinance institutions must be economically viable, that is, free of economic subsidies.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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50

%

MFI subsidies consist of interest subsidies, income subsidies, and equity subsidies. Interest subsidies comprise the main component among the three categories. Grameen Bank’s interest subsidies comes from foreign and central bank loans and from foreign grants. BRAC’s interest subsidies come from capital funds and revolving funds, both of which are provided at a zero concessional rate.

Income subsidies are equal to income grants, which are donations. Equity subsidies represent the income from the equity held by program members, government, and commercial banks, which is subject to market interest rates only. BRAC receives neither income nor equity subsidies.

Although microcredit programs could reduce their subsidy dependence by raising interest rates, because of the nature of their clients they have to rely on subsidized resources to develop institutionally before they can compete for market resources [17].

Another factor that increases the subsidy dependency of microcredit programs is landlessness. Microcredit programs in Bangladesh target landless households (households that own less than half an acre of land).

Graph 22 shows the landlessness rate, versus the segment of the households considered landholders. Graph 23 shows the percentage of households suffering from extreme poverty in program villages.

120 100 80 60 40 20 0

Landholders

78%

66%

65%

BRAC

RD-12

Grameen

Landlessness

Graph 22. Percentage of Landlessness in Villages under the Microcredit Programs.

Source: World Bank.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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51

120 100

%

80 60 Over Extreme Poverty

40

Extreme Poverty

20 15%

17%

13%

BRAC

RD-12

Grameen

0

Graph 23. Percentage of Extreme Poverty in Program Villages.

Source: World Bank.

This placement of programs in areas in which poverty is high justifies subsidized funding of microfinance institutions in the early years of their operation.

Some rural credit programs were subsidized in their early years but attained self-sustainability over time. For example, Indonesia’s Badan Kredit Kecamatan (BKK) and Bank Rukyat Indonesia (BRI) were given funds as seed capital, with the understanding that they would become self-sustaining within the shortest possible period [24].

Of course, there are fundamental differences between the Indonesian and Bangladeshi institutions. Unlike the Indonesian banks, Bangladeshi microcredit programs have some inherent institutional weaknesses. BRAC, for example, is not a chartered bank and thus cannot mobilize savings from nonmembers. Grameen Bank is a bank, but it is a bank for the poor and finds it difficult to attract deposits from those other than the poor. Given their respective institutional weaknesses for attaining self-sustainability, both BRAC and Grameen Bank must raise interest rates on levels consistent with inflation rates and find other ways to attain financial self-sustainability. If subsidy is unavoidable in order to attain the primary objective of poverty reduction, it has to be used in the most efficient manner possible [17].

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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52

Outreach Evaluation Microcredit programs are evaluated by their outreach not only in terms of their coverage area, but also in terms of membership, the volume of lending, and the levels of savings. A microcredit program’s volume of lending and the levels of members’ savings indicate the depth of this outreach. Outreach can be increased by expanding membership within an existing branch network or by extending the branch network. Increasing membership per existing branch is probably less expensive. The number of villages served by the three microcredit institutions rose significantly. In 1994 Grameen served 34,913 villages, BRAC served 13,224 villages, and RD-2 served 14,577 villages [4].

Grameen Bank Centers

BRAC Village Organizations

RD-12 Bittaheen Societies

70000 60000

Units

50000 40000 30000 20000 10000 0

1989

1994 Year [Source]

Graph 24. Branch Expansion Source: [21].

Grameen Bank had 26,976 centers in 1989 and 59,921 centers in 1994 (Grapg 24). BRAC had 6,434 village organizations in 1989 and 24,859 in 1994. BRDB RD-12 had 6,294 “Bittaheen [landless] Societies” in 1989 and 16,565 in 1994 [21].

Branch-level program expansion was also rapid between 1989 and 1994.

Grameen Bank increased the number of branches from 641 in 1989 to 1,045 in 1994. In 2005, the number of Grameen’s branches reached 1,537 units, PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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53

covering 54,022 villages, with a total staff of 13,947 (www.en.wikipedia.org). BRAC expanded its branch network from 81 branches in 1989 to 195 branches in 1994. BRAC is present in 64 districts, 480 Thanas (or sub-districts), 68,408 villages, and in 4,378 urban slums with 137 regional offices, 498 area offices, and 1,172 team offices touching the lives of almost 100 million as of December 2004. BRDB RD-12 increased its number of branches from 45 in 1989 to 119 in 1994 (www.mfnetwork.org).

The Group-Approach Targeted Credit To help the poor, targeted credit programs must find ways to reach out to households that do not know how to obtain access to institutional credit.

Experience shows that the spatial and social cohesiveness developed among individuals of the same gender, residing in the same village, and with similar economic backgrounds are important factors in the smooth functioning of these groups.

All three MFI programs discussed here have vertical hierarchical structures, in which village organizations are conglomerations of groups of five to eight members. These village-level organizations are federated under branches of Grameen Banks and BRAC or under thana-level offices such as the Thana Bittaheen Central Cooperatives Societies (TBCCSs) of BRDB RD-12. An area office controls the branches of Grameen Bank and BRAC, which is, in turn, under the supervision of the head office. In contrast, the head office in Dhaka supervises the TBCCSs of BRDB RD-12. Grameen Bank calls its village-level organizations “Centers,” BRAC calls them “Village Organizations,” and BRDB RD-12 calls them “Bittaheen [landless] Societies” [21].

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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TABLE XII CENTRAL UNITS IN THE THREE PROGRAMS

Central Units in the Three Programs The five-member group is the central unit of Grameen Bank. BRAC uses village organizations that comprise 50–60 people from the target population.

The village organizations are the central pillar of BRAC. However, because the village organizations are difficult to manage, at least for credit delivery and repayment, BRAC introduced solidarity groups of from five to seven people within the village organizations to monitor group performance. The village organizations, not the solidarity groups, are the principal functionaries, however BRDB RD-12 follows a structure very similar to that of BRAC. BRDB RD-12 has found that the small-group approach works better than the large-group approach in monitoring group performance in loan utilization and repayment [17].

In all three programs, groups hold weekly meetings in the presence of a group organizer to review the group’s performance and deposit their weekly savings. They also learn, practice, and discuss the rules of the program and other group activities. Weekly loan installments are also repaid at these meetings. Each group elects a leader, who is responsible for the discipline of group members. All members have the chance to lead their groups. The leader of the group initiates loan proposals at the monthly center or village organization meeting.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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55

Instruments to Reduce the Risk of Microloan Defaults: Savings Mobilization All three of the programs practice group-based credit delivery, which has yielded better loan-recovery rates than the individual-based in a credit model in Bangladesh. This superior performance of group-based credit partly reflects peer pressure from group monitoring whereas microcredit programs have been able to create social capital through group formation and training [18].

Microcredit institutions also introduce a number of instruments to reduce the risk of loan default attributable to production risk. Savings mobilization, for example, is treated as an integral part of financial intermediation. Unlike other lending systems, group-plus-community-based financial intermediation demands borrowers’ active and direct participation in the lending process. Thus, group members have a stronger incentive to enforce the ethics of group behavior and loan contracts. Of course, there are other ways to enforce loan contracts, such as pressure from a village or clan leader. Such an approach works in the case of individual-based lending, such as that done by Indonesia’s Badan Kredit Kecamatan or Bank Rakyat Indonesia [4].

Drawbacks in the Bangladesh Microfinance Industry In years up to 1996, Grameen and BRAC members became increasingly vocal about their dissatisfaction with the denial of access to their savings, and many mature members were leaving with their (often substantial) compulsory savings.

By the end 1995, there was a widespread strike among Grameen Bank members in the Tangail district in support of their demands for access to their locked-in “group funds” (generated through compulsory savings).

Although income and employment generation is an explicit objective of all microfinance institutions, poverty reduction may not be a central concern for many of them. For example, village banks supported by Accion International or Women’s World Banking in a number of countries are programs for microentrepreneurs where poverty reduction is not the prime concern. In participating countries, such as some in Latin America, microfinance emerged in response to market failures in which formal financial institutions failed to cater their financial service to small- and medium-scale enterprises. In contrast, microcredit programs, such as those in Bangladesh, are poverty alleviation programs, but even if they are PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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56

instruments for poverty reduction, they nevertheless practice financial intermediation.

Microcredit to the poor is one of many instruments for poverty reduction.

Microcredit institutions must thus be evaluated against the performance of alternative instruments of poverty reduction. Many microfinance institutions address market failures and use grants or soft loans to provide services to target clients. This involves subsidies, and the questions to ask are to what extent these programs benefit from subsidies, whether MFIs are able to eliminate subsidies, and if so, how [25].

Conclusion The success of microfinance in Bangladesh has destroyed three commonly held myths in rural finance: • the poor are not creditworthy • women represent greater credit risks than men • the poor do not save The large number of beneficiaries of microcredit programs shows how widespread microfinance has become in rural Bangladesh. Microfinance has reduced the volume of lending from informal sources [14].

Grameen Bank reduced the informal lending rate on loans with terms of more than one year. Grameen Bank also reduced the extent of interhousehold transfers in rural areas. Agricultural financing increased because of microfinancing by BRAC and BRDB RD-12. Grameen’s seasonal and family loans, which mainly support crop production on leased land, also increased agriculture financing in recent years, making agriculture the largest category of loans disbursed by Grameen Bank in 2004 (www.grameen-info.org).

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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57

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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58

3 Brazil: State-Owned Commercial Banks in Microfinance Introduction Since the 1990s, large state-owned commercial banks have also initiated microfinance operations. These include Banco do Nordeste (BN) in Brazil, Banco del Estado in Chile (BECH), the Bank for Agriculture and Agricultural Cooperatives (BAAC) in Thailand, and others.

Having only started its microcredit program in January 1999, BN has built up its portfolio in one-third the time it took comparable programs to reach similar portfolio sizes. BN in Brazil has become one of the largest programs in Latin America with 55,000 borrowers [26].

The public sector in Brazil, by operating directly through official banks with microfinancing products such as CrediAmigo of BN, emphasizes the utilization of microcredit as an integrated and complementary instrument to public policies aimed at the promotion of local and regional development.

In less than a decade, Brazil has evolved from an unproductive participant in the microfinance industry into an innovator. In addition to describing the development and impact of microfinance in Brazil, this chapter will also investigate how the Brazilian government managed to control prices and implement the economic and legal measures that created the stage for the growth of Brazil’s microfinance industry since the mid1990s.

State Banks State banks have generally under-performed for five reasons: 1.

2.

3.

4.

5.

the lack of strong, stable leadership; the lack of commercial orientation; insulation from political dealings; the lack of a strong community presence; the lack of a good reputation.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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However, because of their ability to grow programs rapidly through an extensive branch network, they could become the partners of interested donors. Subsidiary arrangements can also be an important option for state banks. Nevertheless, with state banks, or any institution associated with the government for that matter, there is always the underlying danger that political tides may shift [2].

The number of “other” commercial institutions (meaning institutions that did not begin as nongovernmental organizations [NGOs]) that have entered the microfinance market is increasing. In particular, large retail banks have a competitive advantage, which arises primarily from [2]: 1. extensive branch networks offering immediate channels for market penetration, 2. experience in offering savings and payment services, 3. access to resources needed to establish a microcredit program, possibly including loan capital, 4. funds for capital improvements, and 5. an administrative infrastructure.

Virtually every country in the world has examples of banks with these inherent advantages. Often they are stated-owned, with mandates to carry out agricultural and rural development. Typically, these banks were established to provide subsidized credit to farmers through extensive branch networks that could reach deeper into rural areas than other banks.

Moreover, most developing countries have saving banks that were established during colonial times to provide payment and savings services.

Because of poor performance and the withdrawal of government subsidies, many of these banks are now bankrupt or moribund. Many governments are actively seeking to transform these institutions, partly to stem ongoing losses that require expenditures from government budgets, but also to recognize that rural areas remain vastly underserved by financial institutions [2].

New Entities in the Third Sector: OSCIPs and SCMs In the past ten years, NGOs such as associations, foundations, and civil society organizations, have become active, well-organized, and have grown rapidly in Brazil. Most of them are small organizations created without many resources by and in small communities that have been enjoying the freedom of association as established by the 1988 Federal Constitution.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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However, the third sector 5 in Brazil has experienced many institutional problems. In 1999, to alleviate theses problems, the Congress promulgated an important law regarding the third sector: Law 9.790/99 that created Civil Society Organizations (OSCIPs) and Microcredit Societies (SCMs), which allowed for microfinance activities with broader funding bases and outside the limitations of the Usury law [27]. Before these changes, microfinance was undertaken largely by non-profit organizations and these were constrained by the 1% per month ceiling on interest rates imposed by Brazil’s Usury law. Brazil’s Usury law 6 has been meaningless during Brazil’s high-inflation periods, and has been limiting, in the case of microfinance loans, which are traditionally offered for short periods of weeks or months at higher interest rates than loans in the formal and largescale sectors. NGOs were also constrained, in terms of access to capital, to grants or credit lines from government or foreign donors. OSCIPs and SCMs have considerably more flexibility in terms of both funding and lending and outside the purview of the Usury Law. 7 OSCIPs can have a range of objectives, which are not limited to microfinance. OSCIPs exist in many fields such as science, education, and research. Like NGOs, they are deemed to be non-profit organizations.

Importantly, OSCIPs can sign cooperation agreements with the public sector to implement activities and projects of public interest, which implies that they could have access to public-sector funds, in addition to donor funds and owner or sponsor funds. OSCIPs are not able to mobilize deposits from the public. The second form created, the SCM, is much closer to a microcredit society as they exist in other countries. SCMs are formal for-profit financial entities regulated by the Central Bank of Brazil. SCMs can take loans or lines of credit from foreign or domestic financial institutions due to regulations issued in July 2001, which broadened their access to further funding, together with granting them permission to use instruments such as fiduciary alienation for extending credit. 8 However, issuing debt or mobilizing deposits remains restricted. The regulations issued in July 2001 also permit SCMs, like banks, to operate through microcredit service points (Posto de Atendimento de Microcrédito). SCMs’ service points are required 5

Organizations that fit into neither the public sector nor the private sector fall under the third sector (www.indiainfoline.com).

6 Usury laws are state laws that specify the maximum legal interest rate at which loans can be made.

This makes most loansharking, another name for usury, illegal. Often, loansharks use illegal "scare" tactics to ensure that the lent money is paid back.

7 Medida Provisória 1914-4 of June 28, 1999, excluded both OSCIPs and SCMs from the Usury law.

8 Law No. 10194 of February 2001 extended funding sources to include the SEBRAE as well as companies registered with the CVM and investment funds. OSCIPs were permitted to own SCMs. PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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61

to submit information on their lending operations to the Central Bank’s credit risk center (the Central de Risco de Crédito), which in principle could permit them in the future to obtain greatly enhanced credit information on prospective clients (CMN Resolution 2874 of July 26, 2001). These new institutional forms are clearly a major step forward for microcredit in Brazil.

Some existing NGOs, which are microfinance institutions in practice, are considering modifying their legal framework in order to benefit from the ability to tap external sources of finance. However, SCMs have pointed to their heavy tax burden, in common with other regulated financial institutions. This is a deterrent to NGOs or OSCIPs considering converting to an SCM to expand funding sources [28]. In 2001, the Brazilian Association of Microcredit Development (ABMD), also known as the Brazilian Microcredit Gateway (Portal do Microcrédito) was created.

ABDM, a new entity in the third sector and classified as an OSCIP, aggregates the majority of microfinance organizations in the country.

Besides the National Bank for Economic and Social Development (BNDES) and the Program CrediAmigo of BN, there are currently 24 SCMs and 67 Microfinance NGOs qualified as OSCIPs in the Brazilian microfinance market. (www.cgap.org).

General Approach to Regulating Different financial entities have not only different legal descriptions but also different regulators. The type of financial activities the institution performs determines which regulator is responsible for supervising their financial operations. (See Table XIII.)

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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TABLE XIII Development Banks

Definition or description of institution

(For example, Banco do Nordeste of Brazil’s CrediAmigo program.)

Regulator(s) and role of regulator(s)

Activity that determines required regulatory status

Credit Cooperatives

Nonprofit cooperative financial institutions created to meet the basic financial service needs of low- and middle-income citizens.

Central Bank of Brazil (BCB) (http://www.bcb.gov.br).

Routine oversight usually delegated to the two main cooperative credit networks (Sicoob and Sicredit).

Deposit-taking

Providing services to voluntary members.

Microcredit Companies (SCMs)

Microcredit NGOs (OSCIPs)

Formal for-profit financial entities.

Can be owned by OSCIPs.

Nonprofit organizations whose social objectives must fall within a specific list (including provision of credit).

Central Bank of Brazil.

OSCIPs must meet reporting requirements for the Ministry of Justice but are not subject to prudential regulation and supervision.

Establishing a company with the intent of providing credit to the microenterprise sector.

Brazilian Microfinance Sector—Institutional Overview Central Bank of Brazil (BACEN)’s Resolution no. 2874 of 2001, article 2, defines a microfinance institution in Brazil as an entity providing financing and guarantees to individuals with the aim of supporting professional, commercial, or industrial enterprises of a small scale, and to organizations classified as microenterprises under applicable legislation.

SCMs, NGOs (OSCIPs), credit cooperatives, and development banks (e.g., Banco do Nordeste do Brazil’s CrediAmigo program) are regulated microfinance institutions. Government-funded programs also exist to promote development of micro- and small enterprises. Consumer credit and PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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63

supplier credit are also popular. NGOs are non-regulated sources of microfinance. Moneylenders and relatives are the predominant informal finance mechanisms [28]. (See Table XIV.) BNDES Bank and SEBRAE (Brazilian Services to Support Micro- and Small Enterprises) offer government-backed financing to MFIs (SCMs).

Central credit cooperatives are apex institutions owned by member credit cooperatives that, among other things, help to re-allocate surplus resources between cooperatives and seek lines of funding for member cooperatives.

Most of those financial institutions are located in medium and large urban areas, which means a small geographic area of influence (www.comunidadesolidaria.org.br). The microfinance market is highly concentrated in Brazil.

TABLE XIV Banks Development Banks

Number of institutions licensed

Commercial Banks

NBFIs (Non-Bank Financial Institutions) Microcredit Companies (SCMs)

Mortgage Companies

Consumer Finance Companies

Savings and Loan Companies

26

Number of clients Size of lending portfolio

Credit Unions

NGOs

Credit Cooperatives

Civil Society Organization with a Public Interest (OSCIPs)

1374

2 million

$3.3 million

$600 million

Note: Official exchange rate as of 25 February 2004 was 1 US $ / 2.940131 BRL (www.exchangerate.com).

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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10 Biggest MFIs Others 70%

30%

Graph 25. Microfinance Market in Brazil: 2004 Source: BNDES.

50% Crediamigo others

50%

Graph 26. Percentage of Actives Clients in the Microfinance Market in Brazil: 2004 Source: BNDES.

Brazilian Public Sector in Microfinance The public sector in Brazil has been operating directly through official banks with microfinancing products, such as CrediAmigo of BN, or through Bancos do Povo (Popular Credit Fund). They work mostly with resources from federal funding. In November 2004, for instance, BNDES allocated financing of R $7.17 million (US $2.65 million–R$/US $ = 2.77) for microcredit in Sergipe, a state in Northeast Brazil. BNDES established a financing agreement with Banco do Estado de Sergipe S/A (BANESE, or State Bank of Sergipe), which will administrate the fund for formal and informal micro-companies, under PMC, the National Microcredit Program of BNDES. The resources, originating from the Fund for Worker's Assistance (FAT), will be granted with minimum financial cost in order to expand the actuation of the program Banco do Povo de Sergipe (Popular PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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65

Credit Fund of Sergipe). The program already depends on resources from BANESE and from the State Department of Poverty Combat, Social Assistance and Labor, and has already performed over three thousand operations (www.bndes.gov.br). In this context, the BNDES promoted enhancements to support lines, making the PMC program available, which emphasizes the utilization of microcredit as an integrated and complementary instrument to public policies (www.bndes.gov.br). See Table XV for details regarding the regional distribution of loans to microcredit institutions supported by BNDES in 2001.

Besides the microfinance programs launched through BNDES, the Brazilian federal government has stimulated other microfinancing projects that support the microcredit sector, such as the SEBRAE program (the National Small Business Service). SEBRAE is a non-profit organization established in 1990 and financed by a deduction of 0.3% from company payrolls. Delegates from the government and the private sector make up SEBRAE's National Deliberative Board (www.fas.usda.gov).

BN, on the other hand, is known for serving as one of the main channels of disbursement for the PRONAF (National Program of Familiar Agriculture) (www.interdev.oecd.org), the federally subsidized credit program aimed at developing small- and microagribusiness. BN offers a series of diverse banking services that range from financing large agribusinesses to serving low-income microentrepreneurs through its microfinance program. The microfinance sector is not very developed in the rural areas of Brazil because of the existing climatic risks and due to the fact that most of the activities are concentrated in agricultural products with volatile prices (banana, coffee, rice, and others), which complicates the entrance of small producers.

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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TABLE XV REGIONAL DISTRIBUTION OF LOANS TO MICROCREDIT INSTITUTIONS SUPPORTED BY BNDES: 2001 South Region Average loan size

R $1,234

Subtotal % share Institutions

2,510 30.7 BM SC and PR

Casa do Empreendedor

CEAPE RS

PortoSol

BluSol

Southeast Region Average loan size Subtotal % share Institutions

R $1,656 1,649 20.2 CEAPE ES

Vitória CrediSol

Banco do Povo ACP

South plus Southeast (%)

FAEP

Rotula

VM MG

Viva Cred

Banco do Povo de Santo André

CEAPE BA

CEAPE PE

CEAPE PB

CEAPE SE

FAEJ

Microcred

50.9

Northeast Region Average loan size Subtotal % share Institutions

R $948 3,474 42.5 VM AL

VM BA

VM CE

VM PE

VM RN

BM BA

CEAPE RN

Central–West Region Average loan size Subtotal % share Institutions

R $890 378 4.6 CEAPE GO

Rio Verde de Credito Popular

North Region Average loan size

R $1,867

Subtotal % share Institutions

161 2.0 CEAPE PA

North, Northeast, and Central-West (%)

49.1

Notes:VM = Visão Mundial . BM = Banco da Mulher. CS = Conquista Solidária . ACP = Popular Credit Association (Associação de Crédito Popular). The table does not include data on the one MFI in the Federal District of Brasília, CEAPE Nacional. Source: BNDES Social Programs Department.

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67

CS

ORGAPE

Government’s Economic and Legal Measures: Building the Stage for the Advent of the Brazilian Microfinance Industry Brazil has had long had severe difficulties with inflation. Even in the 1980s and early 1990s, policymakers seemed to perceive inflation as a problem solvable by decree and by indexing the cost of everything from private school tuition to power bills based on past price movements. In their periodic efforts to fight inflation, policymakers would typically periodically freeze wages and prices, stop indexing, and perhaps impose a fixed exchange rate. Brazilian policymakers did not behave as if they appreciated the connections between [29] 1.

2.

3.

4.

a problematic tax system, fiscal deficits, printing of money to pay for what taxation could not, and inflation.

Because inflation had become the most visible symptom of the publicsector unbalance, there were several attempts to bring inflation under control through what came to be known as heterodox economic shocks. The period saw three such shocks: the Cruzado Plan (1986), the Bresser Plan (1987), and the Summer Plan (1989). During the 1980s and early 1990s, the country changed currency several times. Brazilians had been dealing with the Cruzeiro until 1986. That year, the Cruzado Plan cut three zeros from the bills and changed the currency to the Cruzado. The objective of the Cruzado Plan was to eliminate inflation with a dramatic blow. Early in 1986, the situation had become desperate, prodding the implementation of the plan. Its main measures were a general price freeze, a wage readjustment and freeze, readjustment and freeze on rents and mortgage payments, a ban on indexation, and a freeze on the exchange rate. The plan's immediate results were spectacular: the monthly rate of inflation fell close to zero, economic growth surged upward, and the foreign accounts remained under control.

However, by the end of 1986 the plan was in trouble. According to the U.S. Library of Congress, the wage adjustments were too large, excessively increasing aggregate demand and creating inflationary pressures.

The 1980s ended with high and accelerating inflation and a stagnant economy, which never recovered after the demise of the Cruzado Plan. The public debt was enormous, and the government was required to pay very high interest rates to persuade the public to continue to buy government debt instruments.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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In 1990, the Cruzados Novos were retired and the Cruzeiros were back.

In 1993, the Cruzeiros lost another three zeros and were turned into Cruzeiros Reais. The subsequent conversion rate, which factored in the course of the American dollar, was 1 Real = 2,750 Cruzeiros Reais. In 1994, following this complicated methodology, the real came to life.

The Real Plan In 1994, Brazil finally initiated an economic stabilization plan that showed appreciation for the linkage between spending, money creation, and inflation. This Real Plan, named after the new currency, whose exchange rate system would be instrumental to inflation-fighting efforts, temporarily involved indexation. However, indexation was tied, through the exchange rate, to the number of dollars required to purchase a product rather than to measures of inflation and the currency. In addition, since 1994, inflation has been maintained at reasonable levels (in 2003, consumer prices rose by about 8%), and Brazil’s citizens have had the chance to get accustomed to a stable currency.

In 1994, Brazil established risk-based minimum capital requirements consistent with the Basel Accord. The Basel Accord represented a movement of industrial countries to increase the stability of the world’s banks and ensure that banks would be properly capitalized. Its signatory nations agreed in 1987 to enforce a risk-based capital requirement of 8% on all banks within their boundaries.

Changes in Legal Structure Governing the Regulation of Brazil's Banks Although the legal structure governing the regulation of Brazil's banks was obviously changing, a common problem in Latin America is that those in charge of bank supervision and regulation do not have the power to enforce the government regulations on the books. The ability of the Banco Central do Brasil, Brazil's regulatory authority for banks, to cause banks to follow its directives was very limited throughout most of the 1990s.

In August 1996, Brazil issued new regulations about the conditions for the rescue of publicly owned banks. Bailouts would take place, provided the banks were privatized, liquidated, or transformed into development agencies.

In addition, in August 1996, Brazil's government began to permit foreign banks to take control of small financial institutions. In 1997, in the wake of government interventions in larger banks, Brazil allowed foreign controlling interest in these institutions as well. In March 1997, new laws permitted the PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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69

BACEN to demand that a bank with liquidity problems transfer control to new management or reorganize through merger or closure. In 1998, BACEN was given new powers to compel financial institutions to implement systems of financial controls, also in accordance with the Basel Accord. Meanwhile, Brazil took steps to force the privatization of publicly owned banks. Brazil's Central Bank had long been not only a lender of last resort to the publicly owned banks, but also a routine supplier of capital injections to them [29].

TABLE XVI SIGNIFICANT BRAZILIAN BANKS Bank

BACEN—Central Bank of Brazil

BNDES—National Bank for Economic and Social Development

Brief Description The Monetary Authority An official bank whose mission is to foment enterprises with social-economic objectives.

Significant Commercial Banks

Bank of Brazil

Caixa Economica Federal

The biggest, by assets. Bank of Brazil has shares traded in the stocks exchange, but the Brazilian government has control over the bank.

Another big, official state-owned bank, entirely controlled by the government (no shareholders). Its major function is to finance the civil and construction sectors.

The Biggest Private Banks

Bradesco and Itau

Bradesco and Itau have long been fighting to be the number one bank in Brazil; these are the banks with the most branches and the most clients. Bradesco still seems to be the biggest, but both organic growth and a quick buyout of another bank could change the scenario.

Unibanco ABN AMRO REAL

Former Banco Real, it was bought by Dutch ABN AMRO a few years ago

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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70

Santander

They bought BANESPA, the former official bank of the State of Sao Paulo; along with a comprehensive array of branches, they got a long list of clients.

American Banks Citibank Boston

Citibank Boston have an old presence in Brazil, but their target is the upper class

Source: Brazilian Financial Ministry

Brazilian Microcredit Industry Contradictory to its delay in growing in the microfinance business, Brazil was one of the first countries in the world to implement a microcredit program. In 1973, the União Nordestina de Assistência à Pequenas Organizações, known as UNO, was created in some counties of Salvador and Recife, with the assistance of ACCION, then known as AITEC, and with the participation of private institutions and local banks. Until 1994, however, only the CEAPE (Center of Support to the Small Entrepreneur) network with 13 branches, and Banco da Mulher (Women’s Bank) do Brasil (http://www.bancodamulher.org.br/), with seven branches, operated in the Brazilian microfinance industry.

Nevertheless, half of the Brazilian working population works in firms of no more than five employees, consequently classified as small firms. Out of that contingent of small firms, one-quarter operate in the informal market, which counts for 8% of the gross domestic product (PIB). The significant size of the third sector in Brazil justifies that the government carry out actions and policies with the main function of increasing the income of the self-employed, even of employers in small businesses, in order to lessen or eliminate the frequently unstable nature of their professional activities (www.receita.fazenda.gov.br). (See Graphs 27 and 28.)

The provision of banking services in terms of credit and deposits per capita varies considerably between regions. Actually, spatial inequalities in bank branch presence are significant among Brazil’s regions.

The heterogeneous profile of the demographic distribution of the Brazilian population presents the South and Southeast regions as the primary consumer centers in the country. At the other end, the North, almost completely immersed in the Amazonian landscape, presents the lowest demographic density rate. The Brazilian Institute of Geography and Statistics (IBGE) estimates Brazil’s current population, at 169.59 million inhabitants (preliminary data from 2000 census), spread irregularly PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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71

throughout the national territory. Some regions are densely populated, such as the Southeast, with 78 inhabitants per squared kilometer, while others are almost uninhabited, such as the North Region, comprised of the Amazon forest, with a little over 3 inhabitants per square kilometer.

The Brazilian population is predominantly urban, with approximately 81% of people living in cities and towns. In this case, we may also note

% of Total Demand

5 4

3.3

3 2 1

0.6

0.3

0.7

0.6

0.8

0 North

Northeast

Southeast

South

Center-West

Total

Graph 27. Microcredit Supply in Brazil as Fraction of Demand Source: [30].

South 15% Center-West 7% Southeast 42%

North 8% Northeast 28%

Graph 28. Brazilian Population by Macro Regions: 2004 Source: IBGE.

pronounced differences between regions, as the Southeast has an urban population of 91% while the North/Northeast around is only at 69%.

A survey done among urban consumers in 11 Brazilian states shows that only 10% had access to loans (Graph 29). About 32% of urban consumers report an unmet demand for loans. This includes 5% that had their loan application rejected and 27% who thought they would be rejected or did not know how to apply [30].

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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From an economic perspective, the analysis of the data presented in Graph 30 is clarifying. One may note that the Southeast Region has a GDP about four times greater than that of the Northeast Region. However, the population of the Southeast is only two times larger than the population of the Northeast.

Received 10% Rejected 5%

No dem and 58%

Self-selected out 27%

Graph 29. Access to Loans: 2005 Source: SEBRAE.

South 18%

Center-West 7% Southeast 57%

North 5%

Northeast 13%

Graph 30. Brazilian GDP By Macro Regions: 2004.

Source: IBGE.

The origins of such disparity are historical and redistributive policies have been practiced for decades in an attempt to lessen these unbalances.

Another feature of the Brazilian economy is its perverse income distribution, PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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73

with the poorest 50% of the population holding only 12.3% of the national income, whereas the richest 20% hold 62.4% of the national income. In rural areas, it is also possible to find great land concentration, with more than 35% of the ownership of all the existing rural land area belonging to only 1% of the population (IBGE).

Brazil’s First Major Microcredit Program: The Small Productive Loan Program (PCPP) The Small Productive Loan Program (PCPP), created in 1996 under the auspices of the BNDES, was the country’s first major microcredit program.

From the very beginning, its objective was to consolidate a group of MFIs by funding their operation according to a series of criteria designed to ensure their sustainability. The main problem for small entrepreneurs was the impossibility of carrying out operations that would barely finance working capital needs. In 2002, the program had aprroximately 30,000 active clients and carried out about 275,000 operations for a contractual value of US $151 million (www.bndes.gov.br). Several employment and income-generation programs conducted by the Brazilian Ministry of Labor and Employment point toward an increase in the income of the self-employed. Such is the case of one line of PROGER (the Employment and Income Generation Program) targeting the self-employed. Originally created in 1995, it offers financial support for investment, using associated working capital. By August 2002 the program had carried out nearly 308,000 operations, contracting for approximately US $700 million in resources, with an average contracted value of US $2.28 thousand (www.bndes.gov.br).

Currently, there are several microcredit models and enterprises operating successfully in Brazil. Most of them are the result of partnerships among NGOs, government and private groups, and credit societies for microentrepreneurs.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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74

TABLE XVII MARKET FACILITATORS THAT HAVE BEEN INVESTING IN THE MICROFINANCE INDUSTRY IN BRAZIL

USA

Netherlands

Luxemburg

Belgium

Italy

France

Germany

Citigroup Foundation

Oikocredit

Dexia Microcredit Fund

INCOFIN

CRESUD

PlaNet MicroFund

DEG

MIF

DOEN

MicroVest I

Rabobank

Responsibility Fund

Switzerland ECLOF

BIO

Gray Ghost IDF USAID Credit Guarantees

Source: www.mixmarket.org.

PMC (National Microcredit Program)—BNDES Despite the advances made by the microcredit segment through the PCPP, the Ministry of Labor and Employment (MTE) decided that a highly flexible financial support program operating through official federal finance institutions would do much to help develop the microfinance sector in Brazil (www.streetnet.org.za).

In 2003, the Lula 9 regime launched what is known as Programa Nacional de Microcrédito (PMC), a program aimed at extending the outreach of microfinance products to small- and microentrepreneurs through state-owned institutions or through institutions that use government loans as the main source of funds for their portfolios. PMC requires that all institutions funded by the government charge nominal interest rates of no more than 2% per month over the cost of funds. Before 2003 the institutions 9

On October 27, 2002, Brazil elected as its president Luis Inacio Lula da Silva, known to all as Lula [32].

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75

charged interest rates that varied from just under 4% to 6% per month.

CrediAmigo, although a microfinance program within a public bank, is exempt, as its funds are not provided directly by the government, but political pressures remain, and it has been dropping its interest rates as well.

The 2003–2004 period was characterized by intense intra-governmental negotiations with representatives of the microfinance institutions with the aim of defining a national microcredit policy and of contemplating actions that can facilitate and extend access to microcredit to both formal and informal microentrepreneurs. These would both spur the generation of income and employment and help reduce interest rates for financing. In this effort, it is important to highlight the constitution of a Microcredit and Microfinance Inter-Ministry Team (Table XVIII).

TABLE XVIII MICROCREDIT AND MICROFINANCE INTER-MINISTRY TEAM Ministry of Finance Ministry of Planning Ministry of Labor Ministry of Agricultural Development Presidency BNDES

The meetings held with the operating agents of microcredit and microfinance (cooperatives, OSCIPs, SCMs and banks) included discussion regarding 1. the creation of Special Microcredit Deposits, directing 2% of cash deposits to operations of popular credit and productive microcredit; 2. the permission to constitute Cooperatives of Free Association; 3. the creation of a National Program for Guided and Productive Microcredit (PNMPO).

BNDES defined, as a priority axis, the deepening of the inter-sector character and the comprehension of territory aspects of its operation, searching for a greater synergy and rationality in the application of public resources and how to achieve the proposed objectives.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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76

Credimicro Program In August 2005 BNDES approved a productive and targeted microcredit operation with Caixa Estadual S/A Agência de Fomento (Caixa-RS), for R $10 million, for implementation of its Credimicro Program. This program transfers funds to formal and informal microentrepreneurs in the State of Rio Grande do Sul (South Region) for financing up to R $5000 in working capital and fixed investment operations. The financing conditions are very competitive, bearing interest rates of up to 2.5% per month and a maximum deadline of 12 months for repayment. There is no need to present a real property guarantee. The operation with Caixa-RS is the first one approved in the ambit of the new Microcredit Program (PMC) of BNDES, which is based on the new policy defined by the National Program for Productive and Oriented Microcredit (PNMPO). Presently, PMC holds a portfolio of 19 operations, amounting to nearly R $53 million in potential amounts to be contracted (www.bndes.gov.br/ ).

CrediAmigo Program—Banco do Nordeste (BN) CrediAmigo is a microlending initiative of BN, a development bank dedicated to stimulating economic development in Brazil’s poorest region, the drought-plagued Northeast. The Brazilian economy is marked by regional unbalances that require that the state play an effective role as a redistribution agent. This is the determining factor in the participation of the government in the microfinance industry.

The program CrediAmigo began in five pilot branches in 1997 and quickly expanded to 51 branches in 1998. Today, it is one of the largest microlenders in the world, serving 118,000 active borrowers through a network of 165 branch offices. Its main funding sources come from the World Bank.

In the mid-1990s, the World Bank was looking for potential local institutions that could serve as partners in order to launch a microfinance program in Brazil. It decided to establish partnerships with banks, since most of the existing microfinance intuitions operating in Brazil (notably NGOs) were already being financed by a major apex program led by the InterAmerican Development Bank (IADB). 10 10

The Inter-American Development Bank (IDB) is the main funding institution of the CEAPE network, for instance. However, CEAPE branches have received a low rate from institutions specializing in microfinance evaluation such as Planet Rating— Transparency for Microfinance Development. The CEAPE-MA branch, for instance, needs to improve its incipient financial indicators to monitor the year-to-year performance of the firm.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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The World Bank team first met with managers from BN in 1996. Also in 1996, the BNDES started to strengthen the existing microenterprises through the PCPP program. It became clear to the World Bank (WB) that BN was seriously committed to the development of the microenterprise sector in the Northeast region. BN and the WB agreed on a few guidelines that would serve as the basis for the new microfinance program they would launch together. These guidelines included 1. the program would charge real market interest rates, 2. staff salaries would be based on results, and 3. there would be decentralized credit decisions.

After both banks agreed on the basic guidelines of the program, the WB proceeded cautiously since their team recognized that public banks are not traditionally successful managers of credit programs aimed at low-income businesses.

The pilot project, CrediAmigo, began with the assistance of the recently trained consultants of ACCION International, an American-based NGO specializing in microfinance services.

The first loans issued were for up to 90 days, required no collateral, and were offered only to those microentrepreneurs who formed solidarity groups. The groups were comprised of five people each and the interest rates charged were above-market rates, but still lower than those charged by informal money lenders. ACCION trained and recruited the loan officers. A WB/Japanese grant fund of US $900,000 supported the training and other technical assistance from ACCION and other consultants, as well as the development of an information system.

The WB team worked as advisors in order to support the sustainability of the program and BN was responsible for managing the operations. After four months of implementation of the pilot project, BN’s senior executives decided to expand it to another 50 branches. BN announced this expansion publicly, but expanded without sufficient staff training and preparation. This hasty rollout turned out to be a bad decision.

The premature expansion caused significant loan losses because of poor credit analysis. Loan officers were pushed to expand and did not pay sufficient attention to portfolio quality. The focus was on growth and not on risk management, and the portfolio suffered. Losses caused by this early expansion totaled more than US $ 2million. ACCION was called back to help BN to recover and six months later the program was back on track.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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78

In 1998, the BN started to operate with 50 agencies specialized in the program CrediAmigo. Later, in 1999, the WB team approved a US $50 million loan for CrediAmigo with the condition that CrediAmigo would maintain good portfolio quality. The WB required the program to maintain its portfolio-at-risk over 30 days at no more than 8% and write-offs for loan losses no greater than 4% Today, CrediAmigo has more than 265 branches located in 195 municipalities of the Northeast region. The program is one of the largest in Latin America in terms of numbers of clients (138,497) and as of December 2003 had an active portfolio of R $85.4 million 16 (US $28.4 million) (USAID–Banco do Nordeste).

CrediAmigo’s target market is urban microentrepreneurs. They are involved in small-scale manufacturing, commerce, and services, although the vast majority of clients are dedicated to such service activities as hairdressing and car repair. Almost half of the clients are women (49%) (USAID–Banco do Nordeste).

The program offers short-term loans of 3–6 months and longer-term loans of 9–12 months. About 86% of its clients hold group loans.

CrediAmigo also offers consulting services to its clients at no additional cost.

As of 2002, CrediAmigo had maintained its performance indicators as per WB requirements. Growth remained strong—over 40% a year between 1998 and 2002—and its staff productivity (134 clients per staff member) can be considered good. Moreover, the depth of CrediAmigo’s outreach, using the benchmark loan size indicator, is significant if compared to other large Latin American MFIs. While the average loan size of Latin American MFIs was US $816 in 2002, CrediAmigo’s was only US $185.

In terms of profitability, CrediAmigo had good results for 2002, and its return on assets was much higher than the average for the region.

Operational self-sustainability was positive for that same year. The program is covering its costs through operational revenues, meaning that the income generated from the interest and fees charged for its financial services are high enough to cover its costs. CrediAmigo’s operational costs are low when compared to other Latin American microfinance operations.

Additionally, the majority of CrediAmigo’s personnel are subcontracted and not hired as BN employees. BN has implemented this contracting policy because of the high cost of hiring employees due to Brazil’s rigid labor laws.

(See Graphs 31 and 32.)

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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79

45

Gross Loan Portfolio

40 Total Assets

35 25 20 15 10 5 0

2001

2002

2004

Graph 31. CrediAmigo–Banco do Nordeste Financial Indicators. Exchange Rate used for Conversion (BRL/US $) 2001 [2.4] 2002 [3.5] 2004 [2.2].

Source: www.mixmarket.org

180 150

No. Personnel [units]

120 Woman Borrowers (%)

90

No. Active Borrowers (Millions)

60 30 0

2001

2002

2003

2004

Graph 32. CrediAmigo–Banco do Nordeste Outreach Indicators.

Source: www.mixmarket.org

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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80

Million

30

TABLE XIX CLIENTELE OF THE MAIN MICROFINANCE INSTITUTIONS ACTIVE IN BRAZIL Name of Institution

Target Clientele

CrediAmigo

Established microentrepreneurs

% Informal Sector

% Women

Average Loan Size (R $)

NA

48

729

CEAPE

Microentrepreneurs above age 21, with a business in existence for at least six months

89 (a)

56 (a)

918

Banco do Povo

Microentrepreneurs, São Paulo businesses in existence for at least six months with annual earnings < $45,000 and which have been based in São Paulo for at least two years

68

52

2,237

Microentrepreneurs, with a business in existence for at least six months

38

39

1,093

Established microentrepreneurs

38

44

4,023

Banco da Mulher (b)

Low-income women entrepreneurs

70

69

1,559

VivaCred

Microentrepreneurs, with business in existence for at least 12 months

92

45

1,603

Microentrepreneurs, with a business in existence for at least six months and who reside or have their business in the municipality

52

46

2,036

PortoSol

BluSol

Banco do Povo de Juiz de Fora

RioCred

Microentrepreneurs, with a business in existence for at least 12 months

Accepts informal clients

NA

1,205

SindCred/ Crédito Cidadão

Microentrepreneurs, with a business in existence for at least nine months

Accepts informal clients

NA

1,049

Notes: NA= not applicable. Data are for June 2001. (a) Estimates based on data provided to BNDES by nine CEAPE entities. (b) Three entities affiliated to WWB only.

Source: BNDES, individual institutions.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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81

Large Commercial Banks in the Microfinance Industry: Downscaling Private Banks In terms of the aggregate value of funds, it is not surprising that Brazil’s largest commercial banks, both public and private, are the main providers of small loans, followed by non-bank finance institutions (Table XX).

TABLE XX TEN LARGEST PLAYERS IN THE MARKET FOR LOANS BELOW R $5,000

Bank

Ownership

% Share in Loan Size Category

Banco do Brasil

Public, federal

14

Caixa

Public, federal

8

Bradesco

Private

8

Itaú

Private

7

ABN AMRO

Foreign

6

Unibanco

Private, mixed

4

Santander (Banespa)

Foreign

3

Lloyds TSB

Foreign

3

HSBC Brasil

Foreign

3

Nossa Caixa

Public, state

2

Total: 10 Largest Players

58

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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82

26% Private Brazilian Banks Public Banks

40%

Foreign Banks (Foreign Control) 34%

Graph 33. Share of Brazil's Commercial Banks in Loans Less than R $5,000: 2001.

Source: BACEN.

In November 2001, large commercial banks provided a total of R $39 billion (US $17 billion) in loans below R $5000 (US $2150), with an average size as low as R $400 for some banks (US $180) at the thenprevailing exchange rates.

Non-bank finance institutions provided another R $5 billion (US $2 billion), while microfinance institutions provided only R $0.1 billion (US $43 million) of loans, with an average size of R $1087. One public bank, Banco do Brasil, provides 14% of all loans below R $5000. The bank estimates that the average size of its consumer loans was R $1100 in 2001 (less than US $500), placing it in direct competition with microfinance institutions. Banco do Brasil is followed by Brazil’s other large banks: Bradesco, Caixa Econômica Federal, Itaú, and ABN AMRO, each with 6 to 8% in each market. Foreign banks play a significant role in the small-loan market in Brazil, with a total market share of 26% in the market for loans below R $5000 and 36% for loans below R$ 10,000 [31]. (See Graph 33.)

ABN AMRO Real Microcrédito Real Microcrédito is a microlending institution with majority ownership by ABN AMRO Real, Brazil’s seventh-largest bank. ACCION also holds a 20% share in this company. Real Microcrédito is a program launched by Banco ABN AMRO Real and an example of a large private retail bank participating in the microcredit industry.

Real Microcrédito offers small loans to growing businesses that lack access to conventional forms of credit. Through the provision of microcredit, Banco ABN AMRO Real is committed to the economic and social development of its borrowers and to promoting Brazil’s economic growth.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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83

For donors, the choice of the right commercial bank to work with is important. Large commercial banks can be attractive because they can reach many low-income clients with a diverse array of products. This group, particularly those with a large branch network, has the potential to reach large numbers of clients. However, donors should be highly selective when engaging with banks, choosing those with a high level of commitment to the target market derived preferably from their need to find a new market niche (versus their interest in improving their public image) [2].

ABN AMRO Bank, a multinational concern based in the Netherlands, began operations in Brazil in 1927. Since its acquisition of Banco Real in 1998, the bank has had a strong national presence through its 2,350 branch offices.

In 2001, Banco ABN AMRO approached ACCION for its professional expertise to launch a for-profit microlending subsidiary. Real Microcrédito, with ACCION support, launched its operations in São Paulo, which is home to more than three million microenterprises. Real Microcrédito began operations in July 2002 and disbursed its first loan in the São Paulo favela (shantytown) of Heliópolis the following month. Real Microcrédito also currently has microfinance operations in Baixada Fluminense, a coastal lowland region, in Rio de Janeiro state, SE of Brazil. About 95% of ABN AMRO’s clients work in the informal sector. The majority of them conduct commercial activity, service, and production. About 94% of its disbursements are working capital loans and 6% are applied for home improvement loans and fixed assets. (See Graph 34.)

An estimated 15.7 million people work in the informal economy as microentrepreneurs in Brazil, outnumbering formal sector entrepreneurs by more than three to one. Of these informal microentrepreneurs 93% run profitable businesses, 84% of whom do not have access to credit (www.bancoreal.com.br).

Inform al Sector 95%

Form al Sector 5%

Graph 34. ABN AMRO’s Clients.

Source: http://www.abnamro.com/.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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84

ABN AMRO has increased its focus on making microfinance a successful alternative for poor clients. In August 2004, a staff member of ABN AMRO assumed the position of commercial manager, previously held by an ACCION resident advisor, which allowed the bank to integrate more closely the microcredit operations with the branch network. In addition, the microcredit program can reach microentrepreneurs through larger, corporate clients of ABN AMRO’s, for example, a transportation company, many of whose subcontractors qualify for working capital or fixed assets (www.bancoreal.com.br).

In contrast to other microcredit institutions, Real Microcrédito provides micro-credit through individual loans, not solidarity group loans. Although group loans have been successful in many other parts of Latin America and the world, Real Microcredito has determined that individual loans are more effective for its target market in São Paulo. It chose this strategy over group loans because it found that its clients from the metropolitan São Paulo are more individualistic and do not have strong enough links to other people to create the trust relationship required in forming a solidarity group, and therefore responded better to individual loans. Real Microcrédito does offer group loans but, as of September 2003, only one group had signed up. The other 400 clients have preferred individual loans [33]. (See Table XXI.) As of July 2003, Real Microcrédito had 400 clients and recorded 500 transactions (more than one loan per client on average). 11 As of September 2003, 61 percent of Real Microcrédito participants are male, 40-45 percent of the participants are between 30 and 45 years old and 65 percent have bank accounts. About 65 percent of borrowers have monthly income below R$ 800 (US$ 280), which is the average loan taken by its clients. About 77 percent of loan disbursements are below R$ 3000 (US$ 1000).

However, in contrast to CrediAmigo, whose goal includes performing a social impact assessment of its microcredit program, Real Microcrédito has opted not to include specific social measures as part of its measure of success. Real Microcrédito has determined that its social impact is too difficult to measure and has therefore chosen to remain focused on the financial results of this venture.

11

Interview by Frederico Moura of Marcello G. Melo Pinto, Commercial Manager Accion-Real Microcredito, July 25, 2003 PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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85

TABLE XXI PROGRAM GROWTH Year

Active Portfolio

Amount Disbursed

Active Clients

Average Loan Balance

Percentage of Female Clients

2003

$202,000

$340,000

579

$349

39%

2004*

$929,396

$1,187,2002

1957

$475

55%

*Statistics as of October 2004.

Source: http://www.abnamro.com/.

Private retail banks, particularly those with a large branch network, also have the potential to reach large numbers of clients. If they succeed, these large retail banks will be formidable competitors, not only for microfinance NGOs, but also for other formal financial institutions. Transforming these banks involves overcoming an entrenched corporate culture that is usually antithetical to microfinance, including lack of incentives and accountability for performance as well as a lack of understanding of informal sector borrowers. Several retail banks have been able to overcome these obstacles and put in place successful microfinance programs. These bank-based programs are no longer anomalies; rather, they have gained a substantial place in the microfinance industry, and they usually dominate microlending in the markets in which they operate [2].

Brazilian Credit Unions Credit cooperatives were established in Brazil just after the turn of the century in the state of Rio Grande do Sul, and more than 60 were established in the same region until the mid-1960s. At that time, the "open" form of cooperative, known as the Luzzatti cooperative, prevailed with no membership restrictions and thus no restrictions on who could obtain credit.

Financial scandals coinciding with reforms in the banking laws in the mid1960s revealed their risks to regulators and made them uncompetitive with banks. In 1967, there was an outright ban on the establishment of new credit cooperatives. A new cooperative law in 1971 sharply restricted the activities of existing cooperatives and set tight membership criteria. Over the following 20 years, more than 50 cooperatives closed down, with losses for their members [31].

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Printâ&#x201E;˘ Group.

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86

The credit cooperative movement began to witness a renaissance in the early 1980s, when central credit cooperatives that provided apex services to member single credit cooperatives were permitted. These central cooperatives provided a way for liquidity surpluses and needs to be addressed within a network. Central cooperatives are apex institutions for member credit cooperatives that operate at a state level and are owned by at least three member cooperatives. They serve to review standards applied by member cooperatives in such areas as accounting, loan origination, staffing, and facilities. They facilitate the flow of funds from cooperatives with surplus liquidity to those requiring additional resources and assume some auxiliary responsibility from the Central Bank for supervision. Because central credit cooperatives still lacked access to the payments system, cooperative banks were authorized to accept payment in 1995 (CMN Resolution 2193 of August 31, 1995). Two such banks have emerged since then: Banco Cooperativo do Brasil (Cooperative Bank of Brasil, or BANCOOB) and Banco Cooperativo SICREDI (BANSICREDI), owned by the central credit cooperatives in their networks, which act as regular commercial banks.

Non-credit cooperatives can act as channels for banking loans to their members, but only credit cooperatives are authorized to mobilize deposits and offer other financial services to their members. Credit cooperatives can take three forms: mutual credit, rural credit, or a Luzzatti credit union.

Mutual credit cooperatives can be formed by a minimum of 20 individuals who share a common workplace or professional association. People who work predominantly in agriculture or related activities in rural areas can form rural credit cooperatives [31].

In 2001, the Central Bank reported 1,306 credit cooperatives in Brazil. The Organização das Cooperativas Brasileiras (Brazil Cooperative Organization, OCB) provided data on 1,035 cooperatives, of which 670 are mutual credit cooperatives and therefore predominantly urban in nature, 355 are rural credit cooperatives, and the remaining 10 are Luzzattis. An alternative disaggregation from the three major credit cooperative systems in early 2002 indicates 769 in Sistema das Cooperativas de Crédito do Brasil (Brazilian Credit Cooperative System, SICOOB), 107 in Sistema de Crédito Cooperativo (Credit Cooperative System, SICREDI), and 33 in Cooperativa de Crédito Solidário (Mutual Credit Cooperative, CRESOL), plus 10 remaining Luzzatti cooperatives, or a total of 919 credit cooperatives. In addition, Unicred (http://www.unicred-rio.com.br/) operates a network of 400 credit cooperatives for medical doctors in 14 states and has a working agreement with BANSICREDI for access to its central clearing facilities.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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87

CRESOL—Cooperativa de Crédito Solidário (Mutual Credit Cooperative) The first CRESOL cooperative was founded in June 1995. With the establishment of an additional four cooperatives, a central cooperative (CRESOL-Baser) was set up in 1996 to support the system with norms, accounting, systems, training, and interaction with other players, such as banks, agricultural organizations, and national and regional governments.

The system grew from 920 members in June 1996 to 13,500 in December 2000 spread across 31 rural credit cooperatives operating in 100 municipalities in the three southern states of Paraná, Santa Catarina, and Rio Grande do Sul. These cooperatives are linked under the CRESOL-Baser central cooperative and supported by five microregional service units located across the three states. The system provided approximately R $35 million in loans to its members in the 2000–2001 farming season. These amounts are substantially lower than those of SICREDI and SICOOB, but the CRESOL system, aside from being smaller, is also targeted to poorer and more rural clients than are the two bigger cooperative systems [34].

SICREDI SICREDI is the one of largest Brazil's cooperative credit systems, with approximately US $2 billion in assets in 2004. SICREDI is a consortium of more than 126 affiliate credit unions with lending forming a major part of their business. The bank has more than 855 agencies with credit unions spread across south Brazil. SICREDI is headquartered in Porto Alegre, Brazil, and is a member of WOCCU (World Council of Credit Unions, Inc).

Federations Federations are credit unions that are generally more engaged in the political representation of their members. The central credit unions are institutions that have an operational responsibility of industrialization, stocking, transportation, and sales, and financial assistance. In recent years, central unions replaced the federations. The only federation of credit unions active in Brazil now is FENACRED (National Federation of Mutual Credit Cooperatives), a non-financial institution and not supervised by the Central Bank.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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88

In 1961, FELEME (Southern East Federation of Credit Cooperatives) was formed in Rio de Janeiro by four mutual credit unions with the goal of improving the activities of mutual credit unions. FELEME, with the support of CUNA (the Credit Union National Association), a mutual credit union in the US, was the catalyst of mutual credit unionism in Brazil. In 1985, FELEME was divided into four state federations that dedicated themselves to credit union education and technical assistance. (See Table XXII.) TABLE XXII

At that time, FELEME had 300 credit union branches with 350,000 members. In 1991 and 1995, those central mutual credit unions were incorporated in each of their states by CECRESP in São Paulo; CECRERJ in Rio de Janeiro; CECREMGE in Minas Gerais, and CECREST in Espirito Santo.

Credit unions differ from most other financial institutions in that they are not only run by their members, but that their members also own them [35].

This distinction is an important one. Credit unions have achieved an impressive record of accomplishment in serving the needs of their members.

They have proved that, even in the poorest of countries, there are substantial amounts of savings that can be mobilized and monetarized to the benefit of family, local, and national economies.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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89

Services Offered The financial services that credit cooperatives can offer depend on whether or not they are affiliated with a cooperative network with central credit cooperatives and a cooperative bank. 12 Unaffiliated cooperatives are allowed to: (1) mobilize site time deposits from members, (2) obtain national and international loans and grants, (3) offer credit to members, (4) place liquid assets in financial institutions, (5) offer collection and custody services, and (6) enter into agreements with other financial institutions to gain access to check-clearing and settlement system and to corresponding banking services.

By linking with a cooperative bank, credit cooperatives are able to offer a broader range of services. For example, members of SICOOB and SICREDI issue credit cards, offer internet banking, issue trade credits including letters of credit, provide insurance (life, non-life, and rural), and extend working capital and investment loans funded by public programs such as PRONAF and lines of credit from BNDES. FINAME (Special Agency for Industry Financing ), PROPASTO (National Program of Recovery of Degraded Pastures) and PROSOLO (Program of Incentive for the Use of Soil Products). They are also able to facilitate forward sales, notably by coffee growers, through the Cédula de Produto Rural (Rural Bills of Exchange, PR) instrument. Credit cooperatives cannot offer their members foreign exchange services, leasing, or housing finance.

In spite of occupying a small part of the market, credit unions have been showing an impressive growth.

The World Council of Credit Unions (WOCCU) is the international trade association of credit unions (savings and credit cooperatives) and similar cooperative financial institutions. Its members are credit union confederations and free-standing leagues. It represents more than 100 million members in more than 90 countries worldwide. Its functions are to represent the international credit union movement to international governmental and non-governmental organizations and to serve as a venue for communication and coordination between different institutions of the movement.

12

Eligible services were specified under Resolution 2771 of the National Monetary Council and later

by Resolution No. 3106 of June 2003.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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90

1379

1430

1454

2002

2003

1311

806

496 377

320

430

239

1940

1950

1960

1970

1980

1990

2000

2001

Graph 35. Credit Unions in Brazil.

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Printâ&#x201E;˘ Group.

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91

PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Printâ&#x201E;˘ Group.

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92

Conclusion Effective MFIs, such as those in Bangladesh, provide services that help people to improve their economic prospects and to reduce their vulnerability.

Providing effective microfinance services to the poor is part of a povertyreducing strategyâ&#x20AC;&#x201D;but only a part.

BRAC, CRECER, Grameen Bank, Banco do Nordeste, ProMujer, ASA and BRDB, for instance, have also implemented microfinance programs that contributed greatly to the understanding of poverty reduction by illustrating the feasibility of creating MFIs that can approach sustainability and can provide valued financial services to poor people. However, targeting poor people with inappropriate products is likely to damage their interest Microfinance programs can accommodate both the state and the private sector in a complementary way. State-owned institutions with large networks can fulfill the conditions required for insurance systems: large and diversified participation that supports risk pooling. The presence of a publicly owned banking structure can enhance the breadth of microfinance outreach.

The development of NGO-supported microfinance institutions such as ProMujer in Bolivia as an alternative to both government and private sector inadequacies faces serious constraints that may limit their development. Not all NGOs that work in microfinance could be both efficiently and sustainably transformed into regulated formal institutions, following the example of BancoSol and FIE in Bolivia. Many do not aim for transformation into commercial banks and they often do not have sufficient capacity in banking skills, security, or human resources to manage such a transformation [36].

In the long term, commercial banks need to be more involved in supporting microfinance. They have a physical structure, a well-established information system, a sound governance, available funds, and established protocols for offering financial services.

Acting in a complementary role, the state and donors could facilitate capacity-building within commercial banks to support microfinance innovations by investing in network building and compensating for the lack of a financial market.

Despite the fact that the general objective of most microfinance institutions is to alleviate poverty, MFIs are mostly located in wealthier areas, as is clearly the case in Brazil and Bolivia. In this regard, the PRELIMINARY PROOFS Unpublished Work Š 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Printâ&#x201E;˘ Group.

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microfinance programs developed by the public agencies in Brazil and Bangladesh through the BNDES and BRDB, respectively, channel public money into poor and unassisted areas.

Grameen Bank and BRAC are MFIs that give loans to the poorest of the poor. However, because of this, they have a problem in reaching other types of clients with greater purchasing power. Grameen Bank and BRAC have to rely on the government and donor support to remain sustainable. The crisis in the Bolivian microfinance industry in the 1990s and the delay of Brazilian microfinance to start up show that state intervention in the financial system can ensure macroeconomic stability. Financial-market efficiency can be enhanced when the functions of the state, for-profit financial service providers, and non-profit institutions work complementarily.

However, most impact analysis has shown that microfinance services do not reach or do not have a clear impact on the world’s poorest. Extreme poverty requires complementary services (infrastructure, education, and health services), which can be offered, for example, through NGOs or state services, independent from financial services. The public sector must invest in operations to alleviate the poverty of the poorest household in remote areas since sustainable MFIs will not be able to fulfill this role.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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References [1] Accion International, The Commercialization of Microfinance: Balancing Business and Development, D. Drake and E. Rhyne, Eds. Bloomfield, CT: Kumarian Press, 2002.

[2] Elisabeth H. Rhyne, Mainstreaming Microfinance: How Lending to the Poor Began, Grew, and Came of Age in Bolivia. Bloomfield, CT: Kumarian Press, 2001.

[3] Malcolm Harper, Ed., Microfinance: Evolution, Achievements and Challenges (Key Writings on Microfinance). Warwickshire, UK: ITDG Publishing, 2003.

[4] Graham A. N. Wright, Microfinance Systems: Designing Quality Financial Services for the Poor. London; New York: ZedBooks; Dhaka: University Press Limited; New York: St. Martin’s Press, 2000.

[5] Paul Mosley, "Microfinance and Poverty: Bolivia Case Study,” University of Reading, Reading, UK, May 1999.

[6] Antonio Aranibar, 2000.

[7] World Bank, 1985.

[8] Deborah Drake and Maria Otero, Alchemists for the Poor: NGO's as Financial Institutions. Washington, DC: Accion International, 1992.

[9] Ministry of Economic Development of Bolivia, 1999.

[10] Inter-American Development Bank—1999 Annual Report.

[11] La Razon, “Economia y negocios—La Paz,” February 21,1999.

[12] Sergio Navajas, Mark Schreiner, Richard L. Meyer, and Claudio Gonzalez-Vega, “Microcredit and the poorest of the poor: Theory and evidence from Bolivia,” World Development, vol. 28, no. 2, Feb. 2000, pp. 333–346.

[13] Hans P. Binswanger and Pierre Landell-Mills, The World Bank’s Strategy for Reducing Poverty and Hunger: A Report to the Development Community, Monograph 4. Washington, DC: World Bank, 1995.

[14] Shahidur R Khandker, Baqui Khalily, and Zahed Khan, Grameen Bank: Performance and Sustainability. Washington, DC: World Bank, 1995.

[15] Sam Daley-Harris, Ed., Pathways Out of Poverty: Innovations in Microfinance for the Poorest Families. Bloomfield, CT: Kumarian Press, 2002.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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[16] Catherine H. Lovell, Breaking the Cycle of Poverty: The Brac Strategy (Kumarian Press Library of Management for Development). Bloomfield, CT: Kumarian Press, 1992.

[17] Shahidur R. Khandker, Fighting Poverty with Microcredit: Experience in Bangladesh. New York: Oxford University Press, 1998.

[18] Mosharraf Khan Hossain, Credit for Poverty Alleviation in Bangladesh: Performance of Public Sector Banks. Washington, DC: World Bank. 1998.

[19] Yusef Kassam, “Combining participatory and survey methodologies in evaluation: The case of a rural development project in Bangladesh,” in Knowledge Shared, Participatory Evaluation in Development Cooperation, Edward T. Jackson and Yusuf Kassam, Eds. Bloomfield, CT: Kumarian Press, 1998, pp. 108–121.

[20] World Bank, 1987.

[21] Shahidur Khandker, Baqui Khalily, and Zahed Khan, “Grameen Bank: Performance and sustainability,” World Bank Discussion Paper #306, IBRD, Washington, DC, 1995.

[22] Bangladesh Bureau of Statistics, 1989.

[23] World Bank, 1996.

[24] Rodigo A. Chaves and C. Gonzalez-Vega, “The design of successful rural financial intermediaries: Evidence from Indonesia,” World Development, vol. 24, no. 1, Jan. 1996, pp. 65–78.

[25] JacobYaron, “Successful rural finance institutions,” World Bank Discussion Paper #150. Washington, DC, 161,1992.

[26] Steven Schonberger and Robert Christen, “A multilateral donor triumphs over disbursement pressure: The story of microfinance at Banco do Nordeste in Brazil,” CGAP Focus Note No.23, Dec. 2001, Consultative Group to Assist the Poor, Washington DC. [27] Susana M. Sánchez, Sophie Sirtaine, and Rita Valente, “Bringing microfinance services to the poor: CrediAmigo in Brazil,” World Bank, no. 7, Aug. 2002.

Washington, DC. [28] Anjali Kumar, Access to Financial Services in Brazil. Washington, DC: World Bank, 2004.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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[29] William C. Gruben and John H. Welch, “Banking and currency crisis recovery: Brazil's turnaround of 1999,” Economic and Financial Review, Federal Reserve Bank of Dallas, Dallas, TX, 2001.

[30] Jaime Mezzera, "Microcredit in Brazil: The gap between supply and demand,” Microbanking Bulletin, pp. 22–24, Nov. 2002.

[31] Anjali Kumar, Access to Financial Services in Brazil. Washington, DC: The International Bank for Reconstruction and Development/World Bank, 2005.

[32] John Williamson, “Lula’s Brazil,” Foreign Affiars, vol. 82, no. 1, Jan./Feb. 2003, The Council on Foreign Relations.

[33] Yerina Mugica and Frederico Moura, Real Microcrédito’s case study is based on the full business school case study prepared by Mugica and Moura under the direction of Prof. Ted London at the Kenan-Flagler Business School, University of North Carolina, April 15, 2004.

[34] Gilson Bittencourt and Ricardo Abramovay, “Inovações institucionais no financiamento à agricultura familiar: O sistema CRESOL,” Seminário de Economia Institucional-Campinas/SP, 2001.

[35] Kelly J. Morris, “The effects of using credit unions as on lending agents for external lines of credit: The experience of the International Credit Union Movement,” Poverty-Oriented Banking Working paper No. 14, 1995.

[36] Richard L. Meyer and Manfred Zelle, Eds., The Triangle of Microfinance: Financial Sustainability, Outreach, and Impact. Baltimore, MD: Johns Hopkins University Press, 2002.

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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Online References MIX Market: http://www.mixmarket.org Microenterprise Americas 2002: http://www.iadb.org/sds/mic/micamericas/eng/2/p12-23.pdf CIA World Factbook 2004: https://www.cia.gov/cia/publications/factbook/index.html Factmonster.com, “U.S. Dept. of State Background Note: Bolivia,” © 2000–2006 Pearson Education, publishing as Fact Monster: http://www.factmonster.com/ipka/A0107345.html Tradeport.org: www.tradeport.org Infoplease Pearson Education, Encyclopedia, Mercosur: http://www.infoplease.com/ce6/history/A0916164.html Developmentgateway.org: http://topics.developmentgateway.org/ Infoplease Pearson Education, Encyclopedia, Bangladesh, Land and People: http://www.infoplease.com/ce6/world/A0856831.html About.com: http://geography.about.com/library/cia/blcbangladesh.htm The Financial Express, October 2005: http://financialexpressbd.com/index3.asp?cnd=10/8/2005&section_id=3&newsid=3128&spcl=no Wikopedia.org, Chittagong: http://en.wikipedia.org/wiki/Chittagong Microfinance Gateway: http://microfinancegateway.org/files/21806_20.pdf The Association for Social Development (ASA): http://www.asabd.org/ PROSHIKA: http://www.proshika.org PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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Wikipedia:

http://en.wikipedia.org/wiki/Sahel IFAD http://www.ifad.org Banglapedia: http://banglapedia.search.com.bd/HT/M_0232.htm Bangladesh Rural Advancement Committee (BRAC): http://www.brac.net/ Wikipedia: http://en.wikipedia.org/wiki/Grameen_Bank MicroFinance Network: http://www.mfnetwork.org/members/brac.html Grameen Banking for the Poor: www.grameen-info.org India Infoline: www.indiainfoline.com/bisc/jmht.html CGAP: Building Financial Systems for the Poor: http://www.cgap.org/regsup/docs/pro_Brazil.pdf ExchangeRate.Com Inc.: www.exchangerate.com Comunidade Solidária: www.comunidadesolidaria.org.br/interloc/rodadas.htm BNDES: http://www.bndes.gov.br/english/studies/04livreto_microfinance.pdf

SEBRAE (National Deliberative Board): www.fas.usda.gov PRONAF (National Program of Familiar Agriculture): www.interdev.oecd.org Banco da Mulher do Brasil: http://www.bancodamulher.org.br/instituicao.php

Secretaria da Receita Federal (Federal Revenue and Customs Administration): www.receita.fazenda.gov.br PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

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IBGE: www.ibge.gov.br BNDES: http://www.bndes.gov.br/english/studies/04livreto_microfinance.pdf

StreetNet: http://www.streetnet.org.za/English/iloinformaleconla.htm USAID–Banco do Nordeste: http://pdf.dec.org/pdf_docs/PNADD680.pdf

Banco Real: www.bancoreal.com.br ABN AMRO: http://www.abnamro.com/com/homepage.jsp Unicred: http://www.unicred-rio.com.br/

Additional Online Resources FUNDARIO: http://www.gdrc.org/icm/country/bolivia.pdf Comunidade Solidária: www.comunidadesolidaria.org.br/interloc/rodadas.htm USDA http://www.fas.usda.gov/cmp/com-study/1997/comp97-br.html OECD: http://interdev.oecd.org/publications/e-book/10-2001-07-1-1599/5-3.htm US Library of Congress http://countrystudies.us/brazil/68.htm Ministry of Finance of Brazil: http://www.receita.fazenda.gov.br/principal Bangladesh Bureau of Statistics http://www.bbsgov.org/

PRELIMINARY PROOFS Unpublished Work © 2007 Guilherme Malamut. All rights reserved. From the forthcoming book Microfinance in, Brazil, Bangladesh, and Bolivia: 100 Three Complementary Models by Guilherme Malamut, ISBN 1-4243-2899. To be published by the RPM Print™ Group.

This material is protected under all copyright laws as they currently exist. No portion of this material may be reproduced, in any form or by any means, without permission in writing from the publisher. For information regarding permission(s), write to: rpm_print@yahoo.com

Guilherme Malamut About the Cover: “Milho Verde Vendor” and “Sidestreet,” Trancoso, Bahia, Brazil, March 2006. © 2007 Giorg27 Images.

Used by permission.

The objectives of this text are to present, analyze, and recommend the specific endeavors, initiatives, and programs designed to allow these so-called “havenots” to perhaps someday have a bit more, not via the various mechanisms of charity, but rather, through a dignifying empowerment guided by the careful planning of the members of the banking and financial industries. This book represents an investigation of how public institutions, especially public banks, can make a huge difference in improving the ability of microfinance programs to reach the poor.

Microfinance in Brazil, Bolivia, and Bangladesh: Three Complementary Models

Guilherme Malamut

Located in the southeastern section of Bahia on the eastern coast of Brazil, Trancoso is a small fishing village that is resplendent with white sands, the emerald sea, and the lush foliage of the surrounding untouched tropical forests.

Described as perhaps the “world’s sexiest and most exclusive vacation spot” (Food & Wine magazine, February 2006, p.

109), Trancoso is a representative study in contrast that is symbolically appropriate for the cover of this book. Nestled alongside exclusive resorts, very obvious examples of abject poverty abound: Those who struggle on a daily basis to merely survive.

Microfinance in Brazil, Bolivia, and Bangladesh:

Three Complementary Models

Three Complementary Models

Microfinance in Brazil, Bolivia, and Bangladesh:

R P M P ri nt

Guilherme Malamut