OMJ Portfolio 2013 ENG by lina salazar

Opportunities for the Majority 2013 Portfolio

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Introduction Consistent with the mission of the IDB’s Opportunities for the Majority (OMJ) initiative, the year 2013 saw continued support for unique and creative viable business models that serve the base of the pyramid (BOP) in Latin America and the Caribbean. OMJ’s sixth year of operations is notable for the financing of 10 business models in the region and for achieving our goal of $100 million in approvals. In addition, we leveraged $219.6 million from co-lenders and B lenders, which will complement our financing in the region. In 2013, OMJ supported larger endeavors and placed an emphasis on projects with the capacity to reach more people in a more effective and efficient way. Creativity, uniqueness, and scale are features common to the year’s portfolio. Responding to the main socioeconomic needs of the BOP in the region, OMJ facilitated a greater impact in three specific sectors: access to finance, housing, and education. The selection of these sectors was not random, but rather a strategic decision to concentrate human and financial resources in projects and areas where—as OMJ has learned from experience—there is the greatest opportunity to affect the lives of the 360 million low-income people traditionally underserved in Latin America and the Caribbean. Our 2013 financial services portfolio is composed of six operations in Brazil, Colombia, Ecuador, El Salvador, Paraguay, and Peru. The wide range of clients includes financial institutions and food processing, utility, and retail companies. Aware of the business and development potential at the BOP, Banco Agrícola in El Salvador is downscaling its portfolio to BOP microenterprises in a smart partnership with Industrias La Constancia and FUNDES.

Banco Familiar in Paraguay is expanding its portfolio using its own credit scoring system for self-employed workers, and Banco de Minas Gerais in Brazil is using a psychometric risk assessment tool created by the Entrepreneurial Finance Lab to evaluate recently formalized microenterprises. Companies whose core business is not traditionally associated with banks are now serving the BOP, establishing one-of-a-kind partnerships such as that of Electroban with Pago Express in Paraguay; using client information to offer credit, as the gas distribution company Promigas is doing in Colombia; or setting up special financial vehicles to channel working capital to small farmers, a project being undertaken by Pronaca in Ecuador. Alignment and coordination of key actors is the main feature of our housing portfolio. Comfama’s lease-to-own program in Colombia targets the obstacles hindering low-income people from the Antioquia department from owning a house by taking advantage of Comfama’s large network of affiliates and working closely with the government. Edyficar is coordinating credit through hardware stores and construction foremen in order to offer a comprehensive housing solution for the BOP in Peru. FOMEPADE is offering unsecured long-term housing credit to low-income civil servants in Mexico by collecting payments through payroll deductions. Finally, as part of our education operations, Laudex is building on our past efforts by making student loans more accessible and affordable to BOP students who aspire to higher education in Mexico.

HOUSING Affordable Housing for Low-Income Civil Servants in Mexico through Payroll Deductions CLIENT FOMEPADE, S.A. de C.V. Sofom ENR is a leading private Mexican nonbanking financial institution that leverages payroll deductions to offer loans and collect payments from state and municipal civil servants at the base of the pyramid (BOP). The institution was incorporated with the specific purpose of offering BOP civil servants financing for personal and housing loans, and has almost 80 agreements in 17 states for payroll loan deductions.

IDB SUPPORT The Inter-American Development Bank’s Opportunities for the Majority (OMJ) initiative approved a loan of up to MXN $84 million, or approximately US$6.7 million, that will allow FOMEPADE to expand its existing portfolio for home improvements and new housing for the BOP. With the funds, FOMEPADE calculates that it will provide 26,371 home improvement loans and 18,962 loans for new homes built by certified providers.

THE CHALLENGE

THE SOLUTION

A shortage in housing is a large and growing problem in Latin America and the Caribbean, with one in three families living in unsuitable or poorly built structures or in homes that have no water, sewage or electricity. Mexico’s government estimates that the country needs 9 million homes given its housing shortage and the poor condition of existing homes. A new national policy and new laws to stimulate the housing sector through affordable loans and other incentives are hampered by poor coordination among housing market players. Much of the working population lives in unsuitable homes. Although Mexican civil servants with small salaries have stable jobs, many either have no credit history or have bad credit because they borrowed at high interest rates and defaulted on their loans. As a result, these public sector employees are considered high-risk, low-profit borrowers. Commercial banks do not lend to them or offer them affordable financing because it is too expensive to run credit checks and tailor small loans to a such a hard-to-reach population. In addition, many BOP civil servants do not qualify for a homebuyer mortgage through national programs, which provide 85% of all mortgages in Mexico. Thus, many BOP workers build their homes themselves, even if they have no building expertise. It is slow and expensive and the houses are often of poor quality.

FOMEPADE has an impact of the shortage of low-income and decent housing in Mexico by offering BOP civil servants three financial instruments—all of them repayable through automatic payroll deductions. First, it offers mortgages for new low-income houses; second, it offers a lease-to-own programs; and third, it finances do-it-yourself home improvement projects and offers construction expertise. FOMEPADE assesses the creditworthiness of civil servants at the BOP. The company makes sure monthly payments never exceed a third of a borrower’s monthly salary. And it refinances existing debts for low-income civil servants so they can pay them off gradually and affordably. In 2012, when the program started, FOMEPADE financed 454 home improvements and 349 new housing solutions. It expects to increase those numbers by 2,500 and 800, respectively, in 2013.

Above, a newly built house in the municipality of Rojas de Cuauhtémoc in Oaxaca, Mexico financed by a loan provided by FOMEPADE. The photo at right shows the previous structure.

INNOVATION MAKES THE DIFFERENCE Building innovative strategic alliances is key to FOMEPADE’s success in lending to low-income homeowners and buyers. Agreements with state and local governments allow FOMEPADE to structure affordable and convenient payment plans for employees based on income, using payroll deductions. That lowers the company’s credit risk and cost. Coordination with a national program also allows FOMEPADE borrowers to tap directly into a government subsidy. Finally, agreements with certified homebuilders ensure that BOP homeowners can afford a mortgage for a high-quality house built to code and delivered on time.

OMJ 2013 Portfolio

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HOUSING Better Access to Low-Income Homes through Innovative Lending in Antioquia, Colombia CLIENT The Caja de Compensación Familiar de Antioquia, Comfama, is part of a national Colombian network of private, non-profit entities funded by a 4% public and private sector payroll contribution with a mandate to provide its affiliated employees with social benefits like healthcare, housing, and financial services. It has the largest membership of Colombia’s 43 cajas, with 700,000 employee affiliates and over 3 million beneficiaries through 47,000 affiliated companies.

IDB SUPPORT The Inter-American Development Bank’s Opportunities for the Majority (OMJ) initiative approved a loan to Comfama of up to US$6 million. The first US$3 million will allow the caja to buy social housing units for its Lease-to-Own Program (LTO) and to scale its home improvement lending scheme that serves the base of the pyramid (BOP) in Antioquia. The second half will expand both housing initiatives but depends on whether Comfama wants to activate it and on IDB approval.

THE CHALLENGE

THE SOLUTION

The housing deficit in Colombia is particularly worrisome for the BOP in Antioquia, where Comfama operates. In this region, 41% of families rent properties, and 90% require financing in order to acquire a housing unit. There’s demand for 180,000 new homes, and 170,000 are in dire need of repair. Most BOP consumers do not have the credit record or assets pledged as security to qualify for a mortgage or home improvement loan. For their part, financial institutions don’t have the methodologies to assess the repayment capacity of BOP consumers. A minimum 30% down payment is required by law to underwrite a mortgage, a huge bottleneck because Colombians at the BOP have trouble saving enough for it. Difficult access to mortgages is one of the main reasons why the government is unable to disburse existing housing subsidies to low-income Colombians who want to buy social housing units. Several other factors make it difficult for the BOP to own or improve their homes. These include the high cost of urban lots and developers who aren’t confident there will be enough pre-construction sales with qualified BOP mortgage holders.

Comfama designed and will sponsor a pilot of the LTO program, an innovative financing mechanism to help overcome the identified obstacles that prevent BOP families from purchasing social housing units. As part of the pilot, Comfama will buy up to 400 low-income housing units in Antioquia and lease them to member families for three years. This way BOP families will build a credit history through on-time rent payments and qualify more easily for a mortgage from a commercial lender in order to buy the unit at the end of the period. A small amount set aside in each monthly rent payment will allow beneficiaries to save enough for the down payment. In addition, Comfama will expand its existing micro-loan Home Improvement Program to ensure its BOP affiliates in Antioquia can get loans to make home improvements with affordable high-quality materials from qualified suppliers at discounted prices. This will be complemented with construction expertise provided by Comfama technicians. Given the average home improvement loan size of US$3,000, the expansion of the program will benefit almost 3,500 people.

Comfama’s Lease-to-Own pilot program will benefit approximately 1,400 people, and its House Improvement Program will provide loans to an estimated 1,150 persons in the Antioquia department.

INNOVATION MAKES THE DIFFERENCE The first of its kind in Colombia, Comfama’s Lease-to-Own program overcomes both major hurdles to BOP homeownership: the need for a down payment and the difficulty in qualifying for a mortgage. By partnering with Colombia’s largest private bank, Bancolombia, Comfama will help ensure that families complying with the Lease-toOwn program qualify for a Bancolombia mortgage. The project constitutes an innovative housing finance model that could be further scaled by Comfama itself, or replicated through other cajas. This project will provide several lessons that will contribute to knowledge about rent-to-own business models in the region.

OMJ 2013 Portfolio

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HOUSING

Building Better Homes through Market Synergy in Peru CLIENT Financiera Edyficar S.A. is a financial institution established by CARE Peru in 1997 with the mission of providing access and financial services to low-income individuals, especially microenterprise and small business owners. In 2009 it was acquired by Banco de Crédito del Perú (BCP), the country’s largest financial institution. Edyficar has nationwide coverage, with a presence in 21 of Peru’s 24 departments. Around 75% of Edyficar´s clients are BOP with monthly per capita incomes under US$198.

IDB SUPPORT With a loan of US$20 million from the Inter-American Development Bank’s Opportunities for the Majority (OMJ) initiative, Edyficar will greatly expand its Edyvivienda program, which provides access to finance for incremental housing construction, to thousands of low-income families and microentrepreneurs. Through syndication of a B loan for up to US$30 million more, OMJ aims to attract new investors to the program.

THE CHALLENGE

THE SOLUTION

The housing deficit in Peru affects 72% of households. While most of the deficit is qualitative (79%), the quantitative shortage increases every year by about 118,000 homes. Incremental housing construction accounted for 60% of the home building market in 2013. Low-income Peruvians have difficulty obtaining financing because they don’t have the necessary credit histories or titles to their properties, and because financial institutions are limited to offering microcredit that does not factor in the need for expert advice and skilled labor. Financial institutions fail to make use of potential partnerships with hardware store chains that sell the supplies and have access to the large numbers of consumers fixing or building homes in increments. Given these circumstances, BOP families end up building or improving their own homes using their scarce disposable income to buy construction materials. As a result, families take between 15-18 years to build their houses and on average end up spending 30% more in unnecessary construction materials.

Edyficar provides financing and coordinates with hardware stores (suppliers of materials) and construction foremen (labor), to offer its BOP clients a comprehensive construction alternative that involves access to finance, affordable building materials, and technical assistance. Based on a series of incentives— sales increase for stores and foremen, among others—Edyficar has been able to engage and strengthen its network throughout the country. Edyficar expects to engage 750 hardware stores and 1,500 foremen in the next five years. Loans offered range between US$120 and US$20,000.

Around 75% of Edyficar’s clients are BOP. Edyficar expects to engage 750 hardware stores and 1,500 foremen in the next five years. Loans offered range between US$120 and US$20,000.

INNOVATION MAKES THE DIFFERENCE Edyficar breaks through the logjam in incremental housing construction by creating partnerships with construction foremen and hardware store chains—including wholesale centers that supply much smaller stores. They are the ones who are the first line of contact with Peruvians wishing to fix or build a home. By offering the stores and foremen incentives to refer their customers and the information they’ve gathered about them and their building project, Edyficar affordably identifies thousands of potential borrowers. Edyficar’s loan officers have experience evaluating building projects. With branches throughout the country, it can send officers to meet the homeowner and look at the site. Homeowners who are approved for a loan and buy supplies from participating hardware stores automatically receive on-site technical assistance from a qualified engineer or architect. By allowing borrowers to use their loan to pay the builder as well as buy supplies, Edyifcar ensures that more homes are built well and quickly.

OMJ 2013 Portfolio

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FINANCIAL SERVICES Trailblazing Credit Program Provides Financing for Microentrepreneurs in Brazil CLIENT Banco de Desenvolvimento de Minas Gerais (BDMG) is the development bank of the state of Minas Gerais, Brazil. BDMG will offer the new credit product “Acredita” or “Believe” to high potential microenterprises and individual micro entrepreneurs from the base of the pyramid (BOP) that have recently formalized their company and officially started doing business.

IDB SUPPORT The Inter-American Development Bank’s Opportunities for the Majority (OMJ) initiative is entering into a BRL$21 million (approximately US$10 million) risk-sharing facility with BDMG to help it become the first development bank in Latin America to apply a new psychometric risk assessment tool to offer specialized loans to microenterprises in Minas Gerais. The project will also mark the launch of BDMG’s own unit that finances private sector business solutions for populations at the base of the pyramid, seeking to replicate the work of OMJ in Minas Gerais.

THE CHALLENGE

THE SOLUTION

Microenterprises form the backbone of the Brazilian economy, representing more than 93% of the total number of formal companies, a number that is growing fast because Brazil recently made it easier for individuals to register themselves as microentrepreneurs. Across Latin America, microenterprises just getting off the ground have trouble accessing credit as they have no record in the financial system or the business world, and possess few, if any, tangible guarantees that can serve as collateral for lenders. Because lenders don’t have the tools to identify “good” clients within this population, they tend to avoid targeting the market despite its large potential. Microentrepreneurs trying to start a business or get through the early stages of start-up often deplete their limited savings or resort to personal credit lines, with an average annual interest rate as high as 125%. Lack of access to affordable financing hinders their ability to grow, hire workers and make higher profits, thus contributing to a scenario in which 27% of Brazilian microenterprises fail within the first two years of operation.

Acredita loans are offered to microenterprises for a standard amount of up to R$15,000— around US$7,500—for two years, with a three-month grace period. An estimated 4,000 micro businesses are expected to benefit from the program in the two-year pilot phase. Moreover, only registered businesses can apply for BDMG credit, providing an incentive for entrepreneurs to formalize their microenterprises, as BDMG will become the first institution in Brazil to serve newly registered companies with no prior business financing track record. After the pilot phase, the model can be extended to include not just microenterprises but also individual microentrepreneurs. The model is designed to reach scale in Minas Gerais and can be replicated in other states of Brazil or in Latin America with other project partners.

An estimated 4,000 microentrepreneurs from different sectors of the economy are expected to benefit from the program in the two-year pilot phase.

INNOVATION MAKES THE DIFFERENCE Rethinking creditworthiness is the key. BDMG uses the Entrepreneurial Finance Labâ&#x20AC;&#x2122;s (EFL) automated, low-cost survey to determine risk affordably and help BOP loan applicants cut through red tape and obtain funding. The survey tool uses qualitative factors to assess the potential of the main person operating a small business. It asks questions that determine attitude, ethics, business knowledge, ability, and intelligence. Answers to the questionnaire analyze an individualâ&#x20AC;&#x2122;s willingness and ability to repay a loan rather than a business track record or guarantee. BDMG is the first bank in Latin America to use EFL as part of the loan credit and underwriting process, and to develop a new loan product targeting recently registered BOP entrepreneurs. To efficiently and affordably reach as many potential clients as possible, BDMG is also partnering with the state agency that registers microbusinesses, JUCEMG, and other business partners to support application of the EFL survey tool.

OMJ 2013 Portfolio

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FINANCIAL SERVICES Financial Services for Paraguay’s Informal Workers

CLIENT Banco Familiar, S.A.E.C.A. is the third largest bank in Paraguay and focuses on the base of the pyramid (BOP), a segment with whom traditional banks generally do not do business. With 15 years of experience developing ways to analyze creditworthiness, Banco Familiar has designed the first credit scoring system for low-income self-employed workers. Banco Familiar has 58 branches throughout the country, and as of end-2012 had more than 300,000 clients.

IDB SUPPORT With a loan up to US$10 million from the Inter-American Development Bank’s Opportunities for the Majority (OMJ) initiative, Banco Familiar will triple the number of micro loans it offers, most of them for emergency health care, education and working capital to informal workers who have a stable income but no way of proving it.

THE CHALLENGE

THE SOLUTION

Most of Paraguay’s population still remains outside the financial system. That is because more than 80% of Paraguay’s workforce has no paper trail proving they have a steady flow of income that would allow them to obtain credit. Most of the country’s workers are self-employed, run informal micro-businesses or are hired informally. In Paraguay, 68% of the employed population is informal, while the region’s average is around 53%. Local banks and microfinance institutions use business ledgers, tax returns or other formal financial information to analyze the creditworthiness of even BOP clients. Without such paperwork, institutions can’t afford to spend the time needed to go in the field and verify whether informal workers can repay a loan. As a result, informal workers borrow from loan sharks and informal lenders who charge exorbitant interest rates. Since the loans are often for emergencies, borrowers pay whatever is asked, and suffer a “poverty penalty.”

Banco Familiar has developed a new scoring system, Credicedula¸ that targets low-income informal workers who have never had access to credit. Thanks to this innovative methodology, Banco Familiar can now offer loans with few requirements and in just 20 minutes. The methodology will allow Banco Familiar to extend loans to more than 80,000 borrowers, housekeepers, cooks, gardeners, handymen and other independent workers— more than half of them women. Loans are for one year and capped at $450, with interest rates governed by the central bank. This is significantly less than informal loans whose interest can be as much as 100% a month, and reduces the penalty the poor pay to borrow money. The loans are used to meet urgent needs in the areas of health, education, and working capital. Banco Familiar’s success in reaching the unbanked is creating interest in developing new health and education products for this market. Since banks across Latin America have difficulty reaching BOP markets, this model has great potential for replication.

Most of the employed population in Paraguay is informal. Banco Familiar’s Credicedula, will provide access to finance to more than 80,000 people, including housekeepers, cooks, gardeners, handymen and other independent workers—more than half of them women.

INNOVATION MAKES THE DIFFERENCE A breakthrough in the low-income financial market, Banco Familiar’s cost-effective credit scoring method Credicedula weighs a client’s likelihood of paying back a loan using demographics, earnings estimates and behavior. In order to lower the bank’s collection risk without jeopardizing a borrower’s credit history, the client must attend Banco Familiar’s financial education classes and is offered debt insurance at no extra cost in the event of hospitalization, disability or death.

OMJ 2013 Portfolio

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FINANCIAL SERVICES Banco Agrícola: Catalyzing Financing for Microenterprises in El Salvador CLIENT Banco Agrícola S.A., established in 1955, is the largest bank in El Salvador providing retail and banking services. As part of its business strategy, Banco Agrícola will expand its portfolio with the purpose of downscaling and providing financial services to base of the pyramid (BOP) microenterprises, a segment that has been traditionally underserved by commercial banks.

IDB SUPPORT The Inter-American Development Bank’s Opportunities for the Majority (OMJ) initiative is sharing the credit risk of Banco Agrícola’s downscaling strategy through the provision of a credit guarantee of up to $5 million. The guarantee provides Banco Agrícola with credit-risk coverage to support its entrance into the BOP microenterprise segment through the provision of financing to mom and pop shops in El Salvador with limited or no access to credit.

THE CHALLENGE

THE SOLUTION

Microenterprises are crucial to the Salvadoran economy as a whole. They contribute 43% of GDP and employ approximately 65% of the active workforce. Moreover, they represent a critical sector for women’s economic participation, as almost two-thirds of microenterprise owners are women. Yet, it is difficult for these microentrepreneurs to obtain commercial loans. Information asymmetries prevent commercial banks from expanding their financial services to microentrepreneurs. Banks encounter a variety of challenges to analyzing their creditworthiness and risk profiles, given that they generally don’t have the business or financial track record, or the assets needed to qualify for a bank loan. This makes banks uncertain of whether the benefits outweigh the risks of serving this segment of the population.

Banco Agrícola has partnered with Industrias La Constancia (ILC)—El Salvador’s largest soft drink distributor and a subsidiary of SABMiller—and FUNDES—an international private organization that works to improve market access to small and medium-size enterprises—to expand access to finance for productive and working capital for BOP micro and small entrepreneurs in El Salvador. ILC is committed to helping Banco Agrícola overcome information asymmetries by selecting and pre-screening microentrepreneurs from its supply chain that have good repayment histories and could qualify for financing from Banco Agrícola. At the same time, FUNDES will support this selection and will also provide technical assistance to microentrepreneurs who receive financing from Banco Agrícola. The bank will provide microentrepreneurs with financing for working capital, acquisition of equipment and physical infrastructure improvements. The value-added financial products plus the technical assistance will help BOP microentrepreneurs achieve sustainability in their business and improve their management skills.

Beneficiaries of Banco Agrícola’s downscaling program. They are among an estimated 8,000 entrepreneurs expected to gain access to finance by 2017.

INNOVATION MAKES THE DIFFERENCE The partnership between Banco Agrícola, Industrias La Constancia, Fundes and the IDB allows different stakeholders to leverage each other’s resources and market expertise in order to effectively serve microentrepreneurs and solve the market failures that undermine the long-term growth of the sector. The business model capitalizes on the organizations’ own expertise and core business in order to benefit an important sector of the Salvadoran economy. With the IDB’s support, Banco Agrícola is expected to increase its microenterprise portfolio by 23.5% and reach an estimated 8,000 entrepreneurs by 2017.

OMJ 2013 Portfolio

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FINANCIAL SERVICES Meeting Basic Needs through an Innovative Credit Program in Colombia CLIENT Energy holding company Promigas S.A. E.S.P. designs, builds, operates and maintains natural gas transmission and distribution systems in Colombia. It distributes gas in 13 of the country’s 32 departments and electricity in the Cauca department. By offering credit to mostly unbanked, largely base-of-the-pyramid (BOP) utility customers through its Brilla program, Promigas and its gas distributors are improving the quality of life of their customers.

IDB SUPPORT With a loan of up to US$20 million from the Inter-American Development Bank’s Opportunities for the Majority (OMJ) initiative, Promigas will expand Brilla to enable 1.4 million of Colombia’s BOP families to be able to afford basic necessities such as floors, beds, stoves or school fees. OMJ is lending up to US$20 million—the first loan exclusively for this program— and is mobilizing private capital from commercial banks and other financial institutions for up to US$30 million.

THE CHALLENGE

THE SOLUTION

Becoming part of the formal economy, opening a bank account, or obtaining a loan continues to be a challenge for the majority of BOP families in Colombia. In areas where Promigas operates, one-third of families earn too little to purchase basic goods and services, and just over half of them earn enough to pay for their living expenses. Almost 87% of the company’s residential customers are among the poorest in Colombia. On average, 72% of BOP adults— particularly those with low education levels— lack access to financing, which in turn results in lower incomes. BOP borrowers often end up paying much higher interest rates on loans taken outside the banking system or on credit from hardware or appliance stores. Colombian financial institutions have not been successful at lending to the BOP segment. It is expensive and difficult to obtain the credit histories of individuals who have no bank account or paper trail of their incomes or businesses. Low-income individuals have a reputation as high-risk borrowers—even if that cannot be proved. Additionally, opening up branches in remote areas of the country where much of the BOP lives is seen by banks as expensive and not worth the investment.

Promigas has a mass reach and can affordably assess credit histories of BOP consumers; it offers credit to those who have repaid their gas connection and bills on time for two years. Brilla uses Promigas distribution and bill collection channels to reach the credit beneficiaries. To be part of the program clients are not required to make do down payments or put up collateral. The program’s portfolio of goods and services responds to the clients’ particular needs. After surveying its customers, Promigas concluded they needed money to improve their homes, pay tuition, start businesses and have a cushion for emergencies, so Brilla tailored loans to those needs. With the Brilla loans, borrowers buy on credit from several hundred hardware, appliance and department stores, boosting sales at small stores and stimulating local economies. Promigas serves almost 2.6 million people, and Brilla’s OMJ-financed expansion is expected to give 1.4 million low-income families financing so they can invest in 400,000 home improvements, buy 700,000 household goods and appliances—including energy efficient ones—and 275,000 computers and tablets. The expansion will also finance 25,000 loans for technical education and school supplies.

The Brilla program has allowed 24% of Promigas’ BOP clients to access credit to finance home improvements, as well as basic amenities such as refrigerators, and stoves. Almost 94% of Brilla’s customers have family monthly incomes of less than US$914.

INNOVATION MAKES THE DIFFERENCE Promigas has leveraged the valuable information it gathers from its BOP clients and transformed it into a business opportunity. Brilla builds on Promigas’ existing infrastructure and information to quickly and cheaply assess the creditworthiness of the unbanked and offer affordable credit. This program is not only profitable for Promigas, it has also allowed the company to have a positive impact on the families it serves. Through sharing of credit information, Promigas allows customers to access financing with other institutions, since their track record through Brilla is reported to the National Credit Bureaus.

OMJ 2013 Portfolio

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FINANCIAL SERVICES Affordable Appliances for Paraguayan Microentrepreneurs CLIENT Grupo Electroban SAECA (Electroban) is a Paraguayan retail company that commercializes appliances and home products in base of the pyramid (BOP) segments of the population in the country. The company sells energyefficient appliances, productive assets such as agricultural tools, and sturdy furniture, and offers financing with flexible repayment schedules to low-income individuals and microentrepreneurs.

IDB SUPPORT With a loan of up to US$6 million from the Inter-American Development Bank’s Opportunities for the Majority (OMJ) initiative, Electroban will expand its financing to approximately 15,000 BOP microentrepreneurs so they can buy productive assets that will allow them to consolidate and grow their small businesses. To reach more clients, the company will hire and train an additional 800 low-income individuals as new sales representatives in target communities.

THE CHALLENGE

THE SOLUTION

Financial services penetration in Paraguay was 22% in 2011, well below the regional average. Very little credit is available to microentrepreneurs, who form a large part of the country’s economy, where average GDP grew 4.3% between 2002 and 2011. It is estimated that about 800,000 Paraguayan microentrepreneurs who would like to obtain credit are unable to do so given the limited supply of financing for this segment. Those who manage to access credit, borrow mainly from microfinance institutions whose focus is short-term working capital lending. However, medium-term lending has proven to be more compatible to the small entrepreneurs’ need for buying productive assets like freezers, hair dryers and computers. It is estimated that only 7% of micro entrepreneurs who receive financing use it to buy productive assets. This is a consequence the inappropriate financing terms available in the market. Private banks are unable to offer longerterm financing to their clients, given the limited supply of long-term funding in the Paraguayan financial system. This, combined with the expense and difficulty of obtaining credit information on BOP consumers with little proof of income or collateral, further restricts credit availability for the improvement of microbusinesses.

With affordable financing and a wide range of products, Electroban offers a comprehensive solution for microentrepreneurs who range from mom and pop shop owners to smallholder farmers, laundresses, hairdressers, gardeners, or contractors. Several studies have shown that microentrepreneurs who buy basic equipment for their businesses can have more stable incomes and earn more, hire more workers and have a better cushion against economic shocks. Electroban has showrooms around the country and reaches out to BOP consumers through a strong door-to-door salesforce in low-income communities and telemarketing. As a result, 85% of sales are via catalogue. All of what is sold is delivered at no charge, eliminating another hurdle for BOP buyers. Electroban’s clients do not leave home to be assessed for a loan. Sales representatives send basic information over their cell phones to the company’s IT center. Approvals take 48 hours. This method greatly increases BOP access to financing and allows unbanked clients who demonstrate good payment behavior with the company to start building a history in the financial system.

An estimated 800,000 Paraguayan microentrepreneurs who would like to obtain credit are unable to do so given the limited supply of financing for the BOP segment. Electroban will expand its financing to approximately 15,000 BOP microentrepreneurs so they can buy productive assets that will allow them to consolidate and grow their small businesses.

INNOVATION MAKES THE DIFFERENCE Electrobanâ&#x20AC;&#x2122;s in-depth knowledge of the BOP market enabled the company to develop its own scoring methodology to assess the creditworthiness of low-income individuals and microentrepreneurs who generally have no paper trail to substantiate their incomes or business cash flows. When delivering the products it sells, Electroban verifies information about each microentreprise with which it does business. By allowing customers to repay in weekly, bi-weekly or monthly installments tailored to their cash flow, Electroban makes hard-toobtain financing more accessible to the BOP as its medium-term lines of credit are easier to repay. In order to provide a value-added service to its customers, Electroban has developed an innovative partnership with the national payment network Pago Express that has around 47,000 outlets in supermarkets and even in the smallest shops in the most remote villages, making it convenient for customers both in cities and in rural areas to repay their loans.

OMJ 2013 Portfolio

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FINANCIAL SERVICES Boosting Small-Scale Farmers in Ecuador through Access to Working Capital CLIENT Established more than 50 years ago, Procesadora Nacional de Alimentos, C.A., or Pronaca, is Ecuador’s largest food processing company. Pronaca’s operations include the production, distribution and sale of meat and poultry products. Pronaca also produces pet foods and agricultural inputs and processes and manufactures value-added goods such as canned meats. Pronaca is a multilatina with operations in Colombia, Brazil and Costa Rica.

IDB SUPPORT Through Opportunities for the Majority (OMJ), the Inter-American Development Bank (IDB) granted a loan of US$7 million to a special-purpose vehicle (Trust) created by Pronaca to channel working capital financing to its supply chain. With this loan, Pronaca will be able to scale its Rueda del Éxito program, a 22-year old business model that incorporates small-scale farmers into the company´s value chain through the provision of in-kind working capital financing and technical assistance.

THE CHALLENGE

THE SOLUTION

Agriculture represents 9% of Ecuador´s GDP and employs 26% of the economically active population. Yet small and medium-size farmers face several challenges when it comes to accessing credit for working capital. Despite the efforts of public and private financial institutions, there is still limited credit for working capital, which restricts farmers’ productivity. The lack of property records for over 50% of rural properties in Ecuador, and the absence of legal titles for 324,000 small land owners, undermines farmers’ access to finance, as financial institutions require cthat the farmers put up collateral as a guarantee of their ability to repay the loan. Additionally, as most small farmers lack a credit history, they do not qualify for commercial loans, which often pushes them to resort to more costly, predatory sources of informal credit. Also troubling is the low productivity of small and medium-size farmers’, as they often lack access to quality agricultural inputs and better production practices. Agro-industrial companies demand strict standards of quality, which this segment of the population cannot meet. Technical assistance to adopt better agricultural practices is scarce, and small and mediumsize farmers are left out of more secure and profitable value chains.

The goal of Pronaca’s Rueda del Éxito is to include small and medium-size farmers in its value chain, mainly corn and rice producers with average monthly family incomes of US$500. Access to finance for working capital, technical assistance, and purchase of the crop are the program’s main components. Pronaca first makes a credit analysis of the farmer, which it then passes to the borrowing Trust for loan approval. This Trust was created by Pronaca to channel working capital loans to the farmers entering its value chain. Once the loan is approved, Pronaca gives qualifying farmers a kit with seeds, fertilizers, and other agricultural inputs. Pronaca’s profits on the sale of the kits are used to provide technical assistance before, during, and after the agricultural cycle. The assistance includes an evaluation and monitoring of the seeding process, transfer of technology to improve the irrigation systems, training in environmental practices, and a review of the harvest. As the crops are harvested, farmers deliver the product to Pronaca. The company reimburses the Trust a portion of the value of the crop to pay down the farmer’s debt, and pays the farmer for the rest.

Rueda del Éxito’s expansion will benefit approximately 900 small farmers annually for the next five years. As each farmer will receive two loans per year, the number of total financings will be 9,000 loans.

INNOVATION MAKES THE DIFFERENCE Pronaca is the first nonfinancial business in Ecuador to establish a trust (special-purpose vehicle) to provide working capital financing to its supply chain. The IDB will be the first lender to the Trust, making it more attractive to other potential investors and/or creditors. The trust—which has a 10-year track record—has allowed Pronaca to include BOP farmers into its value chain and gain access to a greater quantity of quality raw materials to satisfy its growing production needs. Thanks to the in-kind financing and technical assistance Pronaca provides, small-scale farmers have experienced higher crop yields and increased their incomes, making Rueda del Éxito a win-win business model. Rueda del Éxito’s expansion will benefit approximately 900 small farmers annually for the next five years. Given each farmer will receive two loans per year, the number of total financings will be 9,000 loans.

OMJ 2013 Portfolio

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EDUCATION Fostering University Graduates through Innovative Loans in Mexico CLIENT Corporativo Laudex SAPI de CV SOFOM, E.N.R., is a Mexican financial institution that focuses on offering student loans to academically qualified young men and women at the base of the pyramid (BOP) who wish to pursue higher education but are unable to afford the cost of a private university.

IDB SUPPORT With a loan of up to US$10 million from the Inter-American Development Bank’s Opportunities for the Majority (OMJ) initiative, Laudex will expand its program and provide thousands of capable low-income students the chance to get a university education and subsequently, a better-paying job. Aside from the US$10 million loan from OMJ, the IDB is syndicating additional funding for US$10 million from private lenders.

THE CHALLENGE

THE SOLUTION

University studies are beyond the reach of most BOP high school graduates with good grades—limiting their ability to improve their skills, apply for higher-paying jobs and move out of poverty. Free state universities do not have the budget to expand enough to accommodate all of the qualified applicants, while private universities are too expensive for families of modest means and offer scholarships based mostly on merit. Almost 40% of Mexican high school graduates do not have the means to attend a university. Although there is pent-up BOP demand to redress unequal access to a university education through student loans, Mexico’s culture of lending for higher studies is still nascent. Few low-income consumers are aware of student loans and if they are, they are wary of banks. Students and their families often are unbanked, and have no credit record or collateral to secure a loan. Most banks are focused on competing in their core markets and have little incentive to expand or promote their student lending business, an activity that requires specific skills and dedication. This has historically limited BOP access to financing for higher education.

Laudex works around the obstacles preventing BOP students from accessing loans and aims to offer financing for university studies to 14,000 Mexican students over five years. With offices on campus grounds Laudex targets students whose families earn on average US$1,400 a month. By forging partnerships with several accredited private universities, Laudex has access to a pool of loan applicants. The company—not the university—screens the applicant and his or her family for their creditworthiness, which removes any conflict of interest. Once the loan is approved, Laudex pays the tuition directly to the university and then collects from the student. To date, 81% of its student loans have been for undergraduate studies, and 44% have gone to women. Studies that lead to low-paying jobs do not qualify for loans, thereby raising the chances that students who borrow from Laudex will obtain degrees in fields with high incomes and be in a better position to pay back their loans.

Almost 40% of Mexican high school graduates are do not have the means to attend a university. The expansion of Laudex will enable it to offer financing for university studies to 14,000 Mexicans whose families earn on average $1,400 a month.

INNOVATION MAKES THE DIFFERENCE The Laudex business model makes student loans more accessible and affordable to BOP students and more attractive to private universities. Laudex makes the universities take on part of the risk, thus incorporating them as key players in making the business model sustainable. Students can qualify to obtain loans by having the endorsement of a family member with proof of income rather than collateral. Importantly, Laudex allows students who are unemployed or work part-time to defer all principal payments on the loan until after they graduate and to start repaying six months later, allowing them time to enter the job market.

Photo by Ismael Villafranco

OMJ 2013 Portfolio

Visit us www.iadb.org/om

Email: OM-IDB@iadb.org