Microfinance niche for spanish banks in Latin America, an andean region approach

Introduction

1.1 Microfinance Overview

1.1.3 Origins of Microfinance

The history of microfinance started after the Second World War, specifically in the 1970s, with the active participation of international NGOs that were concerned about financial mechanisms to alleviate poverty in development countries.

Microfinance started as an experimental venture in rural areas, like the Grameen Bank of Bangladesh. Another example of rural microfinance is the "village banks", incorporated for the first time by the Foundation for International Community Assistance (FINCA) in Costa Rica in 1985 (Khawari, A. 2004).

On the other hand in the mid 80s, in South America, as part of initiative entities set up by NGOs and local leaders, appeared as urban microfinance models BancoSol in Bolivia and the Cajas Municipales in Peru. Nowadays the urban microfinance model in those Andean countries stands as a success, and having achieved financial sustainability, has been successfully replicated in many other countries. In this report, the urban and individual microfinance approach will be considered.1

1.1.2 Definition of Microfinance

In Latin America, microfinance is traditionally understood as financial services primarily for microenterprises: their owner/operators and their workers (Berger, M. 2006). It is a narrow sense though, because, a modern definition of microfinance considers it in a general perspective, as the activity to offer financial services for unbanked poor people. In this sense financial services include loans for business and personal use, savings and other deposit products, remittances and transfers, payment services, insurance, and potentially any financial product or service a bank can offer to this market segment. The poor include microenterprises, small farmers, low-income salaried employees, day laborers, pensioners, and poor households. The products and services can be targeted to meet the financial needs of the households as well as their income generating activities (Young, R. and Deborah D., 2005).

1 Traditionally, the provision of microcredit started with group lending models relying on peer pressure/support to facilitate repayment. But nowadays, most MFIs in the region have been moving away from group lending towards individual loans as the market becomes more commercialized and geared towards individual needs.

For a bank point of view, microfinance can be best described as a hybrid of small-business and consumer banking with a strong dose of understanding the client"s social and cultural characteristics.

1.2 Characteristics of the Microfinance Service

In urban microfinance certain client preferences and needs repeatedly happen. For example, clients tend to value service, speed, and agility over price. In terms of loans, this means reducing and simplifying the paperwork, formal collateral, and time involved to apply for and receive a loan. For deposits, this means unconstrained access to savings and low minimum balance requirements are usually more important than returns (Rutherford, S. 1999).

While the client"s primary sources of repayment are enterprises, salaries, pensions, and remittances, current cash flows are the best determinant of future repayment capacity. Further, family and business finances tend to be mixed. This requires specialized loan appraisal techniques and the opportunity to provide personal as well as business-oriented financial services.

The informal guaranties used for the MFIs accomplish not only the basic function of payment motivation, but also, they help to increase customer loyalty for the MFIs, this is because most clients does not have many possessions to guarantee its loans and they tend to work with the MFIs that have its title deeds as "collateral", but not precisely as a formal mortgage.

2. Microfinance in Latin America an Andean Region Approach

2.1 Actual Context of the Sector

In first term, it is important to notice that the emphasis in Latin America microfinance has been on providing services to enterprises with insufficient access to financial services, as a consequence, microfinance in the region is more narrowly concentrated on enterprise credit, as opposed to other parts of the world where it tends to be broader, including savings, insurance, and other financial services, along with microcredit not only for microenterprises but also for consumers, whether in the informal sector or not (Christen and Miller, 2006).

In Latin America the microfinance industry has been developed mainly trough regulated microfinance institutions and with specialized NGOs. This scenario is reflected in the coexistence of numerous, but most small institutions.

The scenario described has been changing, because in recent years some NGOs got into special regulatory laws which allowed them to launch passive products, like saving accounts. This new funding, along with the entrance in their capital structure of small local partners, investment funds and international specialized institutions have contributed to the expansion of their credit activities. Also the reduction of subsidized funds through the microfinance business has been replaced with term deposits and wholesale sources like issue debt to the capital markets.