Brazil, May, 19 2010 -
As a country which is witnessing strong economic growth exemplified by a widening middle class, rising GDP, large export growth, oil discoveries amongst several other factors – it is often forgotten that some parts of Brazil are still experiencing extreme poverty and income inequality.
Whilst the efforts of social programmes such as ‘Minha Casa, Minha Vida', ‘Bolsa Família' and ‘Zero Fome' are to be commended, much work needs to be done to decrease inequality. This articles outlines some background information about the microfinance industry in Brazil, its development, criticisms, flaws and some future projections.
The concept of microfinance - essentially providing financial services to those who cannot access them - is relatively immature in Brazil – particularly in compared to other Latin American countries. The first official microfinance institution - the União Nordeste de Assistência a Pequenas Organizações (Northeastern Union of Assistance to Small Businesses) was established in the north east of Brazil in 1973 - which, whilst having over 18 years of success, gradually fell apart as proper importance was not placed on its sustainability.
From the period of 1989 to 1997, both municipal and state governments played important roles in the growth of Brazilian microfinance – this was complemented by a rising number of credit cooperatives appearing throughout the country. The Centro de Apoio aos Pequenos Empreendimentos (the centre for the support of small enterprises, CEAPE) was also created and bought the utilisation of social networks into the industry. The period of 1998 to 2002 saw some major changes within the Brazilian microfinance landscape in the form of the introduction of Organizações da Sociedade Civil de Interesse Público (Public Interest Civil Societies, OSCIPs) and the Sociedades de Crédito ao Microempreendedor (Microfinance Credit Societies, SCMs). OSCIPs were introduced to essentially ease the operation of microfinance organisations and SCMs were created to allow profit making activities legal within the Brazilian microfinance industry via the fact that they were allowed to be created as financial institutions. SCMs have generally been viewed as more restrictive due to the fact they are subject to restrictions by the Brazilian Central Bank (the majority of current microfinance organisations use OSCIPs as their legal constitution).
It was after this period that the Banco Nacional do Desenvolvimento Econômico e Social (National Development Bank, BNDES) became more heavily involved in the microfinance market of Brazil - for example via the Programa de Crédito Produtivo Popular (Programme of Popular Productive Credit, PCPP).
The CrediAmigo programme was also considered a landmark development in Brazil’s microfinance industry due to the widespread social impact it has gone on to have. Created by the state-owned bank – Banco do Nordeste do Brasil (the Northeast Bank of Brazil) – CrediAmigo received technical advice from established microfinance institutions from other parts of the world as benchmarks (including Banco Sol from Bolivia, Banco del Estado from Chile, Mibanco from Peru and Bank Rakyat from Indonesia) as well as assistance from ACCIÓN International and the Consultative Group to Assist the Poorest (GCAP). Deemed as a hugely successful endeavour, the programmes strengths have been stated as due to a number of causes: targeting the informal sector; lending to solidarity groups; charging of market rates to ensure that loans can be sustained (the default rate of CrediAmigo, since its inception, has never exceeded 2.2%); incentives for timely repayments; the provision of initial small loans which are increased on a performance basis; amortizing loans on a regular basis; close monitoring of microfinance organisation cash-flows; the creation of bespoke microfinance portfolio products and penalising borrowers in arrears a well as a number of other factors.
Upon election, President Lula promised to expand credit services to the working classes and the microfinance industry - underpinning his statements of reducing social inequality. Since this time, the presence of microfinance institutions has grown with the number of borrowers increasing from 158,654 to 809,201 (and loan amounts increasing by approximately $R 775.5 million). However, this level is still low in comparison to other developing countries and is largely due to a number of factors:
- The hyperflation period that characterised the economic climate between 1987-97 led to a very strict banking policy which has filtered through into the microfinance sector;
- The ever-present tradition of government-subsidised credit programmes are largely viewed as overly bureaucratic and slow moving;
- There is a lack of framework to support a full and effective microfinance system;
- Crowding out by the public sector: as further result of the economic policy of the Brazilian state, a scenario of prioritising investment in government papers as opposed to the poor has emerged (due to lower interest rates and risk). However, such claims can be refuted with the initiation of programmes such as the ‘Minha Casa, Minha Vida', ‘Bolsa Familia' and ‘Zero Fome' which have resulted in significant government funds being used;
- Whilst there are many micro-finance institutions in operation, none have had the same effect in comparison to projects in other countries such as the ‘Grameen Bank' of Bangladesh and ‘Banco Sol' of Bolivia.
The Brazilian microfinance system currently only has a 2% penetration rate - the most successful global organisations serve the extreme poor, and do so successfully with very low default rates - it is often debated that Brazil needs to move further 'down market' to facilitate those in need. Furthermore, there is a clear need to have tailor made products that meet client needs (other countries with sophisticated systems now offer a range of related financial services such as low cost insurance, loyalty programmes etc). This should be supported by improved marketing strategies - most programmes currently in operation in Brazil are not given enough publicity due to a lack of resources.
With a largely untapped Brazilian market thirsty for microfinance, the industry has a huge potential to grow - yet the existing scale and profitability levels are comparatively lower than many other countries. Despite the many challenges, there are several reasons to feel positive about the growth of microfinance in the country and the fact that more of the bigger banking institutions (such as Banco Santander, Unibanco, Banco Real) are becoming involved is an encouraging sign. The main issue facing Brazilian financial institutions (and many other banks in the world) on lending to poorer sections of society is that there is often little or no collateral (such as assets) which can be used to provide security. As was witnessed in several developed countries via ‘sub-prime' debacle, a repeat scenario of frivolous lending should not be encouraged in any way. However, what makes microfinance particularly unique is that the most globally successful projects have very low default rates due to the fact that loans are made on very low payment terms with an undercurrent of empowerment and business acumen. Brazil microfinance funded organisations could and should follow suit.