University of Antwerp The Limits of Commercial Microfinance and the Role of Multi- and Bilateral Agencies The case of Nicaragua Johan Bastiaensen Workshop:

University of Antwerp

The Limits of Commercial Microfinance and the Role of Multi- and Bilateral Agencies

The case of Nicaragua

Johan Bastiaensen

Workshop:Microfinance at Risk?

CERES SUMMERSCHOOL / ANNUAL MEETING“Global Governance, The Crisis and Development”

New directions in Development Cooperation


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Introduction:

Claim: microfinance = successful & massive initiative of poverty reduction social mission + private for-profit motives new niche market for capitalist investment, generating inclusive growth

~ multi- & bilateral actors heavily involved in the establishment & promotion of commercial MFI-industry

Yet ~ issues and questions:-Tensions between commercialisation & development objectives?- Are mainstream policies & role of multi- and bilateral actors) adequate ?

-Case-study Nicaragua = ‘investment darling’ & showcase of MFi-success... but today = life threatening crisis


Content

1. Mainstream policies in Nicaragua: commercialization and the role of multi- and bilateral actors

2. The crisis of microfinance in Nicaragua

3. Analysis of the crisis: some lessons and points of debate

4. Conclusion


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1. Mainstream policies in Nicaragua

Financial system approach:

sustainable MFIs integration into mainstream financial systems (regularization & up scaling to MFI-banks + downscaling of some commercial banks)

= savings + (inter)national capital massive/cheaper funds & full range of financial

products

Nicaraguan Context: CGAP CLEAR-report (2005)

-Critique of targeted donor subsidies for rural finance fragmentation-‘Obsession with credit’ + lack of non-credit financial services (regulation?)-Horror = possible return of state development bank


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coordinated donor commitment to financial systems approach (led by IFC/IADB)= induce mature NGOs regulated MFI-banks of NBFIs~ heralds GTZ/KfW/IFC/IADB pioneering role (Confia Procredit-bank)

substantial support for regulating/regulated NGO-MFIs ~ Procredit; Findesa-BANEX; Fama; … = equity, cheaper loans, subsidies (specialized multi- & bilateral sources)

= discursive support: IFC certificate good governance Banex; Calpia-Procredit El Salvador ~ ‘best practice’ for rural microfinance = all MFIs: direct/indirect pressure to regulate (including some social investors linked with government co-funding)


Policies + institutional quality of MFIs (incl. Asomif) very fast growth of portfolio (less in clients), especially regulated MFIs

MFI-portfolios in Nicaragua (mio U$)

2004 2008 Annual

growth Main sources of funds

Regulated MFIs: Procredit, Banex, Fama 77 313 +42%

Multi- en bilateral investment funds (IFC, IADB, KfW, Bio, FMO,…), savings: Procredit = 57%; Banex = 27% (2008), private investors (Banex, Fama Blue Orchard, banks)

Non-regulated MFI's: Asomif (FDL, et al.) 105 246 +24%

Social investors (Oikocredit, Triodos, Incofin, ...), private investors (Blue Orchard, ...), multi- & bilateral (BCIE, IADB, DANIDA,...), int. NGOs (Cordaid, Hivos, ...), government (only in 2000), savings not allowed, except SACCO

Other NGOs + SACCOs n.b. n.b. + ? Government (IDR, Magfor), NGOs Total portfolio > 184 > 559 + 33% Total clients >298,359 >503,201 + 14%

-Following CLEAR: public funds (i.c. specialized actors) regulated MFIs, while social (& private) investors = non-regulated MFIs [‘Ligas Mayores- Ligas Menores’ ]-Government not active in MFI, except coops (limited) ~ MFI = neo-liberal policies


2. Microfinance crisis in Nicaragua

-Procredit, Banex, Fama, FDL = 69 % of the market

-Asomif


Total problematic portfolio (restructed, deferred, arrears, judicial action & write-offs)

25 februari 2010

• slide n° 8


Total confiscated collateral (mortgages; 000 C$)

25 februari 2010

• slide n° 9 1 US$ ~ 20 C$


2009 PROCREDIT BANEX FAMA FDL

Loss - 8,1 - 15,7 - 2,6 - 2,5

Active Portfolio (december) 112 108 25 69

Loss/active portfolio -7,2% -14,5% -10,4% -3,6%

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Profit/loss (mio US$)

Severe crisis: struggle for survival ... All MFIs = ‘red alert’ ~recuperate deliquent loans; Fama & FDL core business; Procredit (> 2000 $); Quid Banex?

Paradox: non-regulated FDL outperforms regulated MFIs


The non-regulated segment: ASOMIF

Non-regulated MFIs = similar dramatic situation, some MFIs = close to bankruptcy; others persist, some perform relatively well

Source: CDR (2010)


3. Analysis of the crisis: lessons and issues of debate

* Over-indebtedness crisis = also international responsibility

- uncoordinated overfunding ~ attracted by historical record only excess liquidity & market saturation (‘careless lending’ !)

- ‘Ligas Mayores-Ligas Menores’: unequal & excessive competition promotion of aggressive commercial bank-model deterioration of deontological values ( excessive competition =

deficiency of ‘Sin Riesgos’; forcing loans on clients to meet disbursement targets +

lack of financial education impoverishment of clients + fuel for political

backlash of ‘No Pago’ movement)


* Regulation and dependence on outside funding

- High % of outside funding (Asomif) vulnerability for ‘capital golondrina’ ?

- Emphasis on deposits/savings = OK, but lack of appropriate regulatory framework

- 2-3% cost increase interest rate & loan size- ‘problematic’ (rural) portfolio (Fama 6% portfolio; FDL: shift towards

administered portfolio ~ > 25% of rural portfolio) no legal space for much of rural/agricultural microfinance


* Commercial bank-model fragility due to conventionalization of financial technology

- Model Procredit & Banex = ’European/US style’ of ‘professional’ banking increasing reliance on contract & law ‘proximity’ to clients & legitimacy generated in client-MFI social interfaces

~ origin of No Pago in Nueva Segovia = large loans to local ‘personalities’, connected to

Sandinista networks legal action ~ imprisonment + confiscation collateral; incapacity to negotiate rebellion & mobilization of P-C networks ~ No Pago -> ‘Banex = special case’; ‘a monster’ (slide 9)~ performance FDL & some other non-regulated MFIs ? ~ more social

embeddedness + intense discursive struggle for the ‘harts and minds’ of clients & non-clients (2002 study: keep away from ‘patron-client’ social fields; build upon appropriate values/social

fields)

dangerous fragility of commercial MFI-bank model in the struggle for social legitimacy in an institutional environment with weak states & poor legal systems

~ linked to issues of mission drift ~ accusations of usury & capitalist usurpation of microfinance


* Commercial bankmodel: profit and social mission-Outreach & loan size

Regulated institutions Non-regulated

Banex Procredit FAMA FDL2004 2008 2004 2008 2004 2008 2004 2008

Number of clients 22130 35323 40725 80100 31672 37296 29313 82337

Average loansize 1507 3891 1081 1655 517 1089 666 838

(% BNP/cap) 184% 393% 132% 167% 63% 110% 81% 85%

Number of accounts

7111 39652 5392 276088 No licence yet Not allowed

Average savings 1301 935 3062 272 - - - -

(% BNP/cap) 159% 94% 369% 27%

-Regulation = average loan size increases (Cull, et al., 2009) + average savings tend

to decrease, but little savings for the extreme poor banks for the (lower) middle class?


- ‘Finance only’ & simplistic impact model

Key deficiency too much ‘finance only’

~ social impact: neglected - taken for granted - dealt with superficially (simple SPI- indicators; corporate social responsibility) note: Banex = pioneer of SPM; 15y mortgage loan = housing for the poor

~ discursive shift: ‘poor as micro-entrepreneurs’ ‘poor as vulnerable’ poverty alleviation rather than poverty reduction/inclusive development

related to emphasis on non-credit financial services & downplaying role of

(micro)credit (~ evidence of little impact)

~ impact co-dependent on context and concomitant broader change transformative ‘Finance Plus’ approach articulated to broader institutional & ‘political’ change


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crucial role of finance in asset and network-building for the capital-constrained small enterprises ~ mainstream finance = a passive actor matching ‘demand’; not an active player in creating alternative pathways

risk of financing social exclusion & environmental destruction; vulnerability of clients in value chains (i.c. cattle chains ~ -20% meat

prices in slaugtherhouse, but -50% for life cattle of 1-2 years in the countryside)

Transformative Finance Plus approach need to articulate microfinance to participative market-network building (‘ciudania mercantil’’ – value chains – territorial governance structures)

~ ‘institutional externalities’ of MFIs: beyond mere contract design for finance = social interfaces that make innovative markets works for SMEs & contribute to changes in rural governance

~ some MFIs = perceived as political enemies by clientelistic politicians


4. Conclusion and final observationsOutcome of current mainstream multi- & bilateral policies in Nicaragua =

- establishment of a commercial MFI-banking model ‘with little development’ ~ weak & endangered outreach to the poor – agricultural & rural economy

~ institutional fragility & little transformative institutional externalities

~ breeding ground for the return of state agricultural development bank (Produzcamos) ‘Iron Law of Subsidized Credit’ = inefficiency + ineffective social

targeting + fragile credit culture connected to state VC-approach = squandering and capturing of public

& cooperation resources & strengthening of vertical-authoritarian, clientelistic governance structures which (re)produce dominance &

exploitation


We might end with ‘peaceful co-existence’ of capitalist and socialist banking (even with –albeit limited- multi/bilateral funding for state-segment) … but little political space for transformative microfinance

Development agenda = change in MFI-policies ~ regulatory framework; support for transformative ‘Finance Plus’ approach (incl. subsidies, link to social movements ~change)


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THANK YOU

Documents

University of Antwerp The Limits of Commercial Microfinance and the Role of Multi- and Bilateral Agencies The case of Nicaragua Johan Bastiaensen Workshop: