THE VALUE OF MICROLENDING IN EMERGING ECONOMIES THE CASE OF BRAZIL

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Grant Underwood
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1 THE VALUE OF MICROLENDING IN EMERGING ECONOMIES THE CASE OF BRAZIL Celson Hupfer Banco Itaú

2 Defining Microlending Credit to poor people or micro-entrepreneurs without access to formal credit sources very small tickets borrower without net worth and collaterals usage of cross-aval incentives for due time payments no walk-ins / customer doesn t go to the bank. Credit Agent visits customers in their houses/places Financial and managerial education is part of the Microlending programs Microlending institutions must be self-sustainable

payments no walk-ins / customer doesn t go to the bank.

3 The Brazilian experience The paradox of the Brazilian Financial System Banks with sound financial conditions and very profitable Strong Central Bank supervision Sofisticated clearing system Wire transfer in real time for all amounts over US$ 2,000 Clearing system for checks in 24 H

Central Bank supervision Sofisticated clearing system Wire transfer in

4 The Brazilian experience.in the other hand 43% of individuals do not have a banking account Total credit to individuals and corporations: Brazil 32,6% Germany 164% Spain 135% Chile 86% USA 64% Brazil has the highest interest rates in the world more than 60% p.a. for individuals more than 40% p.a. for small & medium enterprises Government bonds: 14,75% pa

individuals and corporations: Brazil 32,6% Germany 164% Spain 135% Chile 86% USA 64%

5 The Brazilian experience.in the other hand high taxes on interest rates 60% of all bank deposits are retained by Central Bank Legal environment inadequate protection to bad debtors fragile rights over collaterals difficulties to build a positive credit bureau

6 THE CONSEQUENCES FOR MICROBUSINESSES There are 10.5 million non-formal established micro enterprises in Brazil (2003) 94% do not have access to banking credit 83% do not have any debt, even with suppliers Only 40% have deposit account Only 32% have checking account Only 24% have saving account Only 27% have credit card

have access to banking credit 83% do not have any debt, even with suppliers

7 THE CONSEQUENCES FOR MICROBUSINESSES There are 5.3 million small and micro enterprises formally established in Brazil(2004) Only 22% used credit in the last year Only 37% have used credit once In the other hand, 89% of the owners inform they have access to credit in banks as individuals it easier to get credit as an individual. lack of collateral 40% lack of documents 12% derogative information 16% Why?

the last year Only 37% have used credit once In the other hand, 89% of the owners inform they have

8 SOME OUTOMES Poors are unable to finance their own projects which have high social return Support to small entrepreneurship is one of the most important ways to reduce poverty in Brazil Wealth inequality is one of the most important obstacles for economic growth

of the most important ways to reduce poverty in Brazil Wealth

9 SOME OUTOMES But, nothing will be done without Government action, which is necessary to: review & reinforce the legal environment create benchmarking & competition via state owned banks create adequate funding link it to other government initiatives

environment create benchmarking & competition via state owned

10 SOME OF THE MAIN GOVERNMENT INITIATIVES IN THE LAST YEARS Microlending is now one of the most important policies to reduce wealth inequality: mandatory destination of 2% of bank deposits for microlending US$ 650 million banks were allowed to open simplified deposit and saving accounts: no income and address proofs 6 million accounts were opened in 2 years, with average balance of US$ 13,50 per account

microlending US$ 650 million banks were allowed to open simplified deposit and saving accounts: no

11 SOME OF THE MAIN GOVERNMENT INITIATIVES IN THE LAST YEARS banks were allowed to lend to employed and retired with debit directly in there pay checks lower interest rates as risk is reduce TOTAL BANK CREDIT OUTSTANDING TO INDIVIDUALS (US$BI) loans with debit in pay check Total loans % Interest rates (p.a.) (a) (b) (a) / (b) (a) (b) dec/04 7,8 22,5 35,5 39,2 68,4 jun/05 11,9 28,2 42,1 37,5 69,9 dec/05 14,7 32,1 45,7 36,4 67,3 jun/06 19,2 37,5 51,1 35,1 59,8 source: Central Bank

12 SOME OF THE MAIN GOVERNMENT INITIATIVES IN THE LAST YEARS Expansion of CrediAmigo Banco do Nordeste CREDIAMIGO PROGRAM - BANCO DO NORDESTE DO BRASIL # of Loans Amount R$MM Average Ticket R$ Past due 1-90 days ,2 287,3 799,8 2,09% ,8 368,2 846,8 1,81% ,8 440,9 868,3 0,84% ,7 548,2 920,3* 0,96% * R$ 920,30 = US$ 418,32 Source: Annual Report - Banco do Nordeste do Brasil

1-90 days 2002 359,2 287,3 799,8 2,09% 2003 434,8 368,2 846,8 1,81% 2004 507,8 440,9 868,3 0,84%

13 SOME OF THE MAIN GOVERNMENT INITIATIVES IN THE LAST YEARS Banco do Brasil created the Banco Popular do Brasil focused on poor people Expansion of Microlending to small farmers 1,5 million families were served in 2004 and the portfolio increased from US$ 1 billion in 2002 to 2,7 billion in 2004

Microlending to small farmers 1,5 million families were served in 2004

14 MOST IMPORTANT RESULTS Researches show significant income growth to Microlending customers: IMPACTS IN MICROLENDING CUSTOMERS MONTHLY INCOME Before After UP TO 1 MIN WAGE 10% 1% > 1 < 2 13% 7% > 2 < 5 20% 20% > 5 < 10 25% 29% > 10 < 20 14% 20% > 20 min wages 12% 16% Source: research with crediamigo customers (2001) / IPESPE

MIN WAGE 10% 1% > 1 < 2 13% 7% > 2 < 5 20% 20% > 5 < 10 25% 29% > 10 < 20 14% 20%

15 MOST IMPORTANT RESULTS The 10% poorest experienced 7%pa income growth instead of only 0,9% in per capita income growth 13% income growth for the 20% poorest individuals in 2004

16 MOST IMPORTANT RESULTS Causes of this recent reduction in social inequality: 25% of the income growth for the poorest is related to the GDP growth 25% is related to direct income transfer programs 50% is related to growth in salaries & wages due to: Better workforce qualification Upgrade in job positions Geographic decentralization of the economic activity Upgrades (financing & productivity) in familiar agriculture

related to growth in salaries & wages due to: Better workforce qualification Upgrade in job positions

17 Summarizing Most important actions towards Micro-lending were taken in the last 5 years Government initiative (policies & framework) were crucial to launch micro-lending practices in the Brazilian financial market Larger programs sponsored by State Owned Banks Social inequality & poverty reduction are key outcomes besides economic growth Expressive room for portfolio growth

in the Brazilian financial market Larger programs sponsored by State Owned Banks Social

18 T H A N K Y O U... THE VALUE OF MICROLENDING IN EMERGING ECONOMIES THE CASE OF BRAZIL Celson Hupfer Banco Itaú

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