Microfinance in Brazil

Introduction
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 abject poverty and income inequality. Whilst the efforts of social programmes such as Minha Casa, Minha Vida, Bolsa Famlia and Zero Fome are to be commended, much work needs to be done to decrease inequality. This short guide discusses aims to provide some background information about the microfinance industry in Brazil, its development, criticisms, flaws and some future projections. With an increasing amount of investor interest coming towards Brazil, it is important to remember that the countrys future growth depends on alleviating the social status and entrepreneurial ability of all its residents. As the business world is also seeing an increasing amount of philanthropic investors, social and environmental entrepreneurs our aim is to build connections between them and the contacts we have established in the forefront of the industry.

What is Microfinance?
Microfinance, as a global phenomenon, has continued to become an increasingly popular method of providing financial services to those who cannot access them. Microfinance (as defined by the UNHDR): The offering of financial services - either strictu sensu (banks, consumer credit companies and cooperatives) or not (NGOs and OSCIPs) to individuals and enterprises normally excluded from the traditional financial system. Microcredit (as defined by the UNHDR): The offering of loans of relatively small value for productive activities in the context of microfinance. The concept of microfinance can broadly rooted by Fransiscan monks providing community orientated money lending in the 15th century. In the 19th century, credit union leaders, such as Friedrich Wilheim Raiffeisen, developed the concept of cooperative self help to assist hard-working farmers remove themselves from the shackles of extreme debt. More recently, the Grameen Bank, which now serves 7 million people, has become the most prominent microfinance institution and is often used as a model for others to aspire to (more information about this organisation can be read here).

Banking in Brazil for Lower Income Earners

As this guide will explain, the microfinance system of Brazil is relatively immature particularly in compared to other Latin American countries. Yet, at the same time, the banking sector is viewing the lower income bracket as valuable customers out of the 108 million active bank accounts in Brazil at

September 2009, 23% belonged to the lower income bracket). Below are the main types of financing options available: Consumer credit: personal loans offered by financeiras (finance houses and loan companies) are often a last resort for micro entrepreneurs as they often carry disadvantageous interest rate payment terms of 10 percent and over. At the same time, as with most forms of this type of credit across the globe, such loans are heavily marketed which has resulted in an increased amount of people using them. Many have chosen to take such loans regardless of the fees due to the fact that allow for more freedom with regards to how money is spent but the penalties for missed payments are high and often result in the defaulter being blacklisted (known in Brazil as serasa). However, a research report published for the Banco Nacional de Desenvolvimento Economico e Social (published in 2009) stated that the majority of lower income sectors of Brazilian society would, generally speaking, be reluctant to take on these kinds of loan except in exceptional circumstances. Credit Cards: whilst Brazil was slower to respond to the presence of credit cards, their use has been increasing (see the latest statistics via our monthly factfiles). Of the 500 million credit cards in usage at the close of 2009, just over 15% were owned by Class D income earners. However, as with personal loans, their use among the lower income parts of Brazilian has been restricted by the strict banking and lending laws that are in operation as well as the fact that APRs tend to be quite high. Store Credit: most major retailers are now offering instalment credit to consumers (usually in 3 to 15 stage payments) with some of the initial payments being interest free. This has fuelled consumer sales figures and allowed many people who previously could not afford luxuries such as TVs, microwaves and personal computers to purchase and manage their payments. Statistics have also shown that default rates are very low due to the fact that most consumers would like to continue to purchase more goods in this manner (combined with rising income levels and other positive economic factors) Supplier Credit: another substitute to microcredit where suppliers agree payment terms on the basis of future revenues. However, most larger suppliers are reluctant to engage in such practices with lower income business owners (particularly if they are start-ups) due a perception, perhaps unjustifiably, that the payment terms will not be met. Agiotas (loan sharks): individuals and small businesses that offer often extremely high interest rates and are usually avoided by lower income business owners unless absolutely necessary.

The History of the Brazilian Microfinance System

The creation of the Unio Nordeste de Assistncia a Pequenas Organizaes (Northeastern Union of Assistance to Small Businesses) introduced what is now stated as one of the first microcredit programmes in Latin America. The project, based in Recife and Salvador, was further supported by ACCIN International as well as local banking institutions and provided credit lines in addition to management training. Whilst deemed to be a success due to the fact that thousands of microentrepreneurs were able to fulfil their business objectives, the project fell apart after 18 years 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. Today, the organisation has 45 branches and is the second largest microfinance provider in Brazil. The Banco da Mulher (Womens Bank) was created in 1989 and supported by UNICEF and the Inter-American Development Bank the organisation now has branches in Bahia, Paran, Santa Catarina, Rio Grande do Sul, Amazonas, Minas Gerais and Rio de Janeiro. Portosol funded by the city of Porto Alegre, private finance, the German Society of Technical Cooperation, the Inter-American Foundation and the Servio Brasileiro de Apoio as Micro e Pequenas Empresas (Brazilian Services Supporting Micro and Small Enterprises) provided working capital for the purchase of equipment and small-scale infrastructural improvements. Cosigner guarantees, collateral and solidarity groups are also used with subsidised interest rates. The Vivacred programme in Rio de Janeiro was also an example of one of the initial microfinance programmes of Brazil and was funded by the Inter-American Development Bank, the State Development Bank and Fininvest (a subsidiary of Unibanco). The period of 1998 to 2002 saw some major changes within the Brazilian microfinance landscape in the form of the introduction of Organizaes da Sociedade Civil de Interesse Pblico (Public Interest Civil Societies, OSCIPs) and the Sociedades de Crdito 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). The involvement of the Banco Nacional do Desenvolvimento Econmico e Social (National Development Bank, BNDES) marked an important stage in the growth of the microfinance market of Brazil. The Programa de Crdito Produtivo Popular (Programme of Popular Productive Credit, PCPP) was introduced to facilitate the spread of microcredit programmes via offering credit lines with extended repayment periods at interest rates tracked with the Taxa de Juros de Longo Prazo (the Brazilian long term interest rate, TJLP). The PCPP, it is reported, had much difficulty finding quality institutions to work with and some 70 percent of applicants were rejected. The Programa de Desenvolvimento Institucional (Institutional Development Programme, PDI) was subsequently introduced to support the growth of the microfinance industry in the form of a separate funding programme aimed at developing market infrastructure as well as assistance giving organisations business know-how; improving information systems; auditing and ratings procedures. The CrediAmigo programme was also considered a landmark development in Brazils 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 ACCIN International and the Consultative Group to As-

sist 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. The election of President Lula da Silva in 2003 was at a time when the poorer communities of the country continued to suffer from the neo-liberal adjustments made by previous president, Fernando Henrique Cardoso. Whilst his governance will go down in history as one which saw inflation head significantly low his policies did have a high social price. Upon his appointment to office, Lula publically stated that he would focus on promoting social development; generate income and employment and improve the access for all financial institutions. Underpinning these statements was a promise to expand credit services to the working classes and microfinance industry. The first step was to conduct an overview of the microfinance sector with clear goals and objectives to meet the demands of the sector. A council was collectively formed out of the following: the Departments of Trade and Labour; the Ministry of Development, Industry and Foreign Trade, the Ministry of Agriculture / Agricultural Developement, the Central Bank, the BNDES as well as representatives from the Caixa Econmica Federal, Banco do Brasil and Banco do Nordest. 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). The share of microfinance clients mainly remains in the north east of the country where income levels are, generally speaking, lower. The present day microfinance system within Brazil has, therefore, taken considerable steps.

The Brazilian Microfinance System Today

Today, there exist four broad categories of micro-finance institution in Brazil: (i) Institutions associated with international microfinance networks examples would include Sistem CEAPE (with ACCIN), Banco da Mulher (with Womens World Banking) and Viso Mundial (with World Vision). Using these organisations assistance, Brazil microfinance institutions have been able to leverage expertise, methodologies and business acumen. However, research has shown that the relationships between Brazils organisations and the international microfinance community have been weak. The main barrier is said to be language and an inability to pass an adequate level of financial and technical resources given the size and complexity of the Brazilian system; (ii) Civil society organisations a community base methodology of applying the general principles of microfinance with the aim of stimulating the economic development in lowerincome areas. Examples include Portosol (Rio Grande do Sul) and Blusol (Santa Catarina). Whilst lending levels are relatively low due to structural and marketing difficulties that make scaling up difficult these organisations have very low delinquency levels and have been deemed a very successful utilisation of the true microfinance business model; (iii) Government initiatives Brazilian state governors and local politicians have launched microfinance initiatives which aim of serving their local communities. Whist organisations would often take direction from established national and international bodies, many initiatives have

not respected technical principles in their design and political objectives have unfortunately often overruled the real reason of why they were created. Such projects also offer below market initiatives that do not cover operating costs which many end up relying on further government support to continue operations. (iv) Private banks including Banco Santander, Unibanco, Banco Real and Banco do Nordeste (see the CrediAmigo project above). Whilst the success of such programmes has yet to be witnessed from a medium-long term perspective, issues surrounding practicality have been raised and Banco do Nordeste has seen low renewal statistics. Nevertheless, the involvement of larger institutions adopting microfinance principles has been welcomed particularly as it empowers those who could not previously access business loans whilst encourading a healthy banking system.

Criticisms of the Brazilian Microfinance System

With a very low penetration rate academic, economic and political commentators state that much more needs to be done to improve microfinance in Brazil. The main reasons attributed to a lack of strong growth, particularly when viewed comparatively against countries with lower economic credentials, are highlighted below: The hyperflation period that characterised the economic climate between 1987-97 led to a very strictbanking policy being adopted which whilst assisting the country to weather the effects of the global finance crisis also eliminated a large amount of the populations ability to borrow to fund business ventures. As a result of the fact that many principles of the highly sophisticated lending market have been inherited by the microfinance industry, many poorer sectors of Brazil remain in a disadvantageous position; The ever-present tradition of government-subsidised credit programmes are often viewed as overly bureaucratic and slow moving; There is a lack of framework to support a full and effective microfinance system: as stated above, a considerable amount of progress has been made in the last two decades but limitations still do remain. One prime example is the inability of microfinance institutions to be able to offer a wide range of financial products such as insurance and savings putting them at a significant disadvantage in raising the competitive profile. Making the process of foreign investment easier would also assist further growth focus should be made on reducing registration processes for transferring money combined with alleviating currency restrictions. Furthermore, the regulatory and reporting requirements for microfinance institutions in Brazil is one of the most rigorous in the globe, impeding the industrys growth; Crowding out by the public sector: as further result of the economic policy of the Brazilian government, a scenario of prioritising investment in government papers as opposed to the poor has emerged (due to lower interest rates and risk). This subsequently creates a lack of incentive amongst commercial banks to increase their lending activity to lower income business owners. 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 several micro-finance institutions in operations, none have had the effect of projects in other countries such as the Grameen Bank of Bangladesh and Banco Sol of Bolivia.

The Microfinance Industry in Brazil: Moving Forward

With the issues above continuing to impede the much needed growth of the microfinance industry in Brazil, below are some suggestions as to how further growth could be encouraged: Move further down market as currently only having a comparatively low penetration rate of 2 percent, many of the current microfinance organisations do not serve those who fully need assistance. The most successful global microfinance organisations serve the extreme poor, and do so successfully with very low default rates. The fact that Brazils microfinance is only serving a small proportion of low-income clients indicates that there are many who are not able to access services which they should ad deserve to be entitled to. Tailored products that meet clients needs in other South American countries such as Bolivia and Paraguay, the microfinance industry has grown so widely that competition has forced organisations to produce innovative products. Such activity is much welcomed as a means to expand the range of financial services that people can access and encourage better terms / lower rates (Brazil is currently limited to working capital and investment loans). It has been economically proven that the expansion of microfinance product ranges produces high revenues per customer, lower customer acquisition costs, lower delinquency rates and a higher take up of related insurance services. Improved marketing strategies there is a notable lack of awareness and comprehension with regards to the various microcredit organisations in the country. The unfortunate fact is that insufficient resources have restricted the ability of organisations to be able to fully promote themselves particularly those that operate on a small, independent scale. A sustainable strategy to ensure long term growth the Brazilian microfinance industry as a whole has been criticised as being too focused on immediate goals without adopting long term growth strategies. Again, however, it is often said that the increasing role of Brazils own banks (both private and public) and global institutions is helping the organisations focus further down the line which should act as a catalyst for growing success within the industry. With 98 percent of an 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 (including many less developing nations). Despite the many challenges, there are many reasons to feel positive about the growth of microfinance in the country and the fact that more of the bigger banking institutions are becoming involved is a clearly 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.

Get Involved with Microfinance Projects in Brazil

The Brazil Real Estate and Land Guide are very keen to support microfinance projects throughout the country and would very much like to hear from investors, business experts and anyone with an interest in the field. Please take the time to see the various projects we are supporting and contact us at info@brazilinvestmentguide.com for an informal chat. Brazil Real Estate Investment Guide info@brazilinvestmentguide.com