In a recent interview in Forbes, Brazil’s President Lula expressed interest in bringing small and micro businesses into the tax system. Historically, this economic sector has remained outside the country’s notoriously cumbersome bureaucracy. However, by creating a business climate that is more “favorable, safe and free” of bureaucratic impediments, Lula thinks joining the tax base will become a more attractive option.
This new approach to widening the tax base seems to have a brighter side: improving the government-sponsored microfinance services. Brazil’s financial services for the poor are in desperate need of expansion. While microfinance has been on Lula’s agenda for years, Brazil continues to struggle in terms of market penetration. Of the 8 million micro enterprises in Brazil, overall market penetration is a meager 2%. This is in stark contrast to other countries in the region, which drastically exceed the absolute number of people served, even as much smaller markets. The demand for microfinance services in Brazil is particularly high due to the acute income inequality, which leaves 34% of the population below the poverty line.
Brazil consistently ranks as the country with the largest number of entrepreneurs per capita in the world (p. 4), calling into question why the market remains so underserved. Reasons specific to Brazil abound, but the sheer size and population of the country is enough to send most prospective micro lenders running (p. 4). Additionally, the un-chartered nature of the country’s microfinance landscape intimidates (p. 4). Lacking an established microfinance market fueled by NGOs or otherwise, the climate is ripe for government involvement. In spite of the government’s efforts, which certainly strive to harmonize the private and public sectors, just over 10% of the 120+ microfinance institutions have more than 1,000 clients, with a combined loan portfolio of barely $60 million. Of these microfinance institutions, the 30 most solvent are funded by Brazil’s central bank.
The microfinance climate in Brazil is unique, as an array of local, state and federal institutions combine to promote micro lending. Brazil’s enormous development bank, BNDES, which has already disbursed $8.5 billion in 2005, leads this by working as a second-tier institution with micro lenders by making loans to regulated microfinance institutions (MFIs) and by providing technical assistance. The central bank’s role in stimulating private sector activity seems to work as management is left to the actual microfinance institutions. In fact, the central bank loans to so-called ‘societies,’ which are strictly regulated private institutions designed by the central bank. They are run by boards composed entirely of individuals from the private sector. In return, the ‘societies’ are required to raise matching funds from private investors that equal one-third of the loan portfolio. This has even resulted in going beyond Brazilian borders to attract such needed private capital. The central bank views its role as temporary, having a catalytic effect for now but only intended to tide over the microfinance institutions until they are sustainable. Let’s hope Mr. Lula’s new push to tax micro and small business owners does not topple the success to date.
Additional Resources
1) Main article discussed in entry, Forbes: "Interview with Brazilian President Lula."2) Inter-American Development Bank (IDB): "Return of the State." 3) Microcapital Institute: "The Commercialization of Microfinance in Latin America." 4) "Understanding Microfinance in the Brazilian Context."5) World Bank (WB): "Access to Financial Services in Brazil."
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