MICROCAPITAL STORY: Will Peru’s Sluggish Economic Growth Impact Microlending? Microlender, MiBanco Plans to Slow their Loan Growth Rate to 25-30 Percent this Year in Light of Current Economic Conditions

MiBanco CEO Rafael Llosa recently informed Business News Americas (BNA) (a provider of Latin America news and business information, headquartered in Santiago, Chile) that the microlender will ease the loan growth rate this year. “We plan to slow our growth rate to 25-30 percent this year. Our strategy includes adding new clients but not aggressively as last year. In light of the current economic environment, the bank is focusing on its core business (loans to micro and small enterprises) and has stopped issuing home loans,” Mr Llosa stated.

According to BNA, MiBanco was ranked as Peru’s most profitable bank in relation to its 38.9 percent return-on-equity (ROE) versus regions banking system’s ROE of 31.1 percent. Mr. Llosa expects the total number of clients to reach 550,000 by year end 2009. MiBanco’s clients were listed at 498,000 as of year end 2008. MiBanco oversees USD 830 million in loans with 91 percent to micro businesses and SMEs; consumer and home loans at 7 percent and 2 percent reseptively.

As of February 2009, the MiBanco’s loan book/past-due ratio was listed at 2.1 percent in comparison to 3.4 percent past-due loan ratio to microenterprises as reported by the banking system. Mr. Llosa expects the past-due loan ratio to deteriorate, but not to exceed 2.9 percent by the end of this year. MiBanco estimates that 2009 profits will range between USD 28 million to USD 30 million. Net profits for 2008 were at USD 27 million.

Peru‘s central bank recently revised downwards its forecast for 2009 GDP growth to 4 percent 2009 from 9.8 percent in 2008. According to Peru’s Finance Minister Luis Carranza, slumping commodity prices may be a cause for Peru’s GDP downward revision. Lower interest rates can help prompt businesses to invest and consumers to buy good and services, such as from SMEs. In addition, Microloans from microlending institutions such as from MiBanco can potentially spur spending for productive usage and strengthen demand.

MicroCapital reported in April 2009 the impact of the global financial crisis on Latin American and Caribbean microfinance institutions. According to MicroRate, the Peruvian microfinance sector should continue to grow at a healthy pace for 2009 (led by deposit-taking institutions such as municipal banks and regulated MFIs). MicroRate believes that Peru’s MFI sector consists of some of the most sophisticated and advanced MFIs in the world with increased competition in urban centers pushing MFIs into new geographic regions such as the underserved jungle regions. Furthermore, MicroRate has stated that the microfinance sector in Peru “has proven to be a valuable alternative for Peru’s entrepreneurial self-employed and is served by specialized banks, municipal banks rural banks, NGOs, other specialized financial institutions as well as the commercial banking sector.” It is important to note that as many MIVs reach their lending limits for Peru, less established non-deposit taking MFIs may encounter challenges in raising capital.

The Bank of International Settlements (BIS) has developed contingency measures for Peru to combat the global financial crisis that includes larger provisions. In addition, MicroRate has learned that Peruvian financial institutions will have to follow Basel II accounting norms by July 2009, “including those institutions that regulate capital requirements that attempt to cover credit, operative and market risk.” This should provide greater transparency for the Peruvian MFI sector.

MicroCapital also reported in February 2009 the state of the microfinance business environment in Latin America and the Caribbean region. According to the Economist Intelligence Unit (EIU), Peru ranked 1^st with a score of 76.6. The World Bank-IMF mission rated Peru’s main regulator (SBS) with a reputation of 96.6 out of 100 in 2005. The quality of Peru’s financial regulations and supervision was excellent, receiving an 87.5. This main criteria that lead to a high score was due to loan-loss provisioning based on loan status as well as thorough on-site inspection procedures coupled with strict internal controls for MFIs.

Organizations such as Entidades de Desarollo de la Pequena y Micro Empresa (EDPYMEs) (formerly credit NGOs) have converted into regulated MFI giving them the ability to gain access to wholesale finance. In June 2008, SBS adopted a new decree (Legislative Decree 1028) that aims to expand access to capital markets for regulated non-bank MFIs for EDPYMEs, rural homes, and municipalities. A couple of key challenges that lie ahead for Peru are the ease and effectiveness with which MFIs are established and operated. Further compounding this is the judicial quality with the courts still lacking impartiality.

By Zoran Stanisljevic

Business News America, April, 2009: CEO: MiBanco to ease growth this year as economy slows – Peru

MicroCapital Paper Wrap-Up, February 2009: PAPER WRAP-UP: 2008 Microscope on the Microfinance Business Environment in Latin America and the Caribbean (LAC), (Part one of a two part series)

Bloomberg, April 2009: Peru Central Bank Cuts Lending Rate on Slowing Growth

MicroCapital Paper Wrap-Up, April 2009: Cautious Resilience: The Impact of the Global Financial Crisis on Latin American & Caribbean Microfinance Institutions, by Sebastian von Stauffenberg