by the MicroCapital Team -

Inter-American Development Bank invests 3 mm in ParaLife

The Inter-American Development Bank’s (IDB) Multilateral Investment Fund (MIF) will invest $3 million in ParaLife, a new micro-insurance institution established to provide life insurance to people with disabilities, low-income families and micro-entrepreneurs in Latin America. ParaLife founded January 31 2007, by Rolf H̹ppi, a former CEO and chairman of Zurich Financial Services will include a reinsurance vehicle and partnerships with local insurance distribution organizations and local insurance companies in each of its markets. Paralife is headquartered in Zurich, Switzerland and its invested capital benefits operations in a number of countries in Latin America, primarily Mexico. Paralife does not report to the MIX Market, the microfinance information clearinghouse and no other information is publicly available about its performance.

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by the MicroCapital Team -

Inter-American Development Bank Grants USD 1.4 mm and 1.1 mm to Paraguay through the Ministry of Finance and to Peru through ASEP and ASOCAJAS

The Inter-American Development Bank’s (IDB) Multilateral Investment Fund (MIF) plans to grant USD 1,400,000 in technical assistance in Paraguay for a program to strengthen the cooperative sector by improving compliance of the regulatory system. Under the Ministry of Finance, the project hopes to transfer knowledge to and train the cooperative sector in general by providing information on best practices to comply with new oversight regulations. Customers of these cooperatives number about 350,000.

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by the MicroCapital Team -

The Inter-American Development Bank and Norfund Sell Shares in LA-CIF in Microfinance Investment Deal, Giving Gray Ghost 41% of Shares

Gray Ghost has acquired 41% of shares in the Latin America Challenge Investment Fund, SA (LA-CIF) through purchasing all of the shares previously held by The Inter-American Development Bank (IDB) and the Norwegian Investment Fund for Developing Countries (Norfund). The sale makes LA-CIF one of first microfinance funds established by development investors to be sold on to a private investor. The sale price of the shares was not disclosed.

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by the MicroCapital Team -

Latin America and the Caribbean to Receive $55 Billion in Remittances in 2006 – Ripe for MicroFinance Investment

According to the Inter-American Development Bank (IDB), 2005 remittances to Latin America and the Caribbean will reach $55 billion—$10 billion more than remittances in 2004. As Mexico is projected to receive $20 billion in remittances this year, Central America and the Dominican Republic about $12 billion, and Bolivia, Colombia, Ecuador, and Peru (collectively) about $11 billion, it is clear that remittances have become a major source of income for millions of families.

While typical remittances, usually sent by workers in the U.S., Europe, and Japan, total no more than $300, increasingly larger amounts are being sent between Latin American countries—creating a greater and more immediate need for more cost-effective money transfers to unbanked customers.

Since last year the cost of sending a $250 remittance to Latin America or the Caribbean has decreased from $31.25 to $17.50 or about 12.5% of the total remittance amount to about 7% of the remittance amount; however, with increasing competition, costs will continue to decrease as demonstrated in the below exhibit provided by Pablo Halkyard of the Private Sector development blog.

Additional Resources

1) Main article discussed in entry, USINFO: “2005 Remittances to Latin America, Caribbean to Reach $55 Billion.”
2) “The Future of Money Transfers.”
3) “Remittances: falling cost, growing volume.”

by the MicroCapital Team -

MicroCapital Paper Review: “The Second Story: Wholesale Microfinance in Latin America”

To access this article visit: “The Second Story: Wholesale Microfinance in Latin America”

Authors: Marguerite Berger, Alison Beck Yonas, Maria Lucia Lloreda

Published by: Inter-American Development Bank, March 2003

Quantitative Information: This article addresses the use of “second-tier” or wholesale channels within the microfinance sector to distribute additional resources/funding to financial institutions already providing loans to microenterprises. In Latin America, the use of “second-tier” or wholesale channels represents an opportunity to broaden the reach of a developing microfinance market. “Microenterprises with fewer than 10 employees are one of the main sources of employment in Latin America and the Caribbean and account for more than 90 percent of all businesses in the region.” As further demonstration of the market size and opportunity, statistics are provided on microenterprises across Latin American countries, including number of single person firms, number of microenterprises, and projections on the percentage of microenterprises with microfinance credit. Sizing estimates are given for the number microentrepreneurs as a percentage of the total population. Supplemental case studies on wholesale channels have been provided for Columbia, El Salvador, Paraguay, and Peru.

Qualitative Information: This article reviews the Inter-American Development Bank’s (IDB) Microfinance Global Credit Program as an example of a “second-tier” or wholesale initiative within Latin America to both expand microenterprises’ access to capital and support microfinance institutions’ programs while fostering regulatory reform. The authors attest that wholesale programs can effectively channel resources to MFIs, though they do cite Bolivia as an example of a country that has a functioning microfinance industry without the use of many “second-tier” programs. Although the authors argue the IDB’s Global Credit Program achieved the goal of reaching more microenterprises, they concur there are still weaknesses with the “second-tier” model åö namely, in some countries the IDB Program still did not reach smaller borrowers nor did it attract the banking sector to the microfinance industry. Ultimately, they assert market conditions and regulation will determine the success of this “second-tier” model. While this article illustrates the strengths and weaknesses of one wholesale initiative across several countries, the authors fail to compare and contrast other “second-tier” models to reinforce their arguments.

by the MicroCapital Team -

New Open-Source Credit Bureau Application Introduced in Morocco

The credit bureau pilot project underway in Morocco is part of a broader open source project, MIFOS, to create a full framework for the industry. The Grameen Technology Center (GTC), a US non-profit in Seattle, has partnered with PlaNet Finance Morocco, a French NGO, to develop and test the program.The project consists of a central database which is sent data from each of the participating microlenders. The client software at the microlender extracts data from multiple data sources (Oracle, Access, etc) and uses a parametrizable SQL statement to pull from the microlenders’ system. In lay terms, the MFI has a tool at their location that allows them to send a standardized set of information to a centralized location. Then, each participant is allowed to make queries of the centralized server to see what customer records exist at other microlenders. (Thanks to James Daily at the GTC for information).Despite the growing preponderance of microfinance institutions worldwide, ways to track credit histories have been inadequate. Even in Latin America, where anywhere from 20-50% of the economically active population is employed in the microenterprise sector, credit bureaus have only recently begun to incorporate information on microentrepreneurs (p. 8). As competition in microfinance lending intensifies, borrower information becomes all the more important (p. 2).

Additional Resources1) Main article discussed in entry: "Model Credit Bureau ‘Open-Source’ Solution Being Tested in Morocco." 2) Grameen Technology Center: "Credit Bureau Pilot Project" 3) Microfinance Matters: "Credit Bureaus in Latin America: Expanding Financial and Other Services to the Base of the Pyramid." 4) Microfinance Open Source (MIFOS) Project5) Inter-American Development Bank (IDB): “Credit Bureaus: Leverage Information for the Benefit of Microenterprises.”

by the MicroCapital Team -

Lula Sheds Light on Government’s Approach to Expanding Microcredit Services

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."

by the MicroCapital Team -

What Works in Microfinance: Dominican Republic Micro-lender Shows That Local Managers Are the Difference

“ADOPEM,” the Dominican Republic affiliate of Women’s World Banking, is one of the most successful micro-lenders in the country. It has an $8 million USD loan portfolio and about 300 employees, and serves nearly half of all Dominican microcredit borrowers. ADOPEM has posted double-digit ROE for years.

How does ADOPEM achieve such high levels of performance?

1) Strong executive management: CEO Mercedes Canalda de Beras-Gocio learned the business from her mother who founded what was then a little non-profit in 1982.
2) Weak competition: the only other significant microfinance player in the DR is BancoADEMI which works up-market from ADOPEM, issuing larger loans. Otherwise, the DR is estimated to have approximately 30 players, none of which have significant capitalization and professional management.
3) Clear career path: middle managers often begun their careers as ADOPEM clients. This bears repeating: impoverished women that started with a micro-loan now manage million dollar loan portfolios with thousands of customers and dozens of employees.
4) Loan officer corps: ADOPEM solidly beats the industry benchmark with a loan-officer-to-client-ratio of 1 to 400. Some loan officers manage more than 800 accounts. This success is due to rigorous loan officer training, a field-operations focus, and proper incentives based on both delinquency and yield. Loan officers can earn up to an additional 50% of their monthly salaries with performance incentives. All this combined with a clear career path into management, and this is a very motivated bunch.
5) Strong Partners: again and again, Women’s World Banking distinguishes itself as a top ‘network’ providing management consultancy, knowledge and cross-training of successful micro-lenders worldwide.

Additional Resources
1) Consultative Group to Assist the Poor (CGAP): "Dominican Republic."
2) Inter-American Development Bank (IDB): "Dominican Women Lead Lending." pg. 11
3) Women’s World Banking (WWB): "ADOPEM."

by the MicroCapital Team -

Growing Interest in Tracking Remittances Opens a Door for Microfinance

At the Inter-American Development Bank’s (IDB’s) forum last week on remittances, a million dollar tracking agreement was signed, addressing a lack of uniformity in collecting information on remittances to Latin America and the Caribbean.

Migrants to more industrialized countries, or even from a rural to an urban area, often send home a portion of their income, commonly referred to as remittances. The United Nations Capital Development Fund (UNCDF) estimates that in 2003, more than $88 billion was sent to developing countries from workers based elsewhere. Remittances follow foreign direct investment (FDI) as the world’s second largest source of capital flows. However, in developing countries, remittances play a much larger role relative to FDI, representing 2.9% of the total GDP ($26 billion) and 380% of FDI. Figures for remittances are generally conservative, as the true value is most likely much higher because a significant portion is transferred through informal methods (not through wire services or banks). In comparison to other forms of capital flow, such as FDI, remittances offer a steady source of funds that is relatively immune to political or economic fluctuations.

In recent years, “remittances sent by migrant workers have become a major source of hard currency for many countries in Latin America and [the] Caribbean.” According to the Multilateral Investment Fund (MIF), autonomously administered by the IDB, this region last year received around $45.8 billion from its expatriates. Approximately $1 trillion is generated by foreign-born adults in the United States annually, of which one-tenth is sent abroad in the form of remittances. In the past five years, awareness of such huge flows of capital has resulted in widespread competition to facilitate the transactions. Initially, immigrants were paying exorbitant fees to send money home, but with increased attention, competition has made the transfer of remittances home much more appealing, and easier.

The microfinance industry stands to benefit greatly from a more intimate involvement with money transfers related to remittances. Research shows that recipients of these funds are often the same people as those targeted by microfinance institutions. This offers microfinance institutions (MFIs) an important opportunity to facilitate money transfers for a fee, as well as to cross-sell other financial products. By commercially linking with money transfer institutions, MFIs have the opportunity to expand their operations, by offering a (formal) savings mechanism for micro-borrowers, and also providing a guarantor of credit to the same people.

Additional Resources

1) Inter-American Development Bank (IDB): "Remittances."
2) Inter-American Development Bank (IDB) Remittance Forum: "The Impact of Remittances on Microfinance"
3) Inter-American Development Bank (IDB) Press Release: "Competition, Coverage and Technology Seen As Key Factors In Cutting Cost of Remittances to Latin America and the Caribbean"
4) Development Gateway: "Leveraging Remittances for Microfinance"