Microfinance niche for spanish banks in Latin America, an andean region approach

Introduction

1.1 Microfinance Overview

1.1.3 Origins of
Microfinance

The history of microfinance started after
the Second World War, specifically in the 1970s, with the active
participation of international NGOs that were concerned about
financial mechanisms to alleviate poverty in development
countries.

Microfinance started as an experimental
venture in rural areas, like the Grameen Bank of Bangladesh.
Another example of rural microfinance is the "village banks",
incorporated for the first time by the Foundation for
International Community Assistance (FINCA) in Costa Rica in 1985
(Khawari, A. 2004).

On the other hand in the mid 80s, in South
America, as part of initiative entities set up by NGOs and local
leaders, appeared as urban microfinance models BancoSol in
Bolivia and the Cajas Municipales in Peru. Nowadays the urban
microfinance model in those Andean countries stands as a success,
and having achieved financial sustainability, has been
successfully replicated in many other countries. In this report,
the urban and individual microfinance approach will be
considered.1

1.1.2 Definition of
Microfinance

In Latin America, microfinance is
traditionally understood as financial services primarily for
microenterprises: their owner/operators and their workers
(Berger, M. 2006). It is a narrow sense though, because, a modern
definition of microfinance considers it in a general perspective,
as the activity to offer financial services for unbanked poor
people. In this sense financial services include loans for
business and personal use, savings and other deposit products,
remittances and transfers, payment services, insurance, and
potentially any financial product or service a bank can offer to
this market segment. The poor include microenterprises, small
farmers, low-income salaried employees, day laborers, pensioners,
and poor households. The products and services can be targeted to
meet the financial needs of the households as well as their
income generating activities (Young, R. and Deborah D.,
2005).

1 Traditionally, the
provision of microcredit started with group lending models
relying on peer pressure/support to facilitate repayment. But
nowadays, most MFIs in the region have been moving away from
group lending towards individual loans as the market becomes more
commercialized and geared towards individual needs.

For a bank point of view, microfinance can
be best described as a hybrid of small-business and consumer
banking with a strong dose of understanding the client"s social
and cultural characteristics.

1.2 Characteristics of the Microfinance
Service

In urban microfinance certain client
preferences and needs repeatedly happen. For example, clients
tend to value service, speed, and agility over price. In terms of
loans, this means reducing and simplifying the paperwork, formal
collateral, and time involved to apply for and receive a loan.
For deposits, this means unconstrained access to savings and low
minimum balance requirements are usually more important than
returns (Rutherford, S. 1999).

While the client"s primary sources of
repayment are enterprises, salaries, pensions, and remittances,
current cash flows are the best determinant of future repayment
capacity. Further, family and business finances tend to be mixed.
This requires specialized loan appraisal techniques and the
opportunity to provide personal as well as business-oriented
financial services.

The informal guaranties used for the MFIs
accomplish not only the basic function of payment motivation, but
also, they help to increase customer loyalty for the MFIs, this
is because most clients does not have many possessions to
guarantee its loans and they tend to work with the MFIs that have
its title deeds as "collateral", but not precisely as a formal
mortgage.

2. Microfinance
in Latin America an Andean Region Approach

2.1 Actual Context of the
Sector

In first term, it is important to notice
that the emphasis in Latin America microfinance has been on
providing services to enterprises with insufficient access to
financial services, as a consequence, microfinance in the region
is more narrowly concentrated on enterprise credit, as opposed to
other parts of the world where it tends to be broader, including
savings, insurance, and other financial services, along with
microcredit not only for microenterprises but also for consumers,
whether in the informal sector or not (Christen and Miller,
2006).

In Latin America the microfinance industry
has been developed mainly trough regulated microfinance
institutions and with specialized NGOs. This scenario is
reflected in the coexistence of numerous, but most small
institutions.

The scenario described has been changing,
because in recent years some NGOs got into special regulatory
laws which allowed them to launch passive products, like saving
accounts. This new funding, along with the entrance in their
capital structure of small local partners, investment funds and
international specialized institutions have contributed to the
expansion of their credit activities. Also the reduction of
subsidized funds through the microfinance business has been
replaced with term deposits and wholesale sources like issue debt
to the capital markets.