Microfinance niche for spanish banks in Latin America, an andean region approach (página 2)

On the other hand, since mid 90s commercial
banks are also directing their attention to microfinance. In some
banks, microfinance is their main line of business (MiBanco in
Peru, or Banco ProCredit in Ecuador), while in others; it is a
new product (Banco Pichincha in Ecuador, Banco de Crédito
in Peru or Banco Santander in Chile). In a way, banks "downscale"
to be able to reach the typical microfinance client.

There are three main microfinance business
models in the region. The first group includes "downscalers,"
that is, regulated banks that added microfinance as a new line of
business (through an internal unit, a subsidiary or any other
mechanism). The second group is that of "upgraders" or NGOs that
have transformed themselves into regulated specialized
microfinance banks. The third group consists of "greenfields,"
which are institutions that, since their foundation, have been
operating as regulated MFIs.2

According to Table 1, microfinance in Latin
America is having an exponential growth the last years. Around
2005, the number of microfinance borrowers was about six million,
with a credit portfolio up to USD 5.6 billion. According to some
estimation, continuing the growth tendency, nowadays, there are
more than 9 million microfinance customers in the region. A
second important fact deriving from Table 1 is that regulated
MFIs continue to have the biggest market share of microfinance.
Already in 2001, 52 percent of microfinance clients were served
by regulated MFIs. In 2005, this percentage went up to 65
percent. Regarding portfolio, these percentages climb to 76
percent for regulated MFIs in 2001 and 81 percent in 2
There is another model conformed by nonregulated MFIs,
which are NGOs, foundations and any other type of nonregulated
financial institutions.

2005. Data also reveal an average annual
growth rate of 35 percent for the number of borrowers and 46
percent for portfolio. Nevertheless it is only the beginning,
considering that most Latin American people still continue
unbanked.

Table 1

Microfinance Institutions in Latin
America, 2001 – 2005

Source: S. Navajas and L. Tejerina. How
large is the market? IADB, 2006.

1 It includes Greenfields
and Upgrades

2.2 Most and Less Advanced Countries in
Microfinance Services

In the Table 2, countries are ranked
according to number of customers in microfinance institutions, so
that Mexico is first, followed by more traditional microfinance
markets such as Peru, Colombia or Bolivia. However, if countries
are ranked for number of customers over potential microfinance
market, it does change the relative position of larger countries
such as Mexico or Colombia, for instance, Mexico only reach 1.2%
of its population and Colombia 1.3%, in the case of Brazil it is
almost cero. This reveals a huge potential market for
microfinance business especially in those larger
markets.

It is important to mention that the four
countries of the Andean Region concentrate 51% of the Latin
America microfinance Portfolio. Peru with the 27.8% of the total
Portfolio has the biggest credit portfolio of the region. However
this trend will change with the fastest growth rate of the major
microfinance markets like for example Mexico.

In terms of Average Loan there is an
important difference between Peru, Bolivia and Ecuador (Andean
countries) and less mature markets, like Mexico and Brazil. In
the first countries the average loan is higher than in the second
group. This phenomenon is basically explained for the major
competence in the referred Andean countries compared with the
other quite new microfinance markets3.

3 According to
Herfindahl-Hirschman Index, see Annex 1.

As we can see in the Annex 1, according to the
Herfindahl-Hirschman Index (HHI), the most competitive countries
in Latin America are in the Andean Region, specifically Ecuador,
Peru and Bolivia. It seems that strong competition in those
mature markets including Nicaragua, and emerging competition in
Colombia and the rest of Central America, not only will increase
the average loan, but also will continue to encourage MFIs to
diversify their product mix in search of new growth
opportunities.

Also, it is important to have taken into
consideration that microfinance is developing in large countries
in different ways than small ones. Except for Mexico, other big
countries like Brazil, Argentina and Venezuela are not following
the microfinance methods of upgraded MFIs (mainly, those of the
Andean region); few nonprofits there are interested in becoming
regulated institutions, and even Greenfield microfinance is
limited. In Brazil, for example, nonprofits are weak, but State
banks are strong, and a number of recent downscaling efforts were
based on consumer credit technologies rather than the proven
principles of microenterprise lending (Christen and Miller,
2006).

Table 2

Microfinance in Latin America Details
Per Country, 2005

Source: S. Navajas and L. Tejerina. How
large is the market? IADB, 2006.

According to Navajas (2006) there are
discrepancies in definitions and classifications used in
countries for the microfinance business. If the definition of
microfinance is understood and measured as the provision of all
types of financial services to low-income segments of the
population, discrepancies may be affecting the data, with
possible underestimations of big countries like, Brazil and
Mexico.

Today, microfinance in Latin America
presents specific characteristics depending on each country
culture and the local regulatory basis. For instance, in some
countries, such as Bolivia, Peru or Honduras, the regulatory
authorities created specialized nonbank firms for MFIs. These are
supervised qualified financial institutions that need to comply
with the regulations set forth by the corresponding financial
authority. The most significant difference with a bank is usually
lower capital requirements and a limited number of services being
provided.

2.3 Urban Microfinance, the Leading
Model in the Region

Specifically in the Andean region the microfinance
industry focuses its attention in the urban areas. This practice
happens because entering rural areas is yet difficulty and costly
to IMFs, due to a lack of proper physical infrastructure, and the
dispersion of the rural communities.

But in the urban areas the outreach is
still modest in terms of the number of people with basic access
to financial service and the type of financial services offered
to low-income populations, so there is still ample room for
expansion in both fronts.

The expansion of services has not been
equal among countries or even within a single country. For
instance, the microfinance industry has, for the most part,
reached an urban clientele in small countries such as Peru,
Bolivia or El Salvador, but it still lags behind in reaching
their poorer rural areas. Also in the case of the largest
countries (Brazil, Mexico or Argentina) both urban and rural
microfinance is just beginning and investors have to consider
that as those countries concentrate most of the Latin America
population, they also have most of the poor people in the
region.4

According to the United Nations (UN) to
2005, approximately 22.6% of the Latin America population lives
in rural areas, about 131 million people. It is certainly true
that in relative

4 According to the World
Bank to 2005 poverty in Mexico and Brazil reach 40% and 38%,
respectively, about 114 million. terms most poor population of
the Latin America region is concentrated in the rural areas; poor
rural people are about 54% of the total rural population,
compared with the 31% of poor people that live in urban areas.
However, in absolute terms, of the total poor people of the
region, about 66% live in urban areas. This is mainly explained
for a migration phenomenon inside each country from the rural to
the urban areas, which will continue, as the UN estimates that
for 2010 the rural population will decrease up to
20.9%.

2.4 More Competition: the Trend Toward
More Sophisticated Products

Two microfinance business models have been
prevalent in the region, both with a commercial focus. Those are
MFIs that become banks: "upgrading", and commercial banks doing
"downscaling" 5. It is
important to mention that those banks, not only are attending
micro entrepreneurs but also they are focus its attention to
unbanked people like new wage-earning, with special consumer
credits or passive products like account deposits, which is a
market

that traditional MFIs were not given
special attention due to their focus in
micro-business.

In this scenario, the referred banks are
offering its new customers a complete range of retail products
like: transfer services facilities, new loan options like
mortgages, and international credit cards, and also
microinsurance to cover default micro business which represent a
huge new market, due to the traditional high micro entrepreneur"s
default rates.

Banks in downscaling process could get faster and better
outcomes by using their competitive advantage and their financial
innovations for the microfinance sector. Innovative products for
the microfinance business, like: loans in local currency,
remittances, securitization programs, microinsurance, equity
stakes or special investment funds.

This can lead to a wider range of options
for further extending microfinance services. For instance,
international banks can achieve greater efficiency and cost
reductions for their microfinance ventures, by helping MFIs to
access to the financial capital markets and by offering technical
assistance to build capacity.

5 Examples of Banks doing
downscaling by themselves: ABN AMRO Real (Brasil), Banco de
Venezuela (Venezuela), Banco del Pichincha (Ecuador), Banorte
(México) and Banco de Crédito (Perú). Other
banks into downscaling process with the support of the
Interamerican Development Bank: Banco Uno (Nicaragua y El
Salvador, 2006), Interbank (Perú, 2006), Banco G&T
Continental (Guatemala, 2005), Bancasol (Guatemala,

2004), El Comercio Financiera (Paraguay,
2001) y Sogebank (Haití, 1998).

On the other hand, for the current
microfinance participants, the most obvious consequence of the
growth in microfinance investment is a sharp rise in competition.
More MFIs are being created, existing MFIs are using new capital
to support their expansion plans, and commercial banks are
arriving from to establish a direct presence, or creating fund
vehicles to do it for them (Lascelles, 2008).

Although demand for microfinance services
continues to rise strongly, expansion on this scale is hurting
the less professionally managed MFIs and could relax its credit
standards as lenders fiercely compete for borrowers. This is
causing alarm through much of the established MFIs, which sees
its markets and profitability threatened, for instance, in Peru,
Caja Municipal de Piura, a leading Greenfield MFI reduced its ROA
from 3.77% at December 2005 to 1.76% at April 2008, and Bancosol
in Bolivia reduced it since 2.73% to 1.5% in the same
period.

Nevertheless, for those well established
MFIs this tendency is helping them to enter in innovative process
looking for new revenue sources, like: new products or better
ways of delivering them, and also trying to improve cost control.
It is also stimulating capital markets operations of biggest MFIs
in the region, who see the prospect of selling out to rich
commercial investors, for instance Banco Compartamos in Mexico,
which raised capital successfully in the Mexican stock
market.6

To sum up, at the end, this new
diversification phenomena will be good for Latin American
microfinance participants in the case of MFIs: i) products
tailored to better fit client"s needs can reduce risk of misuse
of loans, ii) cross-selling financial products to known clients
will provide new opportunities for growth, and iii) product
diversification may allow lenders to establish monogamous
relationships with their clients to cover all of their financial
service needs. And since the point of view of microfinance actual
or future customers this tendency is positive because represent
more diversify and cheaper access to financial
services.

2.5 Actual and Potential Market in Latin
America

There is increasing evidence that
microfinance is a profitable activity in Latin America and it
will very likely continue to expand in the coming years. Still, a
huge potential market exists for microfinance in the region:
according to Navajas (2006) the potential market is close to
67

6 In April 2007,
Compartamos Mexico issue shares for USD 407 millions. But, the
market capitalization of

Compartamos Mexico at the end of June 2008
was about USD 2,000 millions.

Million households in the region, which is
the number of people that their income origin is their
microenterprise activities.

In table 3 are ranked Latin American
countries according the level of penetration of the microfinance
service, besides the mature Andean countries, Peru and Bolivia,
there are other Central America countries, with high level of
penetration, especially Nicaragua that cover about 58% of its
potential market.

On the other hand, the biggest countries of
the region (Brazil, Mexico, Colombia, Argentina and Venezuela)
that concentrate most of the region"s population, about 73%, have
the lower market penetration, most of them below the regional
average of 8.7%. It means that to 2005, about 91.3% of the
microenterprises of the region, approximately 61.7 million did
not have access to financial services.

Table 3

Potential Microfinance Market in Latin
America, 2005

Source: S. Navajas and L. Tejerina. How
large is the market? IADB, 2006.

3. Business
Microfinance Models: Banks, MFIs and NGOs

3.1 Evaluation of the Microfinance
Models

One of the critical decisions that bankers
looking to serve the microfinance market niche must make is
whether to do microfinance in house or through some sort of
external organization such as a service company or subsidiary.
But, whether the bank chooses to do microfinance in house or
through one type or another of external organization will often
have a substantial impact on the success of the bank in this new
venture (Westley, G. 2006). In this sense the bank should
understands the pros and cons of the different structures and how
they depend on country and bank circumstances.

An external organization has more relevant
advantages than an internal unit, as we can see in the following
table that summarize the advantages of both internal and external
units.

Table 4

The Choice of Structure

Source: Gutin, J. Jepsen, J. Miller, M.
Natilson, N. Singleton, T. and Young, R. (2005).

An important advantage of doing
microfinance through an external organization instead of an
internal unit is that the external organization may be able to
escape the rigidities, bureaucracy, and culture of the bank to a
much greater degree and thus use much more appropriate
microfinance procedures and products.

From an image and branding point of view,
external organizations are advantageous for banks that want to
create a separation between their traditional operations and its
microfinance activities. The bank may wish to create an external
organization, if the bank considers that tactics in which poor
people are charged high interest rates, pressured to repay loans,
or have their household goods or equipment seized could damage
its general reputation.

The external organization has other
possible advantages, for instance, when the bank takes on outside
shareholders, specialized in microfinance business like ACCION
International7 or Kreditanstalt für Wiederaufbau
(KfW)8, and is only a partial owner
of the MFI, those partners typically provide high quality
technical assistance to the organization in how to do
microfinance properly, increasing the microfinance program"s
chances of success.

On the other hand, among the advantages of
an internal unit over an external unit, it is important to
mention that usually, greater integration into the bank reduces
operating costs. Mainly, because there are economies of scale in
all of the methods a financial institution uses to fund itself:
borrowing from donors, banks, and other sources; mobilizing
deposits; issuing bonds; and issuing stock.

Another advantage of the internal unit is
the natural reduction in market risks stemming from balance sheet
netting. With less risk, risk-mitigation costs are normally
reduced.

To sum up, there is not a unique solution
to the question of best structure. It mainly depends on the
strategy of the bank to enter into microfinance business and of
course on the legal requirements of each country.

3.2 Drivers to the Downscaling Approach
into Microfinance

Table 5 shows the most important drivers,
both internal and external that a commercial bank can have take
into consideration for a process of downscaling into the
microfinance industry.

7 ACCION International is
a NGO that receives funding of both public and private sources,
for instance: USAID, IFC, Citigroup Foundation, JP Morgan Chase,
Open Society Institute. ACCION develop its operations mainly in
Latin America, where have supported the launch of some of the
most successful upgrade MFIs: Bancosol in Bolivia, Mibanco in
Peru, Banco Solidario in Ecuador and Banco Compartamos in
Mexico.

8 KfW is a German
development bank, very active in the area of microfinance,
nowadays support more than 87 microfinance projects. The bank
contribution to the microfinance business is not only with
financial support (credit lines, collaterals, etc), but also
through technical services, like for instance the initial
assistance for the creation of the Cajas Municipales de Ahorro y
Crédito in Peru.

Table 5

Drivers for Bank Downscale Into
Microfinance

Source: Young, R. and Drake D. (2005) and
Valenzuela, L (2001)

Experience has repeatedly shown, however,
that microfinance best succeeds in institutions that possess a
sound business reason for entering the market; and the most
important are: a continued support of the bank"s board and most
senior management; and a group of midlevel managers who are
persistent in establishing and advancing the microfinance
concept. These internal drivers must be matched by an environment
favorable for microfinance, with sufficient demand, freedom to
set prices, and reasonable regulations.

The most classical reason for international
banks is the good image that allocate money to microfinance
means, because public usually tend to relate microfinance as a
corporate social activity, considering its focus on serving the
poor.

The microfinance portfolio itself achieves
substantial diversification, not only because the performance of
the microfinance portfolio may have low correlations with
traditional bank business lines due to the very different nature
of the clients and activities, but also as a bank business line
that have performed well in times of recession.

MFIs display no statistically significant
relationship with global market movements. But, regarding
exposure to domestic Gross Domestic Product, it is demonstrated
that MFIs are not detached from their respective domestic
economies. In this sense, according to a recent study (Krauss, N.
and Ingo, W. 2008), MFIs may have useful diversification value
for international portfolio investors able to diversify away from
country risk exposures

According to Westley (2006), specifically
in Latin America the main reasons why banks are downscaling into
the microfinance business are:

• Increased competition in the banks"
traditional markets, such as serving large firms, small and
medium size enterprises, and consumers.

• The attractive profits on
microfinance business. For example, the Microbanking Bulletin
reported that of 52 Latin American MFIs reporting for 2003, the
median adjusted return on assets (ROA) was a 1.8 percent and the
median adjusted return on equity (ROE) was 9.5
percent.

• A large unserved market in most
Latin American countries, which holds out the prospect of rapid
growth.

• Ample proof that microfinance works,
and continues to work well even in bad economic times. For
example, Westley (2006) presents individual data on 11 leading
individual MFIs in Bolivia, Colombia, and Peru that show
remarkably low delinquency rates and high ROAs during the
particularly deep and difficult 1998-99 recession.

• Credit coefficients. The governments
of some countries, such as Brazil, Colombia, and Venezuela,
encourage or force all banks to dedicate a certain percentage of
their demand deposits, loan disbursements, or loan portfolio to
microloans.

4. Microfinance
Niche for Commercial Banks

4.1 Double Bottom-Line Microfinance
Business

Success microfinance programs indicate that
low-income markets can be served on a "sustainable" basis, that
is, with full cost recovery and a market return, without subsidy
(Gutin, J. Jepsen, J. Miller, M. Natilson, N. Singleton, T. and
Young, R. 2005). It means that the double bottom approach for
microfinance is the leading model to assure, not only the
sustainability of the microfinance as a new bank business line,
but also as a proved approach to reduce poverty.

As a result, nowadays some major
international banks are using microfinance for both; serve the
unbanked people for corporate responsibility motives, and as a
business case and long- term commercial activity. Also, the
participation of international banks in microfinance can
stimulate innovations for microfinance and contribute to
efficiency gains for microfinance operations, having into
consideration their scale and expertise. This could open the door
to increasing the outreach of microfinance services around the
world.

The difficulty, however, is in marrying
these newer commercial objectives with microfinance"s traditional
philanthropic mission. While many of the professionally managed
MFIs measure their success in terms of profitability and investor
returns, these indicators are not used for most of the industry,
especially non-regulated NGOs, whom sees its main purpose as
relieving poverty and serving the financially
excluded.

One important difference in both approaches
is the charge of higher interest rates for microfinance loans in
the case of the commercial approach. However, the growth of
healthy microfinance portfolios in a diversity of countries, for
instance in the Andean Region, show that micro entrepreneurs and
other low income clients can and will pay higher prices for loans
and other banking services, based on their higher cost
opportunity that they pay to moneylenders and other sources of
financing, as well as the fact that is higher the profit margins
that microenterprises generate compared with the cost of
microfinance loans.

The fact is that worldwide microfinance is
under huge pressure to become more commercial, thus regulated,
because without firm commercial foundations, it is questionable
whether microfinance would become the sustainable business that
it needs to be in order to survive and do well for the poor.
Commercial pressures may be painful but they are also rigorous on
governance, management, cost control, transparency, areas that
showed to be actual or potential areas of weakness for most
MFIs.

4.2 Replication of Best Practices in the
Downscaling Process

Banks entering microfinance will need to
make decisions in every area, from selecting strategic partners
to designing the appropriate operating model, internal
organizational structure and product offerings. At the same time,
they should notice that, some aspects of retail banking, such as
credit systems that separate the credit application, analysis,
approval, and supervision processes, are not effective for
microenterprise lending.

In addition to drawing on the resources of
credit bureaus, a bank, especially one with consumer lending
operations, may use technology such as credit scoring to help
control repayment risk. But nowadays, credit scoring in
microfinance is in its very early stages (implemented by only a
few sophisticated MFIs) and its use has been hampered by a lack
of consistent historical household data (Young, R. and Drake D.
2005).

Of the Latin America urban and individual
lending model, there are some special characteristics or
processes of microfinance that any bank should have to take into
consideration in any downscaling program, like for instance: i)
charge much higher interest rates to compensate for the smaller
sizes, shorter terms, and more frequent repayments of these
loans; ii) the microfinance procedures gives much greater
reliance on character and household cash flow analyses than on
collateral, acceptance of a lack of borrower financial statements
and other business records; iii) loan officers who spent most of
their time in the field looking for loan applicants on site and
calling borrowers with overdue
payments.9

Also, it is necessary to use available
technical assistance about how to do microfinance right. As is
mentioned in the Annex 2, there are some key rules, which have
been probed to be successful during many years in Latin America.
Following those rules banks would save expensive mistakes and
earns greater profits more quickly.

4.3 Risks and Impact of Future
Microfinance Ventures

Financial valid arguments for
commercialization of microfinance is that the risk of financial
failure tends to be low relative to the returns, and that the
risk-adjusted total returns on microfinance exhibit low
correlations to those of other available asset classes, thereby
presenting investors with an attractive opportunity for portfolio
diversification.

But to take a decision about a microfinance
venture, besides the financial risks, banks should understand
that the sector is undergoing great structural changes.
Convergence is occurring between microfinance and mainstream
banking as MFIs grow in size and sophistication, and commercial
banks enter the market. These trends have boosted the size and
quality of the microfinance sector, but also created new
pressures of competition and sharper expectations.

There are some failure experiences in
downscaling programs in Latin America. The two main causes of
failure are, first, a technical failure because those banks often
don"t really understand microfinance characteristics and
processes and how to make it into a profitable business line.
Second, a bank"s failure because a lack of commitment of those
banks to consider microfinance as a profitable business. In such
cases the microfinance program never achieves the scale or
profitability that would justify continued
involvement.

9 For a detailed list of
Elements of an Appropriate Microfinance Methodology see Annex
2.

Another risk facing microfinance worldwide
is the uneven quality of management at MFIs at a time of rapid
change. Closely linked to management there are concern about the
quality of corporate governance and staffing in MFIs, both of
which are seen to be weak and a drag on development (Lascelles,
D. 2008).

Specifically in Latin America, MFIs
practitioners are focused closely on external factors bearing on
their business: competition, regulatory and political pressures.
Also related to the growing commercial pressures to which they
feel exposed a new important concern is their major exposition to
interest rate risk (Lascelles, D. 2008).

The risk of diversification can lead to
increase loan balances per borrower as MFIs make multiple loans
to repeat customers. Furthermore, MFIs entering the consumer
market face lending without the strong guaranties that come with
microenterprise loans or by group lending methodologies. The
combination of the trends towards larger, often riskier
individual loans, especially for consumer use, and rising loan
balances may lead to higher delinquency, along with problems
associated with over-indebtedness.

Finally, it is important to mention the
major risk factor that microfinance deal with in Latin America is
the uncertain political environment of the region. The risk is
that the stability of microfinance policies will affect the
activity, for instance, there are some governments that impose
ceiling levels to interest rates or create bureaucracy subsided
institutions which compete with the MFIs without commercial
terms.

5. Strategies of
Spanish Banks Related to Microfinance in Latin
America

BBVA is one of the top financial groups in
Latin America, providing banking, pension and insurance services
to most countries in the region. The Group is the leader in
Mexico, Colombia, Peru, Argentina, Chile, Venezuela, Puerto Rico,
Paraguay, Uruguay and Panama. It has more than 20 million
customers in the region. In 2007, the region recorded its highest
ever net attributable profit, with a figure of USD 3,424 million
and growth over 2006 of 12.7%10. In
the region there is a high concentration on its operations in
Mexico which represent the 75% of the total profits of the
region.

On the other hand, Santander Group11 after
the acquisition of Banco Real in Brazil has become the largest
banking group in Latin America. In terms of profits, the bank
continue its strong growth trend in Latin America: revenues and
profits generated in the region doubled between 2003 and 2006, in
2007 attributable profit increased 27.3% to USD 3,648 million.
Growth was quite concentrated within the region, because the
three large markets: Brazil, Mexico and Chile accounted for 79%
of the total profit of the region. The bank is also present in
Argentina, Venezuela, Puerto Rico, Colombia, Uruguay and
Peru.

It is important to mention that both banks
have similar goals to their expansion plans into the region. In
the case of Santander Group, focus in Brazil, aspire to double
its business and customer revenues in three years in the region,
as well as reach more than 30 million individual customers in
2009 (26 million in 2007). BBVA, on the other hand, have a
Banking Penetration Plan in Latin America 2008-2010, that have
the goal of double its credit portfolio, with 4 million new
customers in Mexico and 3 million in South America.

But, to first capture the huge potential
market of unbanked people in Latin America, about 61 million
microenterprises that do not have access to formal financial
services; Spanish banks with considerable presence in the region
have different strategies. In the case of BBVA, there is a new
strategy to enter in this business with an important investment
through a microfinance foundation, on the contrary, Santander,
does not have a noticeable strategy to support the microfinance
activities of their Latin America subsidiaries. In this scenario
an analysis of both bank approaches in the region is showed to
identify their drivers and characteristics.

5.1 BBVA Group

The BBVA"s general plan to increase bank
accessibility to the poor people is focused in both, banking and
social programs (BBVA"s Annual Report 2007). Into the banking
programs, which the bank considers as a strong growth engine,
there is a strategy to serve immigrants in Spain (Credit
Express), but also to attend unbanked people in Latin America. In
relation to the

10 The total Net
Attributable Profit in 2007 was about USD 8,380 million, 29.4% up
on 2006.

11 Santander is the first
bank in the Euro zone and the fifth Worldwide by profits. In 2007
got Net Attributable

Profit for USD 11,100 million, a year
increase of 23%. social programs, there are social plans programs
in Spain as well as in Latin America, but the BBVA Microfinance
Foundation is the differential factor into this general
strategy.

BBVA Microfinance
Foundation12

The large flow of money going into
microfinance institutions is a potential problem, for most Latin
America MFIs, because most small MFIs show weak and limited
managerial capacities and few worthwhile projects to fund. An
alternative option to this approach is equity financing of micro
credit financial organizations, linked to technical assistance,
which is exactly the one adopted by BBVA"s Microfinance
Foundation.

BBVA realized that entering in microfinance
they require a radically different approach compared to
conventional banking. With a purpose specific institution the
bank expect acquire significant holdings in specialist
organizations, developing a range of services and unique policies
for risk approval and management. BBVA consider that as, the
microfinance industry is extremely fragmented, therefore to make
an effective impact in poorest areas, usually under-banked levels
of society, it is necessary a specialized microfinance banking
network that would provide the economies of scope and scale,
needed to make it competitive.

In these sense, in 2007, BBVA set up the
BBVA Microfinance Foundation, as a strategic initiative,
considering that according its studies it will fulfills bank"s
requirements of profitability, sustainability and also good
image. This non-profit institution will promote access to
financial services among people with low incomes, focusing
especially on those socially and economic disadvantaged areas.
The Foundation is independent of the BBVA Group in terms of both
governance and management, and its mid-term goal is to
consolidate its position as one of the largest microfinance
networks both in Latin America and worldwide.

The foundation"s strategy involves driving
microfinance through partnerships and holdings in microfinance
institutions with a proven local track-record and solvency in the
management of such resources. Also, as a complement, the
foundation is to undertake programs in professional coaching,
technological innovation, the provision of information and the
know- how and best practices in corporate governance that will
help to create an environment that is more propitious to the
development of microfinance.

12 Information was
collected from BBVA"s web site and BBVA"s Press
Releases.

The foundation currently has an allocation
of €200 million, of which €20.1 million were invested
in 2007. The foundation"s operations are initially centered on
Latin America, with priority being given to those countries in
which the BBVA Group is present. Accordingly, in

2007 the foundation purchased majority
holdings in two Peruvian entities (Caja Rural de Ahorro y
Crédito Nor Perú and Caja Rural de Ahorro y
Crédito del Sur), which are to be merged in 2008. In
Colombia the foundation had created a new regulated entity,
called Bancamía, in cooperation with the world women"s
corporations: Corporación Mundial de la
Mujer-Bogotá and Corporación Mundial de la
Mujer-Medellín.

The bank"s aim is that the future
microfinance network will to create synergies, because there will
be an interchange of knowledge and experience, for instance, the
BBVA Microfinance Foundation will add: risk management, growth
capabilities, access to the capital markets, information
technology development, technical and management abilities and be
part of a big network with international credibility. MFIs
partners would add: knowledge of the local markets and knowledge
of their specific industry.

Table 6

BBVA Microfinance Foundation First
Acquisitions

Source: S. Navajas and L. Tejerina. How
large is the market? IADB, 2006. And SBS Peru

Table 6 shows that BBVA first country
focuses are in the Andean region where the bank has presence. It
seem that those five acquisitions have similar characteristics,
but as it is mentioned previously, each country have its own
peculiarities, for instance, Peruvian acquisition are regulated
institutions and Caja Nor Perú and Cajasur finance most of
their operations with savings accounts. On the other hand, the
MFIs associated in Colombia are specialized non-regulated NGOs,
that having successful results, have other operating differences
with its Peruvian peers, for example, they do not receive savings
and have ceilings for their interest rates. In this sense, the
creation of a regulated MFI in Colombia, called Bancamía,
tends to imitate in Colombia the Peruvian experience.

Corporate Social Responsibility Report
BBVA 2007

The report highlights that with its first
operations in Peru and Colombia, the BBVA Microfinance Foundation
is already reaching 200,000 beneficiaries.

Another important emphasize of the report
is the creation in 2007 of the Fondo Codespa BBVA microfinance
fund (hedge fund). This fund makes BBVA one of the world"s first
banks to roll out a microfinance hedge fund in Latin America. As
well as being the nexus of union between socially responsible
investors and the microfinance industry. In order to support
decision-making in the selection of those microfinance
institutions to be backed, the bank has contracted the services
of BlueOrchard, one of the world"s foremost investment managers
in the microfinance field.

The creation of this new fund seems not
coherent with the current double-bottom line strategy of the BBVA
Microfinance Foundation, considering that most hedge funds
attract institutional investors that with advanced investment
strategies such as leverage and derivative positions look for
generating high returns, without having into consideration
corporate social goals.

5.2 Santander Group

The Corporate Social Responsibility Report
Santander 2007, indicate that Santander"s microfinance
initiatives are focus in its Latin America operations, in this
sense, the Bank participates in various initiatives in order to
contribute with knowledge, capital and work for the development
of the countries in which they operate. According to the referred
Report, Santander has the following microcredit
initiatives:

Argentina

• The local microfinance program is in
its first stages, this program has two objectives: provide
financial assistance to microfinance institutions organized as
NGOs and improve the knowledge of Santander Rio"s managers
handling this business.

Chile

• Through Santander Banefe, the
consumer finance firm of the local Santander subsidiary, during
2007, 56,540 micro businesses received credits, 12,743 of them
for small farmers and new long-term lending products were created
and added to the portfolio offered. Also, in 2007, the first
branch specialized in micro-businesses was opened in
Santiago.

In Chile there is the biggest Santander
microfinance program, it is a downscaling microfinance program
with the creation of a microfinance division in house the bank.
The model is urban and individual lending and the methodology is
similar than in other Latin America countries.

Brazil

• Santander has a microcredit program
for small companies and individual entrepreneurs. In 2007, 30,000
customers were granted these credits. The program has developed
since 2003 and today forms part of the Bank"s line of
products.

It is important to mention that in the case
of Brazil, the next integration of Banco Real to the Santander
Group, the Real Microcredito, originally established for ABN
Amro, will represent a new downscaling microfinance program to
the group. This program was the first case of an international
commercial bank involved in microfinance in Brazil. The bank
partners with ACCION International to get expertise and technical
assistance for its operations, but nowadays it has a quite low
outreach with a currently a portfolio of 8,250
clients.

Venezuela

• The Bank is the leader in the
microcredit segment with a market share of 11.75%.

Santander Venezuela"s micro credits account
for 5.22% of the Bank"s gross lending portfolio, almost double
the 3% required under Venezuela"s banking regulations. The Bank
also sponsors training workshops for micro business
people.

• At the initiative of the Banco de
Venezuela – Santander Group Foundation, Bancrecer, a
development bank, has been granting small personal loans and
advising people without accounts for the last two years. It has
established ambitious goal, like, to grant in five years, 300,000
micro credits, generating 900,000 new direct and indirect jobs,
with more than three million Venezuelan beneficiaries.

The case of Bancrecer in Venezuela is
another downscaling process of a Santander subsidiary. It is
important to notice that this program follows the methodology
prevalent in the Andean region, that is, urban and individual
lending, for instance, according to information of the bank, to
reach its target, the bank"s credit officers goes to the street
looking for its customers located in popular
neighborhoods.

To sum up, Santander already has three
downscaling microfinance programs in its Latin America
subsidiaries. But despite that all these programs have the
characteristics of the leading microfinance models in the region,
which are to be urban and individual focus; they do not seem as
an integral or coordinated program.

5.
Conclusions

Nowadays is clear that microfinance
outreach does not have to be at the expense of profitability.
Alleviate poverty and profitability are not necessarily mutually
exclusive; there are many large MFIs which manage to produce
acceptable financial returns while also meeting their social
responsibility goals.

The past years Latin American microfinance
is growing increasingly diverse, not only in terms of the types
of institutions but also in the different products they offer.
Traditional and leader local banks as well as some international
banks are gradually becoming more involved by offering more
products and services. And as a response to the rise in
competition, some well established MFIs are diversifying with
consumer, mortgage, home improvement and other varied financial
instruments. But, according recent estimations in major populated
countries of the region there is a huge gap between the current
supply of financial services to microenterprises or low-income
population345678s and the demand for it.

And to reach this potential market there is
not a unique model of Latin American microfinance; but the
leading approach is the microfinance cluster in the Andean
region, which is an urban, individual methodology, that after
more than 25 year has stand as a sustainable commercially focus
microfinance model. In this sense, when a microfinance venture is
directed to other countries of the region, either through an
internal or external unit, this model should be consider as a
basis model to have better chances to succeed. Also in
downscaling programs banks should be taken into consideration
circumstances of each country, for instance: the regulatory
framework, the degree of development of local financial markets
and macroeconomic conditions.

Banks that are successful at microfinance,
in terms of growth and profitability, have built their programs
on a sound business case and operate in environments that are
conducive to commercial microfinance. In this sense of the
analysis of the microfinance approaches of the Spanish banks in
Latin America, it seems that neither BBVA nor Santander have a
conclusive strategy. In the case of BBVA, realizing just in 2007
of the potential microfinance market of the region, the bank
launched a long term program as a strategic approach, due to the
size of the money allocated, it appeared as an impressive
attempt. But with the creation of a hedge fund for microfinance,
an opposite approach, the microfinance strategy of BBVA looks
incoherent. Besides the bank replication attempt of the Peruvian
model, should be carefully implemented and monitored depending on
each country peculiarities in order not to have failure
results.

On the other hand, Santander with bigger
presence in the major unbanked country of the region, Brazil,
does not have an integral and coordinated strategy for the
microfinance activities of their Latin America subsidiaries.
However it is important to notice that Santander have inner
strengths in microfinance methodologies, considering its
successful downscaling programs in Chile and Venezuela,
consequently, the bank could use this expertise to support new
microfinance ventures in other bigger markets, where it have
presence. But, first at all, the bank should consider
microfinance not only as a corporate social responsibility issue,
but also as a commercial value added business.

References

Berger, M. Goldmark, L. Miller-Sanabria, T.
editors (2006). An Inside View of Latin

American Microfinance. Inter-American
Development Bank.

Christen, R., R. Rosenberg and V. Jayadeva.
(2004). Financial Institutions with a Double "Bottom Line":
Implications for the Future of Microfinance. Occasional Paper No.
8. Consultative Group to Assist the Poor. Washington,
D.C.

Corporate Social Responsibility Report BBVA
2007. BBVA"s web site, www.bbva.com. Corporate Social
Responsibility Report Santander 2007. Santander Group"s web
site,

www.santander.com.

Economist Intelligence Unit (EIU), IDB/MIF
and the CAF. Microscope on the Microfinance

Business Environment in Latin America 2007
– Country Profile.

Gutin, J. Jepsen, J. Miller, M. Natilson,
N. Singleton, T. and Young, R. (2005). "Banking the Underserved:
New Opportunities for Commercial Banks, Exploring the Business
Case". Bethesda, Maryland: Development Alternatives, Inc.,
commissioned by the Department for International Development
(DFID).

Khawari, A. (2004). Microfinance: Does it
hold its promises? A survey of recent literature. HWWA Discussion
Paper.

Krauss, N. and Ingo, W. (2008). Can
Microfinance Reduce Portfolio Volatility?

Lascelles, D. Microfinance Banana Skins
2008: Risk in a booming industry. Centre for the

Study of Financial Innovation, New
York.

Maarten Brocades Zaalberg. (2006). A
Billion to Gain? A study on global financial institutions and
microfinance. ING Microfinance Support.

Navajas, S. and Tejerina, L. (2006).
Microfinance in Latin America and the Caribbean: How Large Is the
Market? Sustainable Development Department Best Practices Papers,
MSM-135. Inter-American Development Bank. Washington,
D.C.

Rutherford, S. (1999). The Poor and Their
Money. Institute for Development Policy and

Management University of
Manchester.

Valenzuela, L. (2001). Getting the Recipe
Right: The Experiences and Challenges of

Commercial Bank Downscalers. U.S. Agency
for International Development.

Westley, G. (2006). Strategies and
Structures for Commercial Banks in Microfinance. Sustainable
Development Department Best Practices Papers, MSM-123.
Inter-American Development Bank. Washington, D.C.

Young, R. and Drake D. (2005). Banking at
the base of the pyramid: a microfinance primer for commercial
banks. Development Alternatives and USAID.

Annex 1

Microfinance Business Competition in
Latin America 2007 – Country Profile13

*The Herfindahl-Hirschman Index (HHI) is a
measure of the size of firms in relationship to the industry and
an indicator of the amount of competition among them, it can
range from 0 to 10,000, decreases in the HHI index generally
indicate a loss of pricing power and an increase in
competition,

whereas increases imply the
opposite.

13 Adapted from Economist
Intelligence Unit (EIU), IDB/MIF and CAF

Annex 2

Key Elements of an Appropriate
Microfinance Methodology14

1. Small, short-term loans that may
increase in size and term if successfully repaid.

1. High interest rates (much higher than
banks charge for their larger loans) to compensate for the high
operating cost margins associated with making small
loans.

2. Greater reliance on cash flow and
character analyses than on collateral, in which:

• The unit subjected to the cash flow
analysis is the entire household, not just the
business.

• The character analysis is based on
visits to the client"s home and work place and on talks with
business associates, neighbors, friends, and
relatives.

• Collateral generally consists of
unregistered household goods and business equipment and/or group
guarantees.

3. Some use of non-traditional repayment
frequencies to facilitate greater monitoring of borrowers (weekly
or biweekly instead of monthly), or even of installment payments
that vary in size and/or frequency (for clients with strong
seasonal variations in their income, as often occurs in the
agriculture and tourism sectors).

4. Decentralized loan approval processes,
rather than several departments signing off on loan
approvals.

5. Rapid loan approvals and disbursements,
with little or no formal documentation required of clients (such
as financial statements and collateral appraisals).

6. Loan officers who spend 80-90 percent of
their time in the field (developing and screening new clients and
checking on old ones, especially those who are
delinquent).

7. Loan officers who see their loans
through from origination to collection and have an important part
of their remuneration (perhaps 30-70 percent) determined by their
portfolio delinquency rate and loan volume.

8. A strong and effective loan collection
program that includes immediate and repeated follow-ups on loan
delinquency and a management information system that supports
this with daily reports to loan officers showing which of their
clients are delinquent.

9. Operating costs are often held down by
having loan officers use inexpensive modes of transportation and
by operating out of relatively modest branch offices.

Autor:

César Pajares Paz

June 2008

Masters in Finance &
Banking,

Centro Internacional de Formación
Financiera

Universidad de Alcalá de Henares
(Madrid), Spain

Acknowledgements:

CIFF & Universidad de
Alcalá

My mother – Deriabar Paz
Bartolo

My Tutor Supervisor – Sr. Tanguy
Jacopin

Class of 2007/2008– Master in Finance
& Banking, CIFF