Crediamigo in Brazil

Microcredit Diaries in Latin America: Crediamigo in Brazil

I - Microcredit Diaries in Brazil & Crediamigo

Regulatory Framework The case of CrediAmigo, Banco do Nordeste … Institutional aspects … Impacts: quantitative and qualitative Portosol and CEAPE – RS … Impacts of International cooperation … Microcredit Scenario

2 PART I - Microcredit Diaries in Brazil & Crediamigo

1. I ntroduction

Microcredit: Conceptual Aspects

Motivation Around the world, millions of poor people must make their living in order to survive often through self-employment in the informal sector or through family-owned small businesses. Although frowned upon by some economists as a setback to development, due to lack of regulation, more and more policy-makers are becoming aware that the key to economic and political development may, in fact, lie in the informal sector. The informal sector of the developing world grows at a quick pace, and seems likely to become permanent. It consist of a significant source of sustainability for most individuals in the developing world, but it presents many limitations, such as the exclusion from financial services, a key foundation for investment and further economic growth. Without access to financial capital, the poor face large barriers to economic activities, which more importantly, prevent them from moving up the income ladder and pulling themselves out of poverty. The positive news is that as the informal sector grows, so does the market for microcredit. By recognizing that lack of access to financial services is a serious limitation to the poor, microcredit capitalizes on the poor’s entrepreneurial spirit, aiming to provide a starting place for them to achieve economic sustainability and climb the economic ladder out of poverty.

3 improvement of the community. Furthermore, benefits are felt at the business, household and individual levels. Microcredit benefits companies (business) by increasing their output and revenue (less consistent in asset accumulation and employment) and positive effects are felt on households, families, communities and institutions in terms of income/revenues, asset accumulation and overall improved living/working conditions.

General Definitions of Microcredit and Microfinance The term microcredit has different definitions. For Gulli (1998) it consists of small scale financial services, while Schreiner (2001) does not define the term by the value of the loan, but as credit provided to low income groups. We will combine the two definitions, designating microcredit as small value loans given to low income individuals.

Microcredit belongs to the field of microfinance, and involves the supply of credit to clients not served by the traditional banking sector. Microfinance refers to a breadth of diverse financial services, including microcredit, microsavings, microinsurance, real- estate credit, and immigrant remittances, to name a few major services. Other examples of programs in the field of microfinance are the opening of bank branches in traditional commerce (e.g. bakeries, grocery shops, etc.) recently approved by the Central Bank, and even programs of land regularization, in a broader sense.

Microfinance institutions provide financial services to clients that have been excluded from the formal banking sector, aiming to serve individuals who traditional banking institutions do not deem worthy of being served, having as their major clientele, micro- entrepreneurs (or nano-businesses). Micro-entreprises can be regarded as independent economic activities involving a reduced volume of resources, ranging from a traveling salesperson to a small store with few employees, and including any businesses between these extremes. Though small, these activities can be considered entrepreneurial as their agents risk their own resources. These microenterprises, due to their typically informal and often familiar nature, frequently do not possess legal documentation, properties, or regularized wages, which traditional banking institutions demand as guarantees. Therefore, the key to success in microfinance is to develop products and technologies providing financial services to these clients in a sustainable manner. This has become possible through the development of system technology and risk management methods

4 allowing the concession of loans to these individuals with serious asset restrictions, without a formal income or credit history. In this manner, viable channels of loan distributions have been created, and the transaction costs of small loans have decreased, therefore surpassing the high fixed unit costs associated with very small loans, that have always been a barrier to the poor’s access to credit.

In short, microfinance aims to increase the access to the financial system, with a particular emphasis on credit, but also on savings and insurance. It can be perceived as a provision of small-scale financial services for businesses and families traditionally kept at bay by the financial system.

5 The Multiple Dimensions of Microfinance Perhaps the main reason for microcredit’s fascination and admiration is that it appears to be a potential win-win solution (what economists call Pareto) once institutions, as well as poor clients, gain. While some see microfinance as a strategy to reduce poverty, others regard it as an opportunity for banks to increase their profits. In truth, microcredit can be understood, in one of its many dimensions, as a public policy carried out in a private sector spirit, and its success is grounded on an incentive mechanism that enables efficient results. As a result, private profit-maximizing institutions benefit, as they increase their portfolio by encompassing new - hitherto unattractive – clients while contributing to the fight against poverty by providing financial services to low-income individuals, previously excluded from the financial system.

Microcredit virtues earned the admiration of different ideological groups. While some praise aspects such as the focus on the community, women and the aide of those least favored, others support the provision of incentives for effort and labor for poverty reduction , its non-governmental aspect and the use of market-driven mechanisms.

The Social Dimension Experiences have demonstrated that microcredit, if well applied, has a role in improving income, as well as the living conditions of its clients. In many cases, these programs generate a true revolution, as it assists thousands of people to leave poverty and even destitution. Microcredit belongs to what can be called a type of capitalist shock to the poor, enabling their access to productive capital. With extra resources and confidence, the poor can carry out investments that may serve as a structural exit door from poverty. Credit does not create opportunities itself, but it enables the poor to enjoy available opportunities.

By enjoying such opportunities, the poor producer is able to establish a history of credit and trust, family members experience an increase in self-esteem, dignity and capacity. For Muhammad Yunus (1999), founder of the Grameen Bank and the main pioneer in microcredit, the right to financial credit should become universal, due to its large social impact potential. According to Yunus, what the poorest need is money, and not training, for in their way, they already have the ability to generate income, only they lack capital

6 to channel this capacity. According to him, microcredit, even with its large potential to remove individuals from poverty, should not be regarded as a policy of assistance. It should by administered, by private or even public management, but always so as to attain positive returns, so that it may be sustainable. The loss of debt, for example, is extremely harmful to any microcredit business, if default penalties are perceived as non- credible, leading to incorrect incentives to borrowers. What it recommends, for example, is that, facing adverse shocks, the number of installments may increase, while their amount may be reduced, as opposed to forgiving debt. Aside from the direct benefits of access to credit, microcredit generates enables its clients to be involved in productive activities to help them pay their debt, hence challenging them to increase their income. Mostly, however, microcredit is a policy of economic development leading to an increase in the productivity, profit and stability of the microenterpreneurial sector.

The Enterpreneurial Dimension The challenge of microcredit is not only to carry out operations involving smaller amounts and being able to reach the less favored. It is also carrying out these loans and “getting the money back” in a profitable manner. Economies of scale are important, but the minimum portfolio size necessary for an institution’s sustainability is not as large as previously thought. Institutions in Latin America with the best performance have shown that, with one million dollars, they can have good rates of return.

The average global profitability of institutions, as calculated by the Boston Consulting Group, was 13%. Latin American financial institutions included in the MicroBanking Bulletin reported an average ROE of 15.6% against 12.4% in Asia. Furthermore, recent research from The Microfinance Exchange (MIX) and the MicroBanking Bulletin has shown that it takes 5 to 7 years on average for a microcredit institution to become sustainable.

Possible paths leading to sustainability and profitability, according to Berger (2006), would be: i) Upgrading, which involves the creation of a financial institution regulated by a NGO. It evolves into a non-profit institution, and later

7 becomes a profitable institution. The costs of upgrading are considered the highest among the three paths. ii) Downscaling, which consists of previously established financial institutions reaching out to small scale clients. Downscaling banks generally start lending to larger micro-enterprises and only after developing specific know-how, begin serving also smaller clients. According to Beatriz Marulanda, formal financial institutions enter the microcredit market basically for three reasons: a. Profitability b. Product and market diversification c. Fulfillment of a social function iii) Greenfields, which involves the creation of entirely new institutions.

Microfinance Characteristics and Technologies “To say that the poor cannot borrow because they do not have collateral is the same as saying that man cannot fly because it does not have wings.” M Yunus

Credit constraints affecting less favored groups is related to two main factors: i) high operational costs for small operations and ii) lack of guarantees, lack of information (short credit history) and difficulty in monitoring. Microcredit programs were successful exactly because they developed technologies and innovations which made it possible to overcome these obstacles. We will shortly describe the most important and most commonly used tools by the majority of microfinance experiences.

Group Lending

Probably the main methodological contribution for the field of microcredit has been group lending, which consists of the concession of credit to a group of individuals, who take loans together and are jointly liable for their payment. A mechanism called social collateral decreases the default risk: “group members monitor each other and, through joint liability, transform the state-contingent returns of its members´ loans into a security with a different state-contingent pay-off” (Prescott, 1997). The ingenious streak

8 lies in the fact that neighbors know each other’s propensity to repay the loan better than a financial company may ever know.

By transforming neighbors and community members in co-borrowers of a loan, problems of asymmetric information are softened between lenders and borrowers, by social capital and monitoring mechanisms. Neighbors have the incentive to monitor each other (peer monitoring) and exclude risky borrowers to participate, enabling compliance even in the absence of collateral.

Association members, in the case of productive cooperatives for instance, can increase peer pressure by using the individual’s social capital. In case of non-compliance, the association or cooperative may enforce penalties, such as symbolic loss of capital, or other types of social sanctions.

Another key to success in this type of scheme, as shown by Ghatak (1999), is that joint liability creates incentives for groups to be formed by similar individuals; in other words, riskier borrowers tend to unite with those of greater risk and vice-versa, as there is no mutual benefit for different types of borrowers to unite. This process of selection (sorting) is important as it distributes the problem of adverse selection by allowing banks to charge different rates according to the profile of groups and their repayment ability. This aids in the creation of high indexes of compliance and lower interest rates, increasing social welfare. (refer to Varian (1990) and Armendaris and Gollier (1997)).

Another fundamental aspect in group lending is the so-called peer monitoring, which is based on the ability of individuals nearby to monitor each other, leading borrowers to not take excessively high risks, softening the problem of moral risk (Stiglitz (1990), Besley and Coate (1995)). Consequently, banks may charge lower interest rates and increase compliance levels. The solidary credit scheme illustrates the use of simple and cheap solutions to ease the poor’s restrictions to access credit.

There are also problems inherent to group formation. There should be a strong connection between group members for a scheme such as this to work successfully. There is, however, some dissent as to the probability of people to impose harder or softer sanctions on those who are closer to them or not.

Dynamic Incentives A commonly used strategy, exploring the consecutive interactions between lenders and borrowers, is to enforce the following rule: the provision of loans increases through time (progressive lending or step lending), conditional on the repayment of past loans; otherwise, the contract is not renewed. This credible penalty that follows repayment default, strengthened by the possibility of new and larger loans in case of compliance, acts as a source of incentive for repayment. The fact that the relationship begins with small loans allows the bank to test its borrowers identifying ill borrowers before increasing the value of the loan (Parikshit Ghosh and Debraj Ray 1997).

It is fundamental that the relationship is perceived as continuous without a pre- determined end, so as to avoid the classic difficulty of all relationships with finite horizons whereby the incentive to default in the last period may end up removing the incentive from the very first payment, as a result of retroactive induction,.

Regular Payments Timeframe Differing from the traditional modes of credit, , loans start being repaid in smaller instalments shortly after disbursement for a good share of microfinance programs. In the Grameen Bank formula, for example, the total amount owed is divided by fifty and the payment is then carried out weekly, starting only two weeks after taking the loan.

This brings about some advantages. First, it helps to identify the less disciplined and more responsible borrowers, helping lenders to foresee future problems. Accordingly, the consecutive instalments ensures that the money repays the loan before it is consumed or spent in something inappropriate. Thirdly, once the payment starts prior to investment return, it is necessary that the family have some initial income, which causes the bank to assume a smaller compliance risk, and does not depend only on entrepreneurial risk.

Focus on Women There are some reasons why women have been regarded as more advantageous borrowers in microcredit programs. First, in general, women have lower mobility, so

10 there is a smaller risk of their fleeing the place of the transaction. There are also very strong cultural reasons for this preference. Women seem to be more sensitive to social punishment in case of repayment default, such as verbal hostility (Rahman, 1998). Empirical evidence points out that women invest more in their children’s education and health than men. That is, women present a greater chance of investing in their families than men - an important fact to be considered if the program’s idea is to improve the living conditions of the poor. Furthermore, women may be generally less favored than men, and may have an inferior social status in many cultures. Consequently, microcredit could be a tool to attain income inequality reduction among genders. Women’s experiences in banking seek to finance a revolution. In the Brazilian case, the greater level of education of women (measures as years of schooling) and the increasing presence of families headed by women in the population have increased the individual and family impacts of credit.

Agent’s Direct and Personal Contact One of the great secrets of microcredit is its clients’ loyalty, as a result of the clients’ trust in the institutions and services provided. It is necessary to know the clients well and search for products to meet their needs. A relevant streak of many microcredit programs, which distinguishes them from the provision of traditional credit, is that there is a direct and personal contact between the lending institution and its clients. Many programs have a reasonable number of employees who reach out to potential clients, throughout the loan period from disbursement until repayment. On various occasions, their fee depends on their performance applying a diversity of incentives to different actors as a result of the initiative’s success.

A Matter of Subsidies Many specialists, heavily based on ill-performing past experiences, have suggested that loans and their rates not be substantially subsidized. According to Robinson (1994), microcredit clients tend to borrow the same value even if interest rates increase a little. That is, the demand for microcredit is barely sensitive to variations in the interest rate. In this sense, subsidizing credit ends up limiting its scale. Institutions providing subsidized credit are less likely to become sustainable, since they have little incentive towards efficiency. It may encourage the corruption of employees who, facing a demand greater than the available supply of credit, may start charging a premium to free

11 them. Generally, subsidized credit is related to elites capturing state benefits, so that credit does not reach those who need it most.

Other essential features for the success of a microcredit project include: adequate credit technology, a good information technology system, risk management and efficient corporate governance aside from human capital, including banking, management, and business-financial skills.

Microcredit and its Connection to Social Programs Another issue, which will be explored in subsequent sections, is the use of economies of scale and scope of operations by public policies targeting a large number of people. For example, credit institutions may access the record of low-income beneficiaries of social programs, taking advantage of a cost already incurred. Complementarily, the simultaneous analysis of this information offers economies of scope. Decisions relative to credit based on more information may also improve the perception of other public managers.

Another possibility related to the combination of microcredit to other public policies is the idea of collateralizing the income from conditional income transfer programs, such as Bolsa-Família (Neri 2002). This proposal seeks to simultaneously encourage public policy and private market instruments towards the promotion of a long-term social inclusion and a structural exit from poverty and.

Microcredit and its Impacts on Grassroots Development Some economists may see it as a setback to development, not least due to its lack of regulation, but more and more policy-makers are becoming aware that the key to economic and political development may in fact lie in the informal economy, informal family-owned and/or small business and self-employment. The informal economy of the developing world grows at a quick pace, likely to becoming permanent. While this represents a significant source of survival for most individuals in the developing world, it also offers many limitations, such as the exclusion from finance, a key foundation for investment and further economic growth. Without access to finance, the poor face large barriers to economic activities that, more importantly, would help to move them up the income ladder and pull themselves out of poverty. The good news is that, as the

12 informal economy grows, so does the market for microcredit. By recognizing that lack of access to financial services is a serious limitation to the poor, microcredit capitalizes on the poor’s entrepreneurial spirit, as a stepping stone to climb the economic ladder out of poverty and achieve economic sustainability.

Microcredit programs, often targeting the poorest segments of the population, offer a means to attack poverty at the grassroots level. Ultimately, microcredit programs result in the production of material goods, as well as social goods (such as the development of social capital, improvement in women’s quality of life, etc.) It empowers the population, while encouraging partnerships between the lender and borrowers. The programs’ often focus on women, and thus are reputed to empower them and encourage their self-reliance by ensuring their own source of income. Through group loans with mutual responsibility, microcredit programs encourage a sense of community and sharing, providing capacity-building and leading people to gather their resources for the improvement of the community. Furthermore, benefits are felt at the business, household and individual levels. Microcredit benefits companies (business) by increasing their output and revenue (less consistent in asset accumulation and employment) and positive effects are felt on households, families, communities and institutions in terms of income/revenues, asset accumulation and overall improved living/working conditions.

Microcredit’s Positive Attributes

In accordance with the above state, the main characteristics of successful microcredit programs, according to Rhyne and Holt (1994) are:

i) the creation of groups of people who borrow together and are jointly responsible for debt payment ii) bank agent’s direct contact with the client’s reality and environment, in a system barely dependent on physical agencies, but with many representative agents iii) small value and progressive loans according to the client’s compliance iv) flexible means and payment due dates in regards to exogenous shocks v) no subsidized rates nor loans, and no probability of debt canceling

13 Asymmetry of Information and Credit Constraints The relationship between lenders and borrowers is characterized by the asymmetry of information. There are two main problems described in the literature: adverse selection and moral risk. The first involves the creditor’s lack of knowledge in relation to the type of borrower, that is, the lender does not know how risk-prone the borrower is, or how honest, how responsible he is, etc. On the other hand, moral risk involves the lender’s lack of information regarding the behaviour of the borrower. That is, how the borrower will use the loan, what type of investment he/she will choose. In their seminal article, Stiglitz and Weiss (1979) describe how the rationing of credit occurs in equilibrium. According to them, the bank’s return does not always grow as the interest rate increases, since above a certain level of interest rates, there is a reduction in the average quality of borrowers,. This leads to the attraction of less honest, less well-intentioned borrowers, or simply those more inclined to perform riskier investments, therefore reducing the compliance rate, due to a simultaneous problem of adverse selection and moral risk. There is an optimal interest rate, which brings maximum return to the banks; where there are more credit buyers than suppliers, there will be credit rationing. That is, many agents will not have access to credit even though they are willing to pay a higher interest rate. Holgan (1960) also shows that the existence of asymmetries in the evaluation of contracts between creditors and debtors leads to a smaller supply of credit. A large part of the problem is due to the fact that typically, the debtor has knowledge and technology not shared with the lender, otherwise, the lender would also be the entrepreneur.

There is an extensive literature regarding the role of guarantees compensating for market failures of an informational nature. Coco (2002) highlights the use of collateral to partially solve this problem, once the offer of guarantees would overcome asymmetric information problems, foregoing costly searches and monitoring. However, the poor’s assets are not, in general, valid guarantees for loans, as they do not necessarily have property title deeds or a verifiable income flow.

As a result, the poor’s problem is not only the need of assets or opportunities, but the low quality of such assets, which reduces his ability to benefit from the slim opportunities available. Berger & Undel (1998), when analyzing the availability of credit sources in relation to the company size, age and availability of information,

14 demonstrate that small enterprises and those newly-created, probably without collateral, are usually financed by family and friends.

As the business grows, they gain access to credit via financial intermediation and banks. Consequently, if the individual does not own starting capital or does not know individuals from whom to borrow, he will hardly have access to productive capital through the traditional financial sector, and his only option will be to resort to moneylenders. Pinheiro (1998) shows how the size of the credit market depends on the efficiency of the judicial system, due to the inefficiency in the quality of loan contracts enforcement, by analyzing the particular case of Brazil.

Some solutions have already been proposed to the poor’s problem of lack of collateral. A major part of the informational problem could be avoided in theory, through the establishment of a financial good in adequate collateral for loans, such as the case with durable goods and automobiles. In the case of housing credit, the immobility of the asset—object of financing—could be used as guarantee itself, but the high informal profile of housing sometimes presents a serious hindrance. De Soto (2001) emphasizes the formal acknowledgement of the poor’s property rights as a lever of guarantees for the concession of loans. Following this line, some have proposed the adoption of a large scale process to regularize the urban perimeter land. However, there are some obstacles to it. In the Latin American case, home ownership, even if regularized, is not always accepted as collateral to loans. The stories of mortgage settlements, common in American movies, is not replicated in Latin America. On the other hand, access to housing credit is common for Americans, a rare occurrence in the rest of the continent. In other words, the legislation, in its angst to protect home owners from the painful repossession of real estate in the case of non-compliance, causes the shrinking of credit markets. Nonetheless, policies regarding property regularization should be put into practice with moderation, so as to avoid the process’ reflux. This aims to increase the property right of the poor already established in their respective properties and not to encourage invasions, which would then contribute to the decrease, not the increase, of property rights. The last decades have then witnessed the advent of technologies that allow access to credit by millions of individuals excluded from the traditional financial sector, which became known as microcredit.

15 Microfinance in Latin America A Brief History of Microcredit

Halfway through the twentieth century, governments worldwide decided to support initiatives providing widescale credit to those less privileged, particularly in rural areas. Strategies of poverty reduction through the use of subsidized credit were widespread between the 1950s and the 1980s. Nonetheless, this first attempt to broaden microcredit was a generalized failure, mainly because of inefficiency, corruption, and highly subsidized interest rates. The latter resulted in extremely high non-compliance rates, increasing subsidy costs, and benefits accruing to the politically privileged (Adam and von Pischke, 1992), and finally credit rationing. Banks had to reduce deposit rates so as to compensate for the low borrowing rates, and in the end, a small amount of savings was collected, little credit was provided and non-compliance rates exploded while borrowers realized that banks could not last much longer. According to Berger (2006), “Ironically, the cheap credit aimed at reducing inequality ended up making it more severe.”

Grameen Bank’s experience was a turning point in this plot. Grameen made important methodological contributions to the field of microfinance, today commonly used by institutions all around the world. Among its main contributions is the use of group loans as mechanisms for borrower selection and guarantees, adaptive loan volume with seasonal terms, the vision of a pro-active bank reaching out to people and the use of microsavings and microinsurance in the range of offered products. The Rayat Bank of Indonesia, on the other hand, was among the first to show how microfinance could be profitable. Its main innovations included incentive mechanisms for bank employees and a simple, low-tech informational system management model without computers.

As the Grameen Bank started in Bangladesh, a series of experiences started here in Brazil. The first microcredit project taking place in the continent was Project Uno in Recife. This project relied on the principle that promptness in approval and in the disbursement of loans tends to be more important to loan borrowers than the interest rate itself. By sending young and pro-active employees to the field, they developed personal relations with the clients whilst being responsible for all aspects of the loan cycle, from its origin until its end. Other pioneers have been the fund for tricyclists in

16 the Dominican Republic, and Fedecredito in El Salvador. In Latin America, the creation of numerous microcredit provision programs occurred, including: BancoSol, Caja Los Andes, PRODEM, FIE and Sartawi in Bolivia; Caja Social in Colombia; ADOPEM in the Dominican Republic; Financiera Calpiá in El Salvador; Compartamos in Mexico and MiBanco in Peru.

Microfinance in Latin America Since the 1990s, microfinance has been widely discussed and regarded as a source of economic and social development. The issue was brought to the spotlight, becoming a “hot topic” globally, particularly among the least developed countries in Asia and Latin America. Although present in various countries around the globe, these two regions have emerged as leaders in the topic, each as a pioneering in its own aspects: Latin America in its commercial orientation and adaptability; while Asian economies give special consideration to micro-savings. The importance of microfinance not only for grassroots development was recognized last year, when Muhammad Yunus, founder of the Grameen Bank, received the Nobel Peace Prize (along with the Bank itself) for their efforts to create economic and social development from below—with microcredit as an important instrument against poverty, and as such, as a means to advance democracy, human rights, and achieve peace.

In Latin America, microfinance began in urban settings, through private and nonprofit institutions that offered small loans for micro-entrepreneurs. Credit was the main service available, as organizations sought to provide access to financial services for the excluded masses. Due to the informality of microenterprises in the region as well as the high costs of doing business, most micro-entrepreneurs did not have the required documentation or sufficient collateral and assets to access credit. By the early 1990s, microfinance institutions (MFIs) in the region evolved, increasing their outreach and sustainability. MFIs became subject to regulation as they upgraded, and in various countries, government institutions began overseeing this booming sector. Aside from upgrading (NGOs and nonprofit organizations becoming regularized), the region also experienced downscaling, as commercial banks and non-financial commercial institutions added microcredit to the services provided. Depicting the growth of the sector, a survey performed by CGAP and the IDB shows that out of 176 MFIs in 17 Latin American countries, 62 regulated MFIs were responsible for 76% of all credit

17 towards microenterprises, reaching 52% of overall clients (Ramírez, 2004). Nonetheless, non-regulated MFIs remain the most numerous in the region, as can be seen from the table below 1.

MFI S IN LATIN AMERICA Number of Institutio Portfolio Borrower Average ns (Millions) s Loan (US$) Regulated MFIs 98 4,407 3,848,071 1,145 Downscale 32 1,821 1,260,553 1,444 Greenfield 30 1,005 738,671 1,361 Upgrade 36 1,581 1,848,847 855 Non-regulated MFIs 239 1,035 2,128,062 486 Total 2005 337 5,442 5,976,133 911 Total 2001 184 1,189 1,806,445 659 Increase from 2001- 2005 83.15% 357.70% 230.82% 38.24% Source: Navajas, S. & L. Tejerina (2006a)

Although microfinance has been widespread amongst all Latin American economies, it has shown to be more popular among Central American and Andean economies, particularly Nicaragua and Bolivia, where the incidence rates exceed 20% of the market (Ramírez 2006). The largest economies in the region, namely Brazil and Mexico, have experienced a low, yet steady, development of the sector. This can be attributed to the difficulty face by- and slow growth of NGOs in microfinance in the larger economies. NGOs have played an important role in innovation and supporting the extension of credit to the poorest, particularly those in rural areas. In fact, as suggested by Marulanda and Otero (2005), NGOs are the best option for the provision of small loans, while commercial banks and regulated MFIs perform better with larger loans. Consequently, Mexico’s Compartamos, a regulated MFI, has one of the largest public outreaches in the region, while Brazil’s Banco do Nordeste, a commercial bank, is the largest provider of microcredit in the country.

1 Aside from downscalers and upgraders, there are three other common types of MFIs in Latin America. These are: i) greenfields, institutions that since their beginning acted as MFIs; ii) non- regulated MFIs, usually NGOs and nonprofit foundations; and iii) credit unions and cooperatives .

18 2. BRAZIL’S Funding and Regulatory Framework

Initially, we should touch on the elements that lie outside the program’s development, but which have shaped it somehow. The Law 9790/99 introduced the OSCIP – Public Interest civil society organizations – that encompassed organizations operating with microcredit. The Instituto Nordeste Cidadania , that implements the CrediAmigo, is an OSCIP. It should be noted that these organizations are not subject to the legal cap on interest rates, and may charge them according to the law that established the PNMPO (below), 4%.

In 2003, the Law 10735, besides qualifying the borrower, also established that commercial banks, multiple banks with commercial portfolios, the Caixa Econômica Federal, as well as small-scale entrepreneurs’ credit cooperatives, micro-entrepreneurs and associations will direct part of its savings resources to credit operations targeting the low-income population and micro-entrepreneurs.

The Resolution ( Resolução ) 3.109, July 2003 determined that 2% of the deposits be directed to microcredit operations – as long as they meet the conditions referring to the borrower’s profile (low income, among others). As a result, available resources to microcredit increase, even though its implementation is not so simple.

Afterwards, the National Programo f Productive Microcredit – PNMPO, Law 11110/2005, intends to allocate resources to productive microcredit encouraging income and job generation among micro-entrepreneurs (including informal ones) while also offering technical assistance to microcredit institutions. Various regulations followed suit, defining for instance the cap on the net annual income that defines a micro- entrepreneur. This law also allocated resources from the Workers’ Support Fund (FAT) and the share of banks’ deposits, according to law 10735/2003.

In view of these new legal aspects, the possibilities ahead for microcredit organizations are thus defined:

19 “Financial institutions will act under the PNMPO through targeted productive microcredit institutions, by transfer of resources, mandate or acquisition of credit operations that fall within the criteria of the PNMPO.” 2

In line with the new legislation, the operating financial institutions such as federal public institutions have access to FAT resources; public and private banks have access to savings and deposits resources. Such resources will be passed on to targeted productive microcredit institutions such as OSCIP, support agencies ( agências de fomento ), microentrepreneurs’ credit societies and credit cooperatives.

Consequently, from Juny 2006, all CrediAmigo operations were implemented through the PNMPO increasing the availability of “resources in the financial market to back up its credit operations with highly competitive costs associated with financing it” 3.

2 Em http://www.fazenda.gov.br/spe/publicacoes/reformasinstitucionais/apresentacoes/Microcredito_Microfina ncas_do_Gov_Lula_01-09-05.ppt#394,40,Apresentação www.fazenda.gov.br (publicações) Legislação (Leis, Decretos) e Regulamentação (Resoluções do CMN e Codefat) www.fazenda.gov.br/spe (publicações) (Microcrédito e microfinanças). 3 Relatório do CrediAmigo, 2008.

20 The Banco do Nordeste do Brasil hired the Center of Social Policies at the Getulio Vargas Foundatin (CPS/IBRE/FGV) to analyze qualitative and quantitatively the results of the CrediAmigo initiative on its clients, as part of a wider research that seeks to gauge the size of the present and potential market of urban microcredit to help orient the expansionary strategy of CrediAmigo by processing databases of the program, and other microdata and fieldwork interviews with clients and managers, where the program impacts are assessed according to the beneficiaries’ perspectives.

The expansion of the program from the Northeast region outwards beginning with the low-income communities in Rio de Janeiro, such as Rocinha, Maré and complexo do Alemão results from a path initiated in 1997. CrediAmigo reached in this period significant indicators in terms of microcredit depth and breadth, reaching more than two thirds of the domestic market of productive credit for a wider population, as well as the impact on clients and the institutional returns. CrediAmigo is self- sustainable that is, it does not depend on fiscal benefits, generating a 50 reais profit per year per client, even when the opportunity costs of market interest rates are applied to its funding. The program has operational sufficiency (its revenues exceeds its expenses) even when charging interest rates below that of other institutions. Data from our previous research that informed the book Microcrédito: O Mistério Nordestino e o Grameen Brasileiro 4 (Microcredit: The Northeastern mystery and the Brazilian Grameen) released within this project’s mandate, showed that there was an improvement in the performance of CrediAmigo’s clients’ businesses, in terms of real values of revenue, costs, profit, payment capacity and consumption. Operational growth grew 30.7%; net profit, 35.1%; average of the clients’ total assets, 18.1%, return on investment increased from 4.4% to 4.8%. In this sense, the targeted productive microcredit program of Banco do Nordeste do Brazil has received a deserved recognition for its recent results – for example, it won in 2008, among all Latin American institution, the Excellence in Microfinance award (in the “regulated institution” category) by the Inter-American Development Bank, in the following terms:

“CrediAmigo won the IDB’s award for excellence in microfinance for regulated institutions. The program run by state-owned Banco do Nordeste has more than

4 Neri, M. (org.), Rio de Janeiro, Editora FGV, 2001.

21 340,000 clients across Brazil’s poorest region. CrediAmigo’s success has encouraged other Brazilian banks to start microfinance programs. As a socially and economically responsible lender, CrediAmigo has established an ombudsman’s office to deal with clients’ concerns and complaints .” 5

Therefore, the excellent performance of its financial indicators is undisputable. In order to learn from its experience, it is necessary to know, however, how it has come this far: in which conditions it has evolved and the factors that contributed to its success. Besides, it is worth inquiring the gain and the cost of the program to its clients, knowingly, excluded from the mainstream financial system given their low income, vulnerability and informality, which hinders their collateral potential. All of this will be discusses initially based on what is probably the most complete databases on microcredit in Brazil. Firstly, it refers to one of the two major microcredit programs in Latin America with over 400 thousand clients in December 2008. The databases follows up complete financial statements of the same businesses through long time periods, reaching in the case of older clients, more than a decade since their first recorded transaction totaling four more annual observations from 2005 to 2008. This databases also includes households’ asset stocks and income and expenditure flows that help to calculate their real net worth and the capacity of poverty reduction within both personal and business contexts in a combined way. Finally, the databases provides a look into the connections between CrediAmigo’s clients’ results and the Family Grant identifying their synergy. A databases with interactive access will be available on the project’s website.

Apart from quantitative aspects, the current research intends to show that objective indicators hide – namely, qualitative aspects inherent to the program’s institutional arrangements, its operational dynamics and the impacts perceived by its clients, through interviews with CrediAmigo’s beneficiaries and stakeholders. The project’s website also has a sample of these interviews’ videos linked to this report. The study asks: what is the way ahead for CrediAmigo? We will give special emphasis to strategies and actions that offer productive credit to the low-income population, including an evaluation of the Comunidade project, which corresponds to a village bank initiated in 2005, just as the analysis of the relations between CrediAmigo’s clients and the Bolsa Família program.

5 Em http://www.iadb.org/news/detail.cfm?Language=English&id=4758

22 CrediAmigo’s Institutional Design

Its institutional arrangement is the distinct aspect of Crediamigo, because as it will be seen further, it takes advantage of the infrastructure and philosophy of a public development bank, operating with private incentives and lower interest rates than other market rates, but still sustainable. This institutional arrangement results from the regulatory environment that, in the last years, has changed a lot following the introduction of a legislation that incentivizes microcredit, as the last section has asserted.

The CrediAmigo program is in accordance with the Banco do Nordeste’s mission of “promoting the sustainable development of the Northeastern region of Brazil through the financial and technical assistance support for regional productive agents” as it fulfills the definition of targeted productive microcredit program.

CrediAmigo has very distinct management, strategic planning and financial operations inside the Banco do Nordeste’s structure, albeit the latter’s experience is used in its entirety. The operational separation, however, is necessary to the extent that CrediAmigo is not a mere product of the bank, but is a program within it with long-term perspectives. As a matter of fact, an urban microfinance area for the micro and small- scale enterprise was created inside the bank with its own bureau and related management structures (microfinance and micro/small-scale company).

CrediAmigo was established in 1997, with the support from the World Bank and the technical assistance from Acción Internacional, but above all in accordance with Banco do Nordeste’s larger project, thus ensuring the necessary institutional support to the initiative. Not only the external support from Acción, CGAP and the World Bank, but to a large extent, the changes in the regulatory environment of the microcredit sector helped to shape the institutional development of CrediAmigo, as we will see next. Once the institutional foundation was established, the pilot program began with five branches, according to the World Bank’s own report:

“CrediAmigo's first major challenge occurred in May 1998, when BN management decided to expand the program to 46 more branches throughout the Northeast. Insufficient support systems, loan officer and branch manager training, and

23 emphasis on rapid growth resulted in a rapid deterioration in the quality of the loan portfolio. The President of BN instructed all managers to reduce or stop new microfinance lending until arrears were brought under control and loan officers retrained. The rapid expansion cost the CrediAmigo program an estimated $3 million in loan losses, lost productivity and rehiring and retraining costs. However, the experience did provide an important example of the dangers of over-rapid expansion and setting of ambitious growth targets without sufficient controls and attention to portfolio quality. CrediAmigo and BN management have focused on reducing overhead costs, and increasing loan officer productivity and portfolio quality through training, incentives and better monitoring, a process which is being supported by technical assistance from CGAP and ACCION, Intl .”

CrediAmigo’s growth strategy, after the adjustments to its portfolio, included its services’ rapid expansion in order to increase its reach and scale. In other words, CrediAmigo’s growth required high investments combined with a considerable risk and a slow return. Therefore, until its break-even point, which occurred around 2001, it was crucial to have access both to Acción and CGAP’s technical assistance, and the World Bank and Banco do Nordeste’s resources, to pass through the initial period’s (mainly between 1997 and 1998) extremely high costs with an incipient portfolio, as data related to operational efficiency reveal below:

Operational Efficiency: Administrative costs on the average of the loan portfolio Dez Dez Dez Dez Dez Dez Dez Dez Dez Dez 97 98 99 00 01 02 03 04 05 06 527% 183% 51% 43% 38% 36% 29% 25% 23% 22%

Source: Banco Mundial .

Other important adjustments were made to the institutional design of CrediAmigo. The main one, which still exists, is the division of labour for the program operation. Firstly, it was necessary to hire qualified personnel. Microcredit demands a different approach to the traditional bank-customer relationship because its clients do not have a financial knowledge, understood as formal systems and controls; they need guidance regarding their businesses before taking the loan; and more importantly, they lack guarantees to back up their loans. In short, microcredit requires the direct and

24 intense contact between the credit agent and clients aiming at the formation of solidary loan groups (as a substitute for the mainstream loan collaterals) – a social expertise that Banco do nordeste delegated to the Instituto Nordeste de Cidadania, whereas it stills controls the strategic planning, as it states in its documents, decides on the concession of credit and define the products and services and the methodology. The Instituto Nordeste Cidadania is responsible for the selection and hiring of personnel, service operations, and process monitoring.

The new partnership type accelerated the program’s growth process enabling the quick hiring of agents trained for the achievement of social objectives (and not only financial). Their training includes learning about credit policies, but mostly, practical experience followed by actions in the field, before taking on their own portfolio.

The credit agent is absolutely important so that the machinery that begins at the Bank’s management, through its microfinance department and reaches the borrower, works. The agent facilitates the initial contact with clients – usually in their own communities – getting acquainted with them and assessing their profile, while explaining the microcredit rationale. There begins a relationship that will last until the last loan repayment and, with some luck, it will continue after this point with other loans.

The credit agent becomes the face of the bank before its clients, but goes beyond it, as the next section will show. What we will highlight here is the traditionally private rationale where the CrediAmigo operates by offering incentives to agents for the attainment of productivity targets. Agents earn a fixed salary, which respects a salary and job post plan, and a variable payment according to the productivity performance. The high productivity of agents indicates that Crediamigo is in expansion, especially after the creation of the CrediAmigo Comunidade:

25 Gráfico #1. New Clients and Lost Clients: ??

Source Crediamigo.

Part 1 - Crediamigo traditional (3min 54s) http://www.fgv.br/ibrecps/VIDEOS/credi3/CREDI_3_giro_grupo.wmv

26 3. Impact of CrediAmigo

Crediamigo’s microdata provide various ingredients for which an empirical researcher might wish. Firstly, given the size of the sample: 488 thousand clients in December 2008. The databases encompasses complete financial statements of the same businesses through time, including the first observation (baseline) that may go back more than a decade in the case of older clients, with four more observations for 2005- 2008. It includes data on asset stocks and household’s expenses and income flows and it is possible to calculate the gross wealth and the capacity of poverty reduction of the individual and his/her business in an integrated fashion.

3.1 Flow Indicators

The time evolution shows a growing tendency of CrediAmigo to serve low- income clients, as the table below illustrates, as the profit of clients in 2008 just before their entry in the program attests. For instance, the initial markup of someone who entered the program in 2004 was R$ 1261, having fallen 13,1% in real terms until 2008, when the entry level profit is 1097 reais. Consequently, as expected, the profit of 2008 clients is also lower. Nevertheless, as the same table illustrates the difference between the entry level markup and 2008 cresce à medida que voltamos ao ano de entrada. That is, the longer the time spent as a client in the program, the higher the profit gain. For instance, those who entered in 2003 had a 82% profit gain in relation to 2008, while those who entered the program in 2008 had a 13,84% gain in relation to the last observation in the same year. Generally, there is a profit gain of 11 to 14 percentage points per additional year of participation in the program. Among all the active clients in 2008, the markup gain had been 42,51% up to then.

27 CREDIAMIGO CLIENTS- 2008 GROSS PROFIT

INITIAL OPERATION IN 2008 var (%) YEAR PROFIT

TOTAL 1212 1727 42,51

2008 1097 1249 13,84 2007 1143 1449 26,73 2006 1188 1667 40,36 2005 1240 1874 51,09 2004 1292 2110 63,37 2003 1261 2296 82,03 ANTES 2003 1500 2635 75,64

Similar qualitative results were observed for the operational concepts of businesses: a downscaling of clients and a cumulative increase in the size of businesses as clients remain in the program. CREDIAMIGO CLIENTS- 2008 OPERATIONAL REVENUES

INITIAL OPERATION IN 2008 var (%) YEAR INICIAL

TOTAL 3157 4363 38,20

2008 2729 3088 13,15 2007 2865 3583 25,06 2006 3077 4179 35,79 2005 3282 4754 44,86 2004 3472 5391 55,27 2003 3384 5853 72,97 ANTES 2003 4249 6902 62,43

CREDIAMIGO CLIENTS- 2008 OPERATIONAL COSTS INITIAL OPERATION IN 2008 var (%) YEAR INICIAL

TOTAL 185 245 32,39

2008 152 163 6,76 2007 162 198 22,21 2006 166 232 39,31 2005 172 265 54,02 2004 186 312 67,92 2003 191 340 77,99 ANTES 2003 323 409 26,59

CREDIAMIGO CLIENTS- 2008 OPERATIONAL PROFIT

INITIAL OPERATION IN 2008 var (%) YEAR INICIAL

TOTAL 1037 1482 42,94

2008 945 1086 14,98 2007 981 1251 27,48 2006 1021 1435 40,53 2005 1068 1608 50,62 2004 1106 1798 62,60 2003 1071 1956 82,75 ANTES 2003 1257 2226 77,03

Source: CPS/FGV processed CrediAMIGO’s microdata

In its turn, by comparing the growth of household expenses, growth tends to be lower than revenues and the two concepts of profit used here.

CREDIAMIGO CLIENTS- 2008 FAMILY EXPENDITURES

INITIAL OPERATION IN 2008 var (%) YEAR INICIAL

TOTAL 334 470 40,56

2008 339 355 4,77 2007 346 376 8,69 2006 354 404 14,23 2005 348 424 22,05 2004 337 451 34,02 2003 334 470 40,56 ANTES 2003 334 470 40,56

Source: CPS/FGV processed CrediAMIGO’s microdata

29 333.23.2.2.2 Stock Indicators

Comparing the evolution of total assets of both individuals and their companies: liquid assets and family assets show a growth of both concepts, at a superior level in the case of business-related concepts.

CREDIAMIGO CLIENTS 2008 TOTAL ASSETS INITIAL OPERATION IN 2008 var (%) YEAR INICIAL

TOTAL 23299 29682 27,40 2008 22745 23619 3,84 2007 22712 25389 11,79 2006 22257 27574 23,89 2005 22616 30724 35,85 2004 22860 35347 54,63 2003 22860 35347 54,63 ANTES 2003 27753 44257 59,47

CREDIAMIGO CLIENTS 2008 CIRCULATING CAPITAL INITIAL OPERATION IN 2008 var (%) YEAR INICIAL

TOTAL 4036 6096 51,02 2008 3404 3887 14,21 2007 3650 4710 29,03 2006 3858 5717 48,16 2005 4079 6683 63,84 2004 4273 7951 86,06 2003 4273 7951 86,06 ANTES 2003 5849 10658 82,23

CREDIAMIGO CLIENTS 2008 FAMILY ASSETS

INITIAL OPERATION IN 2008 var (%) YEAR INICIAL

TOTAL 14129 17519 23,99 2008 14940 15327 2,59 2007 14568 15732 7,99 2006 13794 16284 18,05 2005 13829 17694 27,94 2004 13586 19826 45,93 2003 13165 20509 55,78 ANTES 2003 13125 23651 80,20

Source: CPS/FGV processed CrediAMIGO’s microdata

30 3.3 Bolsa Família and CrediAmigo

Through CrediAmigo’s microdata it is possible to study the connections between the clients’ results and the Bolsa Família, identifying their synergies. We present next the comparison of the initial status of clients for all years of entry into the program and the last status in 2008 for their total and for those who are Bolsa Familia beneficiaries. Bolsa Familia beneficiaries present lower initial and final business indicators in terms of real flows than the rest of the clients. On the other hand, Bolsa Familia beneficiaries present superior percentage gains of items related to businesses such as revenues, costs and profit concepts than the program’s clients in total (both active in 2008). Family/household expenses present a lower growth for Bolsa Família beneficiaries, suggesting a greater tendency towards productive capital by the program’s clients.

CREDIAMIGO CLIENTS- 2008 Giro Solidário e Investimento Fixo FLOW RESULTS

RESULTADOS IN 2008 var (%) INICIAL

OPERATIONAL REVENUES 3157,00 4362,83 38,20 GROSS PROFIT 1211,58 1726,63 42,51 OPERATIONAL COSTS 185,04 244,97 32,39 OPERATIONAL PROFIT 1036,58 1481,66 42,94 FAMILY EXPENDITURES 346,88 408,38 17,73

Crediamigo’s clients in 2008 & BOLSA-FAMILIA BENEFICIARIES Giro Solidário e Investimento Fixo FLOW RESULTS

RESULTADOS IN 2008 var (%) INICIAL

OPERATIONAL REVENUES 2172,84 3057,09 40,70 GROSS PROFIT 875,41 1261,30 44,08 OPERATIONAL COSTS 101,14 143,42 41,80 OPERATIONAL PROFIT 779,71 1117,88 43,37 FAMILY EXPENDITURES 293,82 341,67 16,29

Source: CPS/FGV processed CrediAMIGO’s microdata

31 An analogous comparison to the previous one (before entry in Crediamigo and the last observation in 2008) in the case of total assets and household assets reveals a differential in the accumulation even more favorable to the Bolsa Família clients.

CREDIAMIGO CLIENTS- 2008 ASSETS TOTAL

INITIAL OPERATION IN 2008 var (%) YEAR PROFIT

TOTAL 23299 29682 27,40

2008 22745 23619 3,84 2007 22712 25389 11,79 2006 22257 27574 23,89 2005 22616 30724 35,85 2004 22860 35347 54,63 2003 22860 35347 54,63 ANTES 2003 27753 44257 59,47

CREDIAMIGO CLIENTS- 2008 & BOLSA-FAMILIA BENEFICIARIES ASSETS TOTAL

INITIAL OPERATION IN 2008 var (%) YEAR INICIAL

TOTAL 13308 17621 32,41

2008 12875 13608 5,69 2007 12765 14844 16,29 2006 13215 17407 31,73 2005 14242 20493 43,89 2004 13880 23025 65,88 2003 13007 24139 85,59 ANTES 2003 14993 26367 75,87

CREDIAMIGO CLIENTS- 2008 FAMILY ASSETS

INITIAL OPERATION IN 2008 var (%) YEAR PROFIT

TOTAL 14129 17519 23,99

2008 14940 15327 2,59 2007 14568 15732 7,99 2006 13794 16284 18,05 2005 13829 17694 27,94 2004 13586 19826 45,93 2003 13165 20509 55,78 ANTES 2003 13125 23651 80,20

CREDIAMIGO CLIENTS- 2008 & BOLSA-FAMILIA BENEFICIARIES FAMILY ASSETS

INITIAL OPERATION IN 2008 var (%) YEAR PROFIT

TOTAL 8893 11373 27,89

2008 8893 11373 27,89 2007 8796 9854 12,03 2006 8920 11201 25,58 2005 9479 12792 34,95 2004 9127 14169 55,24 2003 8428 14725 74,71 ANTES 2003 8150 15866 94,66

Source: CPS/FGV processed CrediAMIGO’s microdata

To sum it up, in terms of quantitative results from the clients’ perspective, performance improves according to the amount of time in the program. The program is ever more focused as it attracts clients with small-scale businesses. In the case of the comparison between the program’s total number of clients with those who are also Bolsa Família beneficiaries (2008), the latter present higher tendency to grow. In our quantitative evaluation, the greatest challenge for the program is to reach lower income people while keeping the program and its clients’ sustainability. In 2005, pointing in the direction of a lower income audience, the Comunidade initiative was launched.

33 34 3.3.3. Evaluation of Impact on CrediAmigo’s clclilentsilents

The publishing department of the Fundação Getulio Vargas launched the book “Microcredit, the Northeastern mystery and the Brazilian Grameen: profile and performance of CrediAmigo’s clients” that assesses the Brazilian challenges of microcredit of that which is the largest program in operation in the country. CrediAmigo operates in the Northeastern urban market and has over two thirds of the domestic market of targeted low-income productive credit.

Here we present some additional results beyond the book within the perspective of the current crisis. The fact that we undergo a credit crisis does not imply that any public action in the area is welcome. It is fundamental to tell the wood from the trees, which is after all the essence of credit.

A prerequisite for the evaluation of CrediAmigo is to use an external reference. It is necessary to compare the performance of program’s clients with that of a local control group, because the Brazilian economy and the Northeastern in particular presented growth above the average until recently. As control, the choice fell upon the self-employed workers and employers in the Monthly Employment survey (PME/IBGE). PME and Crediamigo allow monitoring the same individuals, companies and families through time. The analysis here is constrained to the Greater Salvador area and Greater Recife area between 2005 and 2006. Movements of the following performance variables were analyzed: i) micro entrepreneur’s business profit; ii) change in entrepreneur’s household economic class status. The comparison between similar individuals with and without access to credit allows us to detect microcredit impacts on the rise to different household income classes, small business profits and the likelihood of self-employed workers becoming employers (the last of which present similar results, not addressed here).

A first concept of business performance that PME offers is markup, captured through the income from work concept of employers and self-employed units. Analysis controlled by the characteristics based on mincerian profit equations with interactive period and sample dummies reveals a differential usual performance of 7,7% of active CrediAmigo clients vis-à-vis other units surveyed by PME with comparable socioeconomic attributes. These results, it should be noted, refer to productive units

35 located in the large Northeastern metropolises, the absolute improvement of CrediAmigo’s clients outside the metropolises, where credit is scarcer, was 600% higher.

The growing difference in markup performance of female clients in relation to male clients of CrediAmigo fell 3,9% in their favor, in the case of PME the gender difference increased 7,8%. In short, while the difference in profit between men and women increases in the PME sample case, and decreases in the case of CrediAmigo’s clients, reinforcing the interpretation of microfinance as a tool to reduce gender-related labor differences. Heuristically, microcredit in general, and CrediAmigo in particular, work as a source of financing for the so called women’s revolution underway. Despite being one third of the Northeastern urban micro-entrepreneurs, women are two thirds of CrediAmigo. Given the solidary loan group methodology, together with the higher focus on and return obtained by women, as in the case of Grameen Bank, CrediAmigo is a reference in the domestic microcredit scene.

Mobility among economic classes directly comparing CrediAmigo’s families with PME families through an ordinate multinomial logistic model is used to respond to the key question: would more access to credit increase the possibility of household economic ascension? In this exercise, by keeping constant education, gender, age, activity sector, company size and metropolis, we do not reject the hypothesis that, for Northeastern micro-entrepreneurs who initially in 2005 belonged to classes E, D or C, access to CrediAmigo enabled a greater probability of progression through the economic class scale. For those initially in class A/B, the effect is opposite.

Analyzing the transitions without controls in the same period gives a better hint about the magnitude of the results obtained. From class E, the probability of economic class ascension among Crediamigo’s clients was 54,72%, versus 38,82% of microentrepreneurs. This result ratifies the award-winning article by Teixeira Soares and Barreto (2008) on the same databases as in our book. From class D, the score was 36,92% versus 34,03%. From class C, it was 9,95% of CrediAmigo versus 7,55 of the rest. Finally, from the higher classes A and B, seen together, the descending probability is almost 50% higher among CrediAmigo clients, 46,84% versus 38,76% of microentrepreneurs in general. The program focuses on classes D and C, but the smaller the client’s initial income, the larger the program’s clients’ gains (pro-poor return).

36 4.4.4. Comunidade: institutional design

In 2005, a village banking format of the program was created where loans – for mostly informal nAno-businesses working capital – seek to:

• Incentivize savings. • Encourage job and income generation. • Empower families through group activities. • Educate for credit. • Reduce poverty.

Therefore, in this type of loan, the agent’s intervention is more intense to qualify clients to the formal financial activity, transmitting knowledge since the beginning of the relationship, and following clients up through the life of the loan. It is a change in clients’ culture, for instance, by incentivizing savings, even though small (R$ 10 for the “insurance” quota, in some cases) and a process of social strengthening that requires the presence of the agent, mutual trust and the reciprocal support of the group.

Moreover, another Comunidade innovation is to allow that 20% of the groups’ participants be beginner-level micro-entrepreneurs, that is, whose businesses are not necessarily 6-month old. The risk in this case is controlled by i) the savings of other group participants; ii) their guarantee regarding the beginners’ repayment capacity. In this sense, it is possible to assert if this innovation helps to increase CrediAmigo’s depth of reach towards the basis of the pyramid, offering credit not only to those without collateral or a guarantor, but also to those who need to acquire business experience.

CrediAmigo Comunidade’s loan range from R$ 100 to R$ 1000 for each client, who can only borrow as a member of the group, which may reach more than twenty people. What are the strategic objectives of the Bank? In its documents, Banco do Nordeste asserts the following:

1. Reach the basis of the Brazilian social pyramid

2. Contribute to reaching the program’s goal of 1.000.000 active clients in 2011.

3. Fill a gap in the market that is not yet served by CrediAmigo’s products

4. Provide support to the program to fulfill its mission

37 5. Support Banco do Nordeste as an agent for the sustainable development of the Northeast region

Box. Village Banking The concept of village banking belongs to the microfinance Field as it offers low-value loans to boost the working capital of 15 to 30 people organized into groups, who know each other and may mutually guarantee their loans. Therefore, it is possible to get closer to the basis of the income pyramid. Nevertheless, besides credit itself, village banking also have an important role of reinvigorating their respective communities, as it will be seen further in this study. The village banking methodology is based on the group’s responsibility, seeking its autonomy. For the success of the endeavour, it is imperative to admit first and foremost – before other requisites are met – that the poor have the capacity to save: “So in [sic] the end of the day, I think it's critical for all of us to remember that most poor households are net savers. It's just that their savings take the form of a goat or a chicken or a half-built hut .” 6 So, by corroborating this hypothesis, the initial trust is established to enable the group loan. The next step, after the individual endorsement of each loan by all the group’s members, refers to savings – or the reserve quota, as in the Comunidades’ terminology – which concerns a small percentage of the loan and aims to act as a monetary guarantee against the group’s insolvency. It also seeks to encourage savings within the group to change the financial culture and teach about the role of liquidity. None the less, in the case of reserve quotas (just as savings accounts, in village banking schemes outside Brazil) is not uncontroversial. “This is because of the compulsion that all clientes must save all of the time regardless of the business or other uses that they might have for these savings. In addition, these savings are often made quite inaccessible to the client. (…) While requiring all clients to save all of the time appears to have important drawbacks, advocates of forced savings argue that many clients lack the willpower to save on their ow n”. The reserve quota may ultimately be educational as it helps to build a positive credit history, and the use of its resources should be approved when clients show financial responsibility in the good management of their own resources. Whether deciding for the reserve quota or not, the microcredit institution is left with the role of providing loans as well as of building a specific financial intermediation capacity to ensure that this low-income group not only has access to credit, but that they also allocate the resources to improve their quality of life. Hence the importance of the solidarity group methodology, which not only avoids greater default problems, but also generates many possible non-financial gains for the group. The methodology is enhanced by the use of the groups’ members as multipliers: as if, outside groups’ meetings with the credit agent, their members could support each other

Crediamigo Comunidade http://www.fgv.br/ibrecps/VIDEOS/credi3/CREDI_3_comunidade.wmv

6 http://www.cfr.org/publication/16490/mi

38 Comparing Clients and Businesses: Comunidade and CrediAmigo

Given the time lapse since its creation, Comunidade already presents some impacts that we will discuss in the next section. We present next a table with the evolution in the number of program’s clients

PAnorama of the total PAnorama of active clients PAnorama of active clients active clients in 2008* in 2008* in 2008*

Total CrediAmigo Original CrediAMIGO Comunidade Year of Activity Year of Activity Year of Activity

Category Initial 2008 Category Initial 2008 Category Initial 2008 1997 21 0 1997 21 0 1997 - - 1998 2369 0 1998 2369 0 1998 - - 1999 2926 0 1999 2926 0 1999 - - 2000 5546 0 2000 5546 0 2000 - - 2001 10552 0 2001 10552 0 2001 - - 2002 14816 0 2002 14816 0 2002 - - 2003 18291 0 2003 18291 0 2003 - - 2004 22261 0 2004 22261 0 2004 - - 2005 29509 0 2005 29126 0 2005 383 0 2006 45576 16 2006 41975 16 2006 3601 0 2007 78967 1203 2007 68982 1185 2007 9985 18 2008 85241 314856 2008 72172 287836 2008 13069 27020 Obs: * includes only clients with records available in these two moments

The clients of CrediAmigo’s original products are around ten times as much as the Comunidade’s. Given the inceptive nature of Comunidade and its tendency to reach larger groups with a lower initial income, the range of economic and financial data present in CrediAmigo’s original product is not matched in Comunidade. The databases allow a comparison between the sociodemographic profiles and the business features of both programs.

39 6.1 Socio-demographic features

Comunidade has younger clients than CrediAmigo. The proportion of people between 10 and 29 years old is 30,6% in Comunidade versus 24,9% in CrediAmigo, just as the share of single people: 42.2% in Comunidade versus 39,8% in CrediAmigo. Education is a particularly useful observable variable to track the profile of entrepreneurs and their businesses. Comunidade’s clients present a lower educational level as 71% of clients have not completed secondary education, versus 61,5% of CrediAmigo’s (8 th grade). Despite being predominantly female with 63,3%, Comunidade is not more feminine than Crediamigo, 64,8%. In socio-demographic terms, Comunidade has been more of an entry door to microcredit for less educated (poorer) and younger people.

Socio-Demography CrediAmigo’s Original and Comunidade clients PAnorama of active clients In 2008 Total Population

Category CrediAMIGO Original CrediAMIGO Comunidade population % population %

Total 289037 100,00 27038 100,00 Marital Status Single 115035 39,80 11408 42,19 Married 154464 53,44 14397 53,25 Divorced 12685 4,39 687 2,54 Widow/er 6840 2,37 546 2,02 Age 10 to 19 years old 6227 2,15 924 3,42 20 to 29 years old 65715 22,74 7345 27,17 30 to 39 years old 86590 29,96 7608 28,14 40 to 49 years old 72961 25,24 5813 21,50 50 to 59 years old 40127 13,88 3450 12,76 7,02 60 years old + 17416 6,03 1897 Sex Female 187165 64,75 17112 63,29 Male 101872 35,25 9926 36,71 Educational level Education- none 6970 2,41 1093 4,04 Read and write 170707 59,06 18114 66,99 Education – secondary 90073 31,16 5608 20,74 Education – high school 9534 3,30 403 1,49 Education- tertiary 3326 1,15 80 0,30

Source: CPS/FGV processed CrediAMIGO’s microdata

40 6.2 Family, work and business

Comunidade presents a higher proportion of households with Five or more people (31,6% versus 29,3% of CrediAmigo) which could be a reflection of the expected poverty level of the former. If Comunidade’s clients are poorer, they are also younger than CrediAmigo’s, which may explain the larger presence of one-person households (11,3% in Comunidade versus 8,6% in CrediAmigo). By assembling these two vectors, there is no significant difference in the average number of household members. In turn, the presence of businesses that do not employ family/household members is larger in Comunidade (74% versus 62,1% of Crediamigo), mirroring the smaller business scale.

PAnorama of Active Clients in 2008 Category CrediAMIGO Original CrediAMIGO Comunidade population % population %

Total 289037 100,00 27038 100,00

Quantity of family members employed in the business 0 179434 62,08 20073 74,24 1 77419 26,79 4982 18,43 2 24965 8,64 1507 5,57 3 4354 1,51 273 1,01 4 1368 0,47 83 0,31 5 ou mais 980 0,34 100 0,37 Ignored 517 0,18 20 0,07 Quantity of people who work in the business 0 32458 11,23 3257 12,05 1 70787 24,49 6130 22,67 2 135807 46,99 13123 48,54 3 32380 11,20 2908 10,76 4 11147 3,86 951 3,52 5 ou mais 6335 2,19 668 2,47 Ignored 123 0,04 1 0,00 Quantity of people living in the client’s household 0 24863 8,60 3067 11,34 1 7470 2,58 762 2,82 2 31260 10,82 2748 10,16 3 63588 22,00 5444 20,13 4 77163 26,70 6460 23,89 5 ou mais 84609 29,27 8557 31,65 Ignored 84 0,03 0 0,00

Quantity of non-family members employed in the business 0 263740 91,25 26309 97,30 1 13707 4,74 285 1,05 2 5294 1,83 231 0,85 3 2729 0,94 87 0,32 4 1302 0,45 59 0,22 5 ou mais 1791 0,62 48 0,18 Ignored 474 0,16 19 0,07

Source: CPS/FGV processed CrediAMIGO’s microdata

41 6.3 Business Features

Reflecting a difference in the scale of businesses among the two programs, in Comunidade there are fewer clients with another business (14,4% versus 25% in CrediAmigo), just as businesses with a fixed physical structure (63,8% versus 70% in CrediAmigo). Particularly here, there are significantly fewer businesses located in retail spots in comunidade (10,6% versus 28.1% in Crediamigo) and fewer home-run businesses: 35,46% in comunidade versus 51,4% in CrediAmigo.

Neste ponto, a presença de pontos comerciais é significativamente menor no Comunidade (10,6% contra 28,1% do CrediAmigo) e a de atividades exercidas em casa (local fixo) menores 35,46% no Comunidade versus 51,4% do CrediAmigo.

Panorama of active clients In 2008 Population Total

Category CrediAMIGO Original CrediAMIGO Comunidade population % population %

Total 289037 100,00 27038 100,00 Business’s physical structure Stall 23278 8,05 1216 4,50 Mobile unit 10553 3,65 884 3,27 High street trading point 81256 28,11 2865 10,60 Home delivery 71453 24,72 8185 30,27 Home business 102497 35,46 13888 51,36 Ignored 0 0,00 0,00 Has YEARther business Yes 72261 25,00 3902 14,43 No 216776 75,00 23136 85,57 Type of trade Wholesale 169333 58,59 12425 45,95 Factory 11348 3,93 600 2,22 Producer 14143 4,89 3092 11,44 Retail 94203 32,59 10920 40,39 Fixed business - location profile Street vendor 86246 29,84 9782 36,18 Store Owner 154007 53,28 14635 54,13 Rented space 48265 16,70 2607 9,64 Ignored 519 0,18 14 0,05 Types of business’s administrative controls Good 29883 10,34 1866 6,90 None 27345 9,46 6663 24,64 Precarious 119051 41,19 11923 44,10 Satisfactory 112758 39,01 6586 24,36 Type of payment Cash payment 75589 26,15 9196 34,01 15 to 30 days 171058 59,18 15586 57,64 31 to 60 days 37928 13,12 2032 7,52 More than 60 days 4462 1,54 224 0,83

Source: CPS/FGV processed CrediAMIGO’s microdata

42 As a result of the existing scale differences, the lack of administrative controls in businesses is higher in Comunidade (24,6% versus 9,5% in CrediAmigo). Among those clients who apply such controls, there is a marked difference in the quality of administrative records, according to credit agents – 11,5% are considered good controls in the case of CrediAmigo; 7,4% in comunidade’s case. Sales in Comunidade are mostly paid for straight away (34% versus 26,2% in CrediAmigo). In other words, CrediAmigo’s clients offer more credit to their buyers. In terms of purchases, retail prevails

6.4 Business Distribution

In terms of sector distribution, Comunidade’s businesses are less concentrated on manufacture (0,84%) and services (3,85%) than CrediAmigo, wich 1,95% and 5,61% respectively. In any case, clients strongly concentrate on commerce, over 92%, in both programs. The spatial mapping of activities reveals that Comunidade is relatively better represented than Crediamigo in Maranhão and Bahia states, while the opposite occurs in Ceará.

Panorama of active clients In 2008 Population Total

Category CrediAMIGO Original CrediAMIGO Comunidade population % population %

Total 289037 100,00 27038 100,00 Activity sector Commerce 267147 92,43 25770 95,31 Manufacture 5645 1,95 227 0,84 Service 16227 5,61 1041 3,85 State Maranhão 28685 9,92 4939 18,27 Piauí 29180 10,10 2147 7,94 Ceará 92299 31,93 6090 22,52 Rio Grande do Norte 17637 6,10 1199 4,43 Paraíba 22800 7,89 2733 10,11 Pernambuco 23395 8,09 2104 7,78 Alagoas 18008 6,23 682 2,52 Sergipe 12843 4,44 360 1,33 Bahia 32054 11,09 5937 21,96 Minas Gerais 10654 3,69 813 3,01 Espírito Santo 659 0,23 21 0,08 Distrito Federal 775 0,27 0,00

Source: CPS/FGV processed CrediAMIGO’s microdata

43 6.5 Products’ Dynamics

Finally, there is mobility between the two types of programs, mostly of an ascending type, from Comunidade to CrediAmigo, as only 0,33% of the latter move to the former. Conversely, after the initial entry in the Comunidade, 91,3% remain with this product, 6,55% move forward to the Solidary Group Working Capital and 0,89% to fixed investment.

PYEARrama of active clients In 2008 Population Total

Giro Solidário e Category Investimento Fixo CrediAMIGO Comunidade population % population %

Total 289037 100,00 27038 100,00 Product description in 2008 Solidarity group working capital loan 164238 56,82 1770 6,55 Fixed investment 9904 3,43 241 0,89 Crediamigo Comunidade 961 0,33 24696 91,34 Ignored 113934 39,42 331 1,22

Years as Program’s client 2008 81304 28,13 13327 49,29 2007 e 2008 72737 25,17 9824 36,33 2006 e 2008 3663 1,27 242 0,90 2006, 2007 e 2008 42916 14,85 3260 12,06 2005 e 2008 2943 1,02 13 0,05 2005, 2007 e 2008 4554 1,58 35 0,13 2005, 2006 e 2008 4437 1,54 23 0,09 2005, 2006, 2007 e 2008 76483 26,46 314 1,16

Source: CPS/FGV processed CrediAMIGO’s microdata

Box. CrediAmigo Comunidades

As stated in the master’s Degree thesis “Os Bancos Comunitários e o Empoderamento dos Clientes? Avaliação da Experiência do Crediamigo do Banco do Nordeste” 7 (community village Banks and clients’ empowerment? Evaluation of the CrediAmigo) , “despite being a financial product, CrediAmigo comunidade has a specific credit methodology and its main difference, in relation to the remaining methodology of solidary groups, lies in the fact that, despite also allocated to productive activities, there is no financial analysis of the business. Therefore, the main rationale of Crediamigo Comunidades or village bankings resides in the analysis of clients’ character – here understood as the “ensemble of psychological and/or moral (positive or negative) traits that characterizes an individual or group”. (we translated it).

To measure the program’s impact, 100 CrediAmigo Comunidade’s clients were interviewed, who participated in the first ten village banks in the cities of Caucaia and Maranguape, of which 98 produced valid questionnaires. There were at the time 1181 clients in the Crediamigo comunidades in these two cities.

Educational level was low among researched members. They are either illiterate or have between 1 and 4 years of schooling: 38,8%. Between 5 and 8 years, 23,5%. Between 9 and 11 years, 31,6% and just 6,1% have a graduate degree level. Also worrying for the program is the fact that just 13,3% of its clients answered that they have a savings account, revealing their concern about saving for the future.

Nonetheless, efforts in enhancing the program’s externalities yielded positive effects. “In relation to the reinforcement of kinship and commercial ties in the community, 63,3% of interviewees declared that they purchased some good or service from other members of their own village banking. This commercial relationship occurred between 1 to 6 group’s participants. In relation to the participation of interviewees in community development, 23,7% of them made investments in their own businesses that increased their hiring of workforce. Also, 29,9% of interviewees participate in some community association or group that works for the development of their community.”

Particularly in regards to financial indicators, the average value of loans increased 391,37% when comparing the first with the current loan amount, suggesting that the loan capacity also increased – hence, the productive activity of borrowers. According to a qualitative research by the FGV (June 2009), “a more positive fact, however, was the declaration of 27,8% of respondents who said they had done some kind of refurbishment or acquired some goods for their homes recently”.

7 Charles Diniz Leandro, ‘Os Bancos Comunitários e o Empoderamento dos Clientes? Avaliação da Experiência do Crediamigo do Banco do Nordeste’, Universidade Federal Do Ceará Pró-Reitoria De Pesquisa E Pósgraduação: Mestrado Em Avaliação De Políticas Públicas, Fortaleza – CE, 2009 .

45 46 5. Qualitative Impact Evaluation

*** in common with studies in PartB.

In order to assess the dynamics and impacts of CrediAmigo (mainly in their Comunidades version), a fieldtrip was carried out in June 2009, when Banks and groups were visited for participant observations and semi-structured interviews. Based on in- depth personal accounts of the interviewed clients themselves, we sought to understand the borrower’s perspective on the following aspects:

• What do they need, what are their demands?

• What changed as a result of the loans?

• How does one assess/rate CrediAmigo?

• Transaction costs, capacity building impacts.

• Changes in the local economy.

It is a tentative study based on a purposeful sample, which is limited and non- representative. Two categories of clients of CrediAmigo have been studied, namely: members of solidary groups (working capital groups, R$ 100 to R$ 1000, 3 to 10 participants; CrediAmigo Comunidade, R$ 100 to R$ 1000, 15 to 30 members); and individual clients (individual working capital loan R$ 300 to R$ 10.000,00; individual fixed investment, from 100 to R$ 5.000). The business profile varies according to: subsistence, simple accumulation and extended accumulation.

Among Comunidade borrowers where there is a larger number of people, there is great symbolism in the meetings where each loan repayment is celebrated. During the fieldtrip, one could notice that the meeting reinforces the group’s commitment to endorsing each member’s loan. According to the account of credit agents, meetings are also useful to develop the financial skills of the group, as well as improving their networks – for instance, in the case of fairs that are organized by groups to sell their members’ produce.

The repayment default rate of the Comunidade program in Fortaleza is 0%. What explains it and, more importantly, what are the costs for its clients?

Firstly, the group’s dynamics are the first reason for this non-existent default rate, as the group not only selects its members based on their knowledge of members’ behaviour, but also each member pays the reserve quota since the beginning of their group’s activities in order to guarantee the loan repayment in case some member fails to do so. There is an undeniable inherent and tacit insurance aspect in this kind of loan. Besides, the reserve quota clearly signals the participants’ savings capacity, working as a good indicator of improvements in their income levels.

Furthermore, people served by CrediAmigo in general, and not only in Comunidades, sometimes have a history of borrowing from loan sharks who charge abusive interest rates. Therefore, borrowing at much lower rates is a much smaller challenge – and more: an opportunity to be cherished through the punctual repayment of installments. What clients demand really is a quick response to their credit request, showing that interest rates are a secondary concern – when other options are absent, they can only resort to a loan shark. Some evidence of this perception regarding interest rates is in the account of Ms. Maura (Francisca Andrade de Souza), who borrowed up to R$ 2000, but cannot remember the interest rates. Mrs. Neném (Maria Josefa da Silva Cruz) in turn, considers interest rates of the program low.

48 Ms. Neném, caterer (in her house in Alto do Garrote, Caucaia, Ceará) CrediAmigo Comunidade’s clients, for whom the loan’s interest rates are low.

The transaction costs for clients are limited to attending repayment meetings and going to Banco do Nordeste branches. The loan methodology, however, aims to reduce these costs through some measures: the agent goes to the community for the meetings to take place near the groups’ participants’ homes; the client must go to a branch to withdraw the loan amount, but related costs are progressive: loans under R$ 1000 may be accessed in ATMs, including a network of banks – reducing the transaction costs for lower income clients. For withdrawals above R$ 1000, the client can only do it at a Banco do Nordeste branch, but it is assumed that clients borrowing over R$ 1000 will have the resources to do it.

49 The interviewed clients joined CrediAmigo mostly to obtain working capital to purchase inputs for their businesses. According to Ms. Neném, before the loan she only had access to her pension to afford her bare minimum living costs. Besides low interest rates, the simple procedures that only require a group formation contrast with the existing difficulty present in past transactions. Antonio Egilvan de Oliveira (client) remembers that, in order to obtain credit many years ago, Banks would demand as many as six guarantors. Except for CrediAmigo, he says he still notices this prohibitive bureaucracy in other places.

ANOther important factor for the low default rates, amid the portfolio expansion, is the effective assistance provided by CrediAmigo. In an interview, participants revealed that in general the loan does not negatively affect the household budget. That is, it can be repaid without compromising the minimum consumption and without increasing the clients’ vulnerability to risk. This shows that the loan amount and repayment demand are adequate to the borrower’s status, without deteriorating it.

On the contrary, when questioned about the changes that occurred after the loan, all interviewees mentioned the improvements as a result of it, such as: increase in domestic consumption (from food to electrical appliances); access to services (private health care); and mostly, profit for investment in their businesses. Participants in our research do not measure their improvements financially, but in terms of practical benefits in their lives. Benefits go beyond the borrower to the extent that the loans have generated an employment effect in some cases.

In the case of solidarity group working capital loans, besides the higher capital accumulation level than Comunidades, the risk perception as they borrow is also smaller. Despite this higher accumulation, clients still need to undergo capacity building and assistance in order to improve their financial and business status. Entering the program also happens through working capital loans, given easy access to credit.

After establishing a positive credit score, the client has Access to other bank products, such as loan for investment. Rosângela could increase her asset stock and serving a wider customer base, as well as negotiate better prices for her supplies.

50 Box 2: The downscaling of CrediAmigo: Comunidades

Whereas CrediAmigo reached impressive levels of income increase for its clients and return on assets, the program did not succeed in reaching the poorest layers of the population – whose informal economic activity was also intense, but with increasing difficulty to provide collateral to loans. Therefore, Accion Internacional provided technical assistance to CrediAmigo to develop a product that would be more adequate to the realities of this population group – hence fulfilling the program’s mission, namely: contribute to the development of the micro-enterprise sector through the provision of financial services and entrepreneurial guidance, in an easy, sustainable and timely way, ensuring new job and income opportunities.

The methodology considers, basically, the formation of groups with 15 to 30 members who gather to provide solidary guarantee for loans that may vary between 100 to 1000 reais, at a 1.32% monthly rate. There lies the main difference to other solidary products of the Banco do Nordeste, that is, the loan amount. There follows a specific methodology that raises the group’s financial awareness, encourages the leadership of members in their respective communities, educating them for savings, and above all, the group decides the individual values for loans, instead of the traditional individual financial assessment. For each monthly repayment, there is a meeting where all the group is present and when repayments are celebrated.

This activity, which occurs until the end of the loan contract, strengthens the so- called social capital of the communities, as the data from fieldwork attested. The mutual trust increases as the repayment history is strengthened. These are communities deprived of the State’s presence on many levels: health, education, security and sometimes, basic sanitation. Therefore, the greater confidence among their members has helped many communities to overcome some urgent obstacles that result from the state’s absence. In the case of Banco Progresso (photo 1), meetings occur in the community association offices, where adult literacy programs also take place. The sense of belonging to a community, in this and other cases, is strengthened by the CrediAmigo actions, reducing inhabitants’ vulnerability.

Foto 1. Algumas integrantes do Banco Progresso, operado pela agência de Bezerra de Menezes, Fortaleza, junho de 2009

According to the interviewed female clients, the Solidarity Working Capital Crediamigo loan’s (SWCC hereafter) benefits also refer to the learning process. Maria Luisa Martins and Rosangela França learned about the good use of money and the notion of profit for investment in their businesses, which includes the end of sale on credit to clients, thus improving working capital management. Rosangela also recalls having learned to observe the market and its trends in order to improve its sales. For instance, she may influence her customers’ purchase by keeping them up to date with fashion trends.

Even though taking part in smaller groups than Comunidades, SWCC’s clients also appreciate the sense of mutual help in their respective groups during their meetings, when they discuss improvements and adjustments to their businesses, and form networks to obtain and exchange products and supplies, as – in the case of interviewees

52 – the group is homogeneous in its trade focus (group of cosmetics saleswomen). Besides, they feel more confident when realizing that money flows between members of the group, that is, there is no difficulty in repaying their loans. An indicator in that direction is the possibility of repaying the loan, investing the profit and purchase goods without undergoing hardship, or touching their working capital – whose distinction to profit was unknown to them prior to the CrediAmigo training. Among purchased goods are fax machines, photocopying equipment and household electrical appliances.

A positive effect in the case of SWCC is that clients buy supplies and services in the local commerce – a good sign that access to microcredit may boost the local economy potentially. To a lesser extent, however, there was a job-generation effect – as clients not always hire other people, but work alone in their sales, as in the case of cosmetics, for instance. There has been, however, evidence of indirect jobs, as in the case of Maria Luisa, whose clothes design company outsources seamstress’ services (VIDEO)

A higher capital accumulation level (or “wide”, in the CrediAmigo terminology) causes an increased level of demand for the bank’s services. Luisa, for instance, sought Banco do Brasil to have access to a check book – which was important for her as she deals with many suppliers. Some clients also demand credit cards to enable commercial transactions and negotiate better deals with their suppliers. CrediAmigo has the headstart in this issue, as the Banco do Nordeste flag endorses the initiative. Luisa did not accept the credit card offer by a mobile company because she did not recognize it as a traditional financial agent or with a bank backing up the initiative. This shows that clients are increasingly more demanding, as much as the banks themselves have been towards them.

As a result of a successful relationship with CrediAmigo, clients feel more confident to run their businesses without the help from credit agents, indicating that the initial investment in human capital decreases with time. Among the program’s impacts, they don’t mention numbers or financial sheets, but their families’ recognition regarding their capacity to manage the company and to be independent, as much as having a good reputation among their peers. A stronger indicator, however, must be the optimism they express regarding the future of their businesses.

Box 3. Overcoming Isolation

CrediAmigo Comunidades Clients in the Messejana Offices, Fortaleza

The community of São Miguel (Messejana) is one of the most violent in Fortaleza, where many criminal groups fight and divide the neighbourhood, exposing the population to a combat in its streets:

“Of 630 homicides in the Great Fortaleza area in this year’s first six months, 504 were perpetrated with a gunfire, around 80% of them (…) In the absolute majority of cases, the crime was motivated by drug users’ unpaid debt to drug dealers, the so-called “accounts settlement”. In places distant from the capital’s center, drug sellers impose a regime of fear, violence and silence. ‘Who buys drugs and does not pay for them, dies’ is the order that prevails in the traffic corners. Statistics reveal also the areas in the Great Fortaleza area where the highest indices of homicides are. The most violent neighborhoods in Fortaleza are known to the police authorities, who carry out constant disarmament operations and search for drugs and police fugitives there. Even so, violence prevails in the periphery. By many miles, the Great Messejana area is the champion of urban violence. The area comprises neighborhoods and slums where murderers occur daily.” 8

In every visited productive unity, clients of the CrediAmigo Comunidades have bars in their windows (see pictures) – even in the São Francisco church, which shelters the local police. Insecurity leaves the streets deserted, isolating people. CrediAmigo’s meetings, however, gather these people who resume their social life. During fieldtrip, three solidary groups, program clients, gathered for a presentation and celebration of their partnership. The meeting happened in the community’s church. The level of economic activity is low indeed, formed by small-scale businesses, sales of products from Fortaleza’s market, etc.

8 http://diariodonordeste.globo.com/materia.asp?codigo=652383

54 José Maria, CrediAmigo’s clients in his small (and flawless) grocery’s – where he sells fruits and vegetables through a barred window for fear of violence (see this visit’s video)

CrediAmigo Comunidades’ clients in one of Fortaleza’s most vicious neighbourhoods, close to the so-called Gaza Strip, in reference to the notoriously violent Mid-Eastern territory.

A CrediAmigo Comunidades’ client serves her customers through the barred window because of the violence levels.

Despite the region’s violence, Cristiana shows no signs of discouragement: she adopted her niece, sells fruits in the morning and opened her own tiny grocery’s.

Women complement their income, working in the streets of São Miguel.

57 58 888.8. Two Stories: the Program’s Qualitative Impacts.

Owner of the Abençoado Restaurante

The Abençoado (“Blessed”) Restaurant is in the Cauipe plateau, some kilometers away from the Fortaleza center on the way to the North shore, in demand by tourists. Gilmária joined CrediAmigo 11 years ago by borrowing R$ 350 and her latest loan reached R$ 900 given her good track record. Once the good reputation was established, Gilmária gained access to an individual and fixed capital loan of R$ 5000.00 used to enlarge and equip the kitchen area to better meet the rising demand. Due to the good results of the experiences, Gilmária continues borrowing from CrediAmigo both through the solidary group and alone. The group, which resulted from an informal association of people from the same parish, evolved to include people from other religions who would like to borrow. Through repayment and planning meeting’s philosophy, the group strengthened itself and took on new initiatives, different to CrediAmigo’s activities, including the construction of a community association office to house a medical surgery, the first one in that neighbourhood.

The Comunidade village banking has around 24 people, although this figure may go down to 18, according to the repayment capacity of their participants. She joined the bank in the usual fashion, through an endorser (godfather) who takes responsibility for the new member. This is not the only why she experiences it as a family environment, but above all given the effectively solidary aspect of the initiative “the village banking is ours”. This solidarity is evident in the meetings, where people not only repay their loan, but also contribute a reserve quota – the common fund to offset the default emergences in the group.

Her account of the CrediAmigo’s technical assistance corroborates the targeted aspect of microcredit as Gilmária took part in the entrepreneurship courses provided by the Bank that taught her to use and multiply her resources. Besides, credit agents also solved her particular doubts regarding the use and dynamics of credit. In her view, the presence of the credit agent is important to encourage people to take part in the program in a productive way – suggesting that an outside person could achieve that.

She has invested profits in the restaurant, as a result of the microcredit experience, and is fully aware of the different repayment conditions for the Comunidades program and the individual loan, even in what concerns interest rates. She noticed that, after her joining CrediAmigo and having built a credit track history, other banks began offering her their services – but she stresses that this only occurred after the BNB entered in the community. Incidentally, she obtained a credit line with Banco do Brasil to buy her car.

There was not much evidence in terms of impacts on the local economy. The restaurant’s supplies come from its own garden or from the market in Fortaleza.

59 Nonetheless, the effects of the financial improvement that followed her participation in CrediAmigo are noticed, that is, gilmária does not show her account statements, but mentions the increase in the number of employees (17 now) as, with an improved structure, she could better meet the demand in the region – which is developing by virtue of the construction of the Pecem port. She says that the restaurant’s clientele has doubled. Beforehand, she would have to place the tables under the trees, but with the loans, she could afford to build kiosks to shelter the tables. Maybe more relevant is the fact that, amid the instability inherent to the business, she has felt tranquil thanks to her participation in Crediamigo.

Francisca Gilmária in front of her “Abençoado” (Blessed) restaurant (JUN/09)

60 Homemade sweets

Next door to Abençoado, and sharing the same garden, are the house and small kitchen where Mr. Egilvan (Gilmária’s uncle) produces his sweets – which are also called Abençoado. Before taking a loan with CrediAmigo Comunidades, he produced his sweets in an outdoor area of about 3,5 square meters on the ground in the backyard – without an appropriate place to store the sweets. The loans have helped him strengthen his production business; while the capacity building by CrediAmigo refined his perception of the possible ways to invest his money in the family’s activities. Besides the sweets production, he also raises sheep and cultivates cassava – both of which are supplied to the restaurant. He himself says that this work saves resources, as the sheep raising provides the manure for the cassava plantation.

Mr. Egilvan does not receive the Bolsa Família benefit or defends the program. On the contrary, he expresses his frustration about it given the program’s effect mainly by reducing the supply of a qualified workforce for the initiatives such as the port of Pecem. For him, CrediAmigo’s benefit is exactly to enable people to work, earn a living and improve their living conditions – the reason why Bolsa Familia, for not providing work, cannot be benefic in the long term.

61 CrediAMIGO’s Clients: Operational REvenue (average R$ per city)

Receita operacional média Até a R$ 3.000,00 R$ 3.000,00 a R$ 5.000,00 R$ 5.000,00 a R$ 8.000,00 R$ 8.000,00 a R$ 16.000,00 Mais de R$ 16.000,00 Sem dados

62 9. Conclusions and future perspectives

9.1 Institutional aspects: central actors

The institutional design of Crediamigo enables: the transparency of operations; operational sustainability; the horizontal (number of clients) and vertical (income pyramid) increase in scale. The figure below sums up the crucial actors for the CrediAmigo operations, as follows:

The Role of Credit Agents http://www.fgv.br/ibrecps/VIDEOS/credi3/CREDI_3_assessor.wmv

a) Banco do Nordeste’s staff is in a separate department called CrediAmigo. This separation is fundamental to keep the operational transparency of the program and the performance incentives, as results are distinct from the rest of the bank.

b) the Oscip Nordeste Cidadania helps to untangle the burdens and incentives of the credit agents from the restricted legislation that applies to the public servants. The credit agent is also encouraged by the discourse and the variable part of their salaries, related to the degree and performance of their portfolios. The agents’ w ages work as an authentic system of salary – efficiency, which Joseph Stiglitz and others studies.

63 c) Finally, the solidary credit scheme works as an incentive to separate the good from the bad borrowers, as potential participants themselves select their groups. The social collateral approach adopted in CrediAmigo is the same as in the Grameen Bank. The solidary credit scheme illustrates the possibility of simple and cheap solutions to slacken the credit restriction of the poor groups.

According to Marcelo Rezende, CrediAmigo’s director, Comunidades derived from the need to improve the program’s reach and depth into the basis of the income pyramid. And, albeit this step increased the scale of operations, it is less profitable. Nonetheless, it is justified as a social operation.

9.2 Impacts on the clients

a) Return – the most fundamental feature of a successful credit program is the return for the people involved. If the transaction gains pertain more to the financial intermediaries, the transaction is not good for clients and may, ultimately, be detrimental to the lender for attracting a worst type of clients, as in the case of adverse selection, which granted the Nobel Prize to Joseph Stiglitz. On the other hand, if the loan includes negative interest rates spread, as in the case of subsidized credit, the program is not sustainable. In the case of CrediAmigo, the profit is positive, but not abusive – around R$ 50 per year – generating sustainability.

In our evaluation of the small-scale productive units served by the program, we have seen the growth rates of the revenue and profit between the first and the last loan of around 35%, and 15% of household consumption growth rates, with a reduction in their dependence on other income sources, without an implicit or explicit subsidy in this operation. Exercises controlled for the entrepreneur’s and his business’ features indicate that there has been a considerable improvement in the main variables relating to the business performance, both in terms of flows and stock. The average gross profit of clients, which was R$ 1166, went up to R$ 1576, a 35,1% growth, as a result of the increase in the average sales revenue of 34,6. The only variable that

64 showed a reduction between periods was exactly that without a direct relation with the increased access to credit. There is also a return for the community through a stronger local economy – according to the evidence of the fieldtrip – with an increase in the household’s income and consumption levels, as a result of CrediAmigo. The clients’ accounts show that the cash flow and profit of their businesses are invested in local enterprises.

The return to the community is also seen in its strengthened social capital. Pierre Bourdieu defines social capital as “the aggregate of the actual or potential resources which are linked to possession of a durable network or more or less institutionalized relationships of mutual acquaintance or recognition.” Surely, such capital may pre-date the credit program, but microcredit mechanisms may reinforce the construction of this capital.

The positive results, be they qualitative or quantitative, indicate that the solidary credit mechanism is being effectively implemented – mainly in what concerns the social intermediation of CrediAmigo. This consists of the interactions and commitment towards potential borrowers in order to recruit them and prepare them for the loan, in terms of their abilities and confidence. 9

b) Women One of the essential characteristics of microcredit is its predominantly female clientele (94%). The numbers are as follows: 64,3% of CrediAmigo clients are women versus 38% of men, which inverts the proportion of the urban entrepreneurs’ gender, who are in total 65% men and 35% women. That is, proportions between men and women in CrediAmigo and among the Northeastern urban nAno-entrepreneurs are basically switched.

Once more, credit may reach more women, but it doesn’t mean that they make good use of the opportunities opened by the program. Data on the

9 Nitin Bhatt and Shui-Yan Tang, "Making Microcredit Work in the United States: Social, Financial, and Administrative Dimensions," Economic Development Quarterly, vol. 15, no. 3 (2001), pp. 229-241.

65 performance of program clients indicate that women present an operating profit 21,17% lower than men’s, but among the two periods they showed a relative growth of 4,1% above men’s, this kind of result is generalized for the remaining economic variables of the business. In short, CrediAmigo’s features include its focus on women and their higher return on investment.

Even though with a lower profit, the qualitative research showed that the women value the opportunity to increase their income without compromising, for example, their children’s upbringing – revealing an evaluation measurement that goes beyond financial indicators. Yet, it is important to note that clients’ financial knowledge in general improved considerably following CrediAmigo’s capacity building, as they learned about working capital, profit, etc. and also their financial and commercial routines have improved. c) Poverty and Vulnerability – CrediAmigo’s loan program’s results in terms of the poverty reduction of its beneficiaries are impressive: only 1.5% of non-poor people crossed the poverty line downwardly, while 60,8% of those below the poverty line left this poverty status. Here we report some results based on the R$ 117 on regional terms according to living costs, calculated according to the FGV line, but which are robust for other institutions’ lines, such as IPEA, or by using the minimum wage. We also observed that the proportion of clients in the opposite situation, that was very little income reduction to the level of poverty, suggesting a high net effectiveness of the program in withdrawing people out of their initial poverty situation.

Not only does the increase in consumption of in the financial indicators (albeit relevant) point to the positive impacts of credit. Credit has also diminished the clients’ vulnerability as they have access to assets that reduce their susceptibility to external shocks. The loan repayment, mainly did not compromise the income level available for the basic consumption of the household – but on the contrary, credit enabled some gains for the enterprises visited during the fieldtrip:

66 “In a scenario where the credit-financed investment does not generate a significant net profit then an asset is created which can reduce vulnerability but will not reduce poverty as the loan installment repayment takes place through a reduction in consumption and not from the returns to the investment” 10

9.3 Future Perspectives

CrediAmigo’s path has been marked by its overcoming obstacles, making positive advances and carrying out good innovations within a specific regulatory context for Brazil. The impacts on clients have also been, as far as this study could verify, positive in terms of reduction their vulnerability (in the Comunidades) and increasing their income (other loans and Comunidades to a certain extent). Thus, the program’s vocation and the institutional scenario are widely established. Here we analyze briefly the program’s future perspectives.

Firstly, the microcredit sector was recently affected by the reduction in the TJLP (long-term interest rates) that applies to many funds used in leveraging finance in the sector 11 . This shall affect its spread. Before the TJLP reduction, BNB would raise funds at 9,25% and charge 23%.

On the other hand, the operational efficiency rate (revenue allocated to cover administrative costs) of CrediAmigo worsened recently with an increased competition. The search of other banks for personnel specializing in the sector not only drained CrediAmigo’s staff but also created a salary pressure increasing the program’s costs.

Nonetheless, there are many possibilities of program’s expansion that may help to regain the high operational efficiency level. According to a research of Banco do Nordeste, there is a potential market of almost 3 million clients for microcredit. Besides, the program exported its expertise in solidary credit to the Southeast of Brazil, precisely to Rio de Janeiro’s VivaCred.

10 Source: Hassan Zaman, Assessing the Poverty and Vulnerability Impact of Micro-Credit in Bangladesh: A case study of BRAC , World Bank.

11 http://g1.globo.com/Noticias/Economia_Negocios/0,,MUL1211611-9356,00- TJLP+CAIRA+PARA+AO+ANO+O+MENOR+NIVEL+DA+HISTORIA+ANUNCIA+MANTEGA.ht ml

The Bank is also investing in Technologies to gear CrediAmigo to complement the Bolsa Família’s actions. There is a large potential, as CrediAmigo helped 60,08% of its clients to exit poverty. The combination of these two programs maximizes poverty reduction as Bolsa Família would work as a collateral for the loans provided by Banco do nordeste. In turn, CrediAmigo would help to complement this public policy by offering exits out of poverty by enabling an economic activity. In anecdotal evidence from the fieldtrip, Bolsa Familia’s induced complacency (laziness) was mentioned a few times.

As mentioned above, the CrediAmigo evolution is totally bound to the advances of its clients. The increase in the capital accumulation of clients enhances their demand for other banking products, such as credit cards and checks. Banco do Nordeste thus is always and inevitably exposed to a necessary update of its products and services in order to meet the changing demand of its clients, and also to face up to the growing competition, which was attracted to the Northeast region given CrediAmigo’s demonstrative effects.

The strategy to serve more clients includes more branches that will increase the bank’s reach and will reduce clients’ and branches’ transaction costs, as their registration is more agile.

Innovations in its operations should also help CrediAmigo to balance their costs and avoid defaults, as for instance the introduction of a Credit Score system to increase the security and agility of transactions.

The Law 128/08 (Lei complementar) introduces in the regulatory environment the individual micro-entrepreneur, to formalize enterprises with annual revenue of up to 36 thousand reais and an employee. Besides simplifying the tax and labor law procedures, access to CNPJ (firms’ national registration), it will allow micro- entrepreneurs to sell their products and services to more clients and participate in public bids, for instance. There is an extensive list of activities including many characteristics of crediAmigo’s clients (see: http://mundosebrae.wordpress.com/2008/12/11/mei-

68 microempreendedor-individual-vigencia-em-1%C2%BA-de-julho-de-2009/ ). This new legal status may open a new product front for the CrediAmigo program.

Finally, but not less important, the CrediAmigo’s impacts on clients depend not only on macro structural conditions (ineterest rates, for instance) but to a large extent on the investment in social intermediation that consists of the following main aspects: group formation, financial and business capacity building, constant monitoring. The targeted productive microcredit model, as implemented by CrediAmigo, has proved that benefits outnumber the costs of this investments and are reflected in the institution’s results, but mostly, in the social life of groups’ members and the mobilization initiated by CrediAmigo.

The Microcredit sector’s challenges has many causes and consequences. CrediAmigo has effectively performed in most of the aspects – but given the increasing competition (even given CrediAmigo’s demonstrative effect, this scenario will certainly show, demanding adjustment on the part of the banks and credi institutions mainly in what concerns accessible resources, costs structure and reach.

69 Vídeos 12 CrediAmigo Part 1 - Crediamigo traditional (3min 54s) http://www.fgv.br/ibrecps/VIDEOS/credi3/CREDI_3_giro_grupo.wmv Part 2 - Crediamigo Comunidade (8min 40s) http://www.fgv.br/ibrecps/VIDEOS/credi3/CREDI_3_comunidade.wmv Part 3 – Impacts of the External Crisis (1min 12s)

http://www.fgv.br/ibrecps/VIDEOS/credi3/CREDI_3_comunidade.wmv Part 4 – The Role of the Credit Advisor (6min 22s) http://www.fgv.br/ibrecps/VIDEOS/credi3/CREDI_3_assessor.wmv Vídeos diversos Seminar at the Presidential House (Palácio do Planalto (6min 32s) http://www.fgv.br/ibrecps/VIDEOS/credi3/CREDI_planalto.wmv Stélio Gama - BN Development Director (12min 32s) http://www.cps.fgv.br/ibrecps/VIDEOS/credi3/CREDI3_entrevista_Stelio.wmv Marcelo Azevedo – Microfinance Manager - (7min 51s) http://www3.fgv.br/ibrecps/VIDEOS/credi/marcelo_azevedo.wmv Crediamigo & Class Dynamics: Main Results (14min 13s) http://www3.fgv.br/ibrecps/VIDEOS/credi2/credi2_lanc.wmv The Northeast Mystery & The Brazilian Grameen Bank: Main Results (7min 51s) http://www3.fgv.br/ibrecps/VIDEOS/credi/credi_resultados_mc.wmv Pagando a Promessa do Microcrédito (9mim) http://www.cps.fgv.br/ibrecps/VIDEOS/credi3/CREDI_lanc_fortaleza_1.wmv Crediamigo & Bolsa Família (3min 12s) http://www.cps.fgv.br/ibrecps/VIDEOS/credi3/CREDI_entrevista_marcelo_palco_1.wmv Long - Fórum BN de Desenvolvimento - Bolsa Família & Crediamigo (1h 29min 30s) http://www.cps.fgv.br/ibrecps/VIDEOS/credi3/CREDI3_lanc_Palestra_mesa_marcelo_1.wmv http://www.cps.fgv.br/ibrecps/VIDEOS/MISEG/seminario_funenseg.wmv Long - Beyond Microcredit http://www.cps.fgv.br/ibrecps/VIDEOS/MISEG/seminario_funenseg.wmv

12 We will include new vídeos in particular with respect to Agroamigo, they will be selected, edited and in the final version will be incorporated subtitles.

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