La Financiera Nica: MICRO-FINANCE GROWTH STRATEGY IN RURAL NICARAGUA1 MANAGUA, NICARAGUA wo weeks after arrival in Nicaragua from the U.S., operated twelve branches throughout Nicaragua, concentrat- Henry Mas, an American business advisor, received ed in the country’s largest cities.While the population size of T notification from his host company that he was to be Jinotega justified a branch opening, the financiera did not have sent to a remote region in the north of the country. His mis- operations in such a physically remote location. sion was to determine whether or not Financiera Nica should open an office in the rural state of Jinotega. Like many small Nica offered individual loans to three sectors-commerce, lending institutions, the financiera offered small loans to service, and production. Loan offerings ranged from $25 to micro-businesses.A partially washed-out road and noticeable $15,000.While Nica’s loan information could accommodate a storm damage greeted the members of the market study range of lending methodologies, foreign consultants had con- team.As the hemisphere’s second poorest country, Nicaragua vinced Financiera Nica to abandon group lending and housing struggled to maintain the country’s infrastructure in the face loans a few months earlier. of constant tropical storms from May through September. However, the financiera’s donated four-wheel drive vehicle The Excursion negotiated the jungle curves remarkably well. Henry’s colleague, Jaime Lenin Hernandez Guarro, was lead- Company Background ing the excursion.A Nicaraguan native, Jaime was educated in Soviet Russia and ANC-controlled Southern Africa during Financiera Nica (Nica) was founded originally as a non-gov- Apartheid. This coincided with control of Nicaragua by the ernmental organization (NGO) funded through foreign chari- communist-oriented Sandinista government during the 1980s. ty donations. The institution privatized at the end of 1999 Jaime had been the financiera’s training manager, but those with four main objectives: unprofitable services had been abandoned due to donor self- sustainability pressures. Jaime was grateful to be employed by 1. Secure new capital by attracting additional shareholders a stable institution in the post-communist Nicaraguan era. He enjoyed this luxury despite the ideological conflict between 2. Lower the cost of capital for portfolio growth by offer- his formal socialist education and the nature of his occupation ing savings accounts with an institution central to the evolution of capitalism as 3. Attain lending technology from foreign consulting entity less than 1/3 of Nicaraguans were economically active at the time (Exhibit 1). 4. Allow original donors to eventually recoup a portion of their original donation Northern Nicaragua was the site of much of the conflict dur- ing the country’s civil war in the 1980s between Contra The founding charity funded the institution in 1991 with the guerillas and the Sandinista government.The Sandinistas came goal of reducing unemployment in Nicaragua and retained a to power during a 1979 communist revolution, overthrowing controlling stake of about 40% in the new organization. New the multi-generation Somoza dictatorship. U.S. Marines had donor financing was earmarked to cover a portion of office maintained a presence in Nicaragua since the early 1900s opening and costs associated with initiating and growing a when the two countries squabbled over a possible cross-isth- loan portfolio in Jinotega.This secondary donor organization mus canal venture. The project was obviously diverted to would not seek an eventual equity stake in the financiera. Nica Panamá, but U.S. troops and politics continued to intervene in C ASES for M ANAGEMENT E DUCATION 55 C ASE S TUDIES 4,000 3,000 2,000 Population (,000) 1,000 Population Economically Active 0 (,000) 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 Exhibit 1a. Nicaraguam Indicators – Population 100 75 50 Devaluation annual (%) 25 Inflation annual (%) 0 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 e Exhibit 1b. Nicaraguam Indicators – Economy 15 10 5 0 -5 Real GDP (ann. growth rate %) -10 Population (growth rate %) -15 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 e Exhibit 1c. Nicaraguam Indicators – Growth Rates 56 P ORTRAITS of B USINESS P RACTICES in E MERGING M ARKETS L A F INANCIERA N ICA: MICRO-FINANCE G ROWTH S TRATEGY in R URAL N ICARAGUA Nicaragua’s affairs.This intervention included support for the market share and loan averages per institution, was estimated Somoza regime.2 Understandably, Henry felt some apprehen- using data compiled from interviews with both businesses and sion completing a market survey in this area in particular credit institutions. Fifty small and micro-businesses in the tar- given his country’s recent military involvement. get market of Nica’s typical client base were interviewed with the intent to determine which lending products and services Initially battered by a devastating 1972 earthquake in Managua, were offered and corresponding utilization rates.Additionally, Nicaragua’s economic and social indicators demonstrated that the analysts approached twelve financial institutions to com- the 1980s was a difficult time for the country (Exhibit 1). An pile data on portfolio sizes, product offerings, and market economic embargo by the U.S., imposed in response to position. Sandinista government policies, had a particularly harsh effect on the country’s economy.The flight of investment capital from The supply of credit in Jinotega was quite competitive. Credit private national and international sectors was inevitable due to institutions ranged from NGOs servicing micro-businesses, to the government’s campaign to nationalize a large portion of large commercial banking institutions catering to the local the country’s assets. The country had undergone significant coffee export sector. Forty finance and credit providers were currency devaluation over the past 20 years as a result of infla- listed as tax paying entities in Jinotega. Data was collected on tionary pressures and a lingering trade deficit. The economy the sixteen primary banks, NGOs, and cooperatives offering graph in Exhibit 1 depicts the period of hyperinflation between credit via the interviews with small and micro-businesses, and 1984 and 1992. Economic growth rates suffered tremendous- lending institutions. Five of the seven largest commercial ly in the 80s, while annual population growth rates remained banks in Nicaragua measured by the size of their credit port- relatively constant at around 3% (Exhibit 1). folios serviced Jinotega via branch offices.3 One commercial bank noted that five new competitor institutions opened Jinotega was the name of both the state and the capital city of offices in Jinotega within the last year. Further, many business- this region situated about 164 kilometers north of Managua. es utilized distributor terms and government-subsidized pro- The road to Jinotega was in horrible condition and the linger- grams as credit sources. ing damage from Hurricane Mitch in 1998 was evident and this damage was amplified by normal seasonal storms. 38 tropical Micro-finance institutions generally consider a lender ade- storms were recorded in the area in September 1999 alone. quately self-sustainable when less than 5% of loans are 30 days Cars were stuck in roads and ditches. Fortunately Nica had an past due. This key indicator of loan quality, portfolio at risk experienced driver who could successfully navigate the route. (PAR), averaged about 10-12% across all lenders interviewed He was one of five drivers the financiera maintained to couri- in Jinotega. er documents and chauffeur managers throughout Nicaragua. The drive to Jinotega took about five hours from Nica’s Casa In the NGO sector, FAMA, ACODEP, ServiFinsa, and Atiende Matriz (company headquarters) in Managua. controlled the Jinotega market. Cooperatives, government programs, and other NGOs offered a wide range of compet- The analysts spent three days in Jinotega gathering information ing financial services. Commercial banks with the largest pres- relative to the opportunity to open a branch to serve the area. ence in this sector were Banco Popular, Banco Mercantil On the return trip to Managua, a main bridge had washed out (BAMER), Banco Nicaraguense (BANIC), Banco del Café so the group altered their course through the northern jungle, (BANCAFE), Interbank, Banco Exportación (BANEXPO), and adding three hours to the trip.As night fell, Henry and his col- Banco Caley Dagnall. Other government sources provided leagues stopped the four-wheel drive vehicle to gaze out at the credit to a small number of businesses and many of the farm- striking display of stars in the night sky. While contemplating ers in the region. the group’s geographical remoteness and the magnitude of the universe under the thick cloud of the Milky Way, Henry real- Some generalizations taken from interviews are explained in ized that their analysis would fundamentally change the way the following notes. An estimated share of the total micro- the financiera would grow in the future. and small-credit markets, measured by total number of clients, is included in parenthesis. The Analysis Henry used annual percentage rate (APR) formulas to calcu- Supply late comparative interest rates.APR =[interest/month x 12] + The supply and demand of credit in Jinotega was analyzed [commission/tenure].A complete analysis of these institutions using a variety of methodologies.The most valuable source of is included in Exhibits 2-4. information came from the Administración de Renta (tax administration) and the Alcaldia in Jinotega (mayor’s office). Specific information regarding the supply of credit, such as C ASES for M ANAGEMENT E DUCATION 57 C ASE S TUDIES NGOs FAMA (20%) This NGO opened its Jinotega office in 1994. FAMA was estimated to serve more micro- and small-businesses than any other institution in Jinotega.While loan averages were high relative to the NGO sector, loan minimums were among the lowest of any competitor.