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. 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 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