Letter from the FDL Board of Directors
The micro-finance industry in Nicaragua has continued its vigorous growth, despite the deterioration in the economic situation and in the investment climate and the fact that we still don’t have an adequate regulatory framework that promotes the development of micro-financing institutions.
The preliminary estimates by ASOMIF and the Superintendence of Banks are that the overall micro-credit portfolio expanded at a 35% average annual rate during 2007. In contrast, Nicaragua’s per-capita income grew at the lowest rate in Central America (1.7%) while our economy had the region’s highest inflation rate (16%).
The investment climate for the micro-financing institutions was affected by the government’s decision to directly compete with them through its new subsidized credit program called “Zero Usury,” geared to urban micro-businesses. At the same time, the government has distributed rural credit at subsidized interest rates through credit and multiple service cooperatives. The “Zero Usury” program is financed with national budget resources, while the resources for the subsidized rural credit come from Venezuelan cooperation. We have also been affected by the lack of progress in the reforms needed to modernize and adjust the industry’s regulatory framework. The Micro-finance Law—proposed some seven years ago—continues to await approval by the parliament but no progress was made in 2007.
The paradox of the notable growth of Nicaraguan micro-financing institutions became apparent in a recent study on the micro-financing industry in Latin America by The Economist. In the study Nicaragua appears as the country with the highest percentage of micro-credit service coverage relative to its total population. At the same time, it is the only country where this indicator is not related to the investment climate, the regulatory framework or the institutional development of this industry. One possible explanation is the high level of external cooperation Nicaragua has received to finance the growth of micro-credit and the considerable weight of micro, small and medium businesses in Nicaraguan economic activity compared to the rest of Latin America.
The rapid growth of the micro-credit service coverage is also linked to the intensified competition in the market, particularly in the small and medium urban commerce and service businesses. Indirect competition from credit cards, supplier credit and consumer loans from the commercial banking system is increasing. Nicaragua’s commercial banks have adjusted their strategies to penetrate the lowest income markets aimed at retail services, because the corporate banking market is narrow and has become very competitive. This strategic shift has involved a notable expansion of the network of commercial bank branches, which have penetrated into rural zones that are far away from the main urban centers.
Nonetheless, the supply of financial products and services is not very diversified and the Nicaraguan market is still far from saturated, particularly in the rural areas. The social coverage of the agricultural market tripled in the past five years, but still only a third of the producers have access to the financial services offered by micro-financing institutions and commercial banks. And there is still a considerable deficit of credit to improve or build housing for the rural and urban population and to attend to the numerous micro commerce and service businesses.
The Local Development Fund has continued to support the development of the micro-credit market, expanding its social and geographic coverage and diversifying its supply of financial products. We are experimenting with and developing new financial products to adapt to the needs of urban and rural micro-businesses and have modified the products of the agricultural investment portfolio based on the evaluation we made of the results obtained in the past two years of operation. We have also expanded and strengthened our alliance with the diverse actors of the agroindustrial chains to help improve the producers’ insertion into the markets. The 2007 Annual Report presents a synthesis of the progress we have made in these and other important aspects of our institutional development.