FINANCE-BRAZIL: Small Loans Counter Economic Apartheid

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Aug 7 1998 (IPS) - Microcredit represents the end of economic apartheid and the possibility of an effective campaign against poverty an inequity, said economists who will recommend Brazil adopt this as a mass public policy at the weekend.

The first Brazilian Conference on Microcredit and Development Policies will be held from Saturday to Monday in Rio de Janeiro.

Brazil is way behind the rest of the world on incorporating this mechanism for loans to people and small businesses excluded from access to the formal financial system.

This “world tendency” has already had excellent results in other countries of Latin America, said conference organiser and MicroBank director, Jose Dominguez Alonso.

Various initiatives have arisen in recent years offering credit to entrepreneurs in the nation’s informal and marginalised sector, but they are limited to a few thousand recipients in each case.

One pioneer movement was the National Federation of Support Centres for Small Entrepreneurs (FENAPE), a non-governmental network which expanded to half the 26 Brazilian states.

The most well-known, however, is the Communitarian Credit Institution of Portosol, created in 1996 in Porto Alegre, in southern Brazil. With the encouragement of the City Hall, its success is attributed to innovations, like the group guarantees.

The beneficiaries organise themselves into groups, and all the members become responsible for paying off the loans of the whole group. This means burocratic guarantees can be eliminated along with any risk of bankruptcy, and the neighbours also have the advantage of knowing each other and can therefore avoid taking on bad partners.

The success of these experiments – the good social outcomes and proof that “poor people pay off their debts” – has multiplied the number of “people’s banks” set up since 1997 by provincial governments and their development banks, like those of Brazilia and the Northeast.

“They are all interesting experiments,” but conditions still need to be created for microcredits to become widely available, and consequently a consistent mechanism to combat poverty and social inequality, “a question which is more political than technical in the Brazil of today,” said Alonso.

In Rio de Janeiro, Alonso is in charge of setting up the MicroBank which, in association with the Grameen Bank of Bangladesh, aims to expand microcredit in Brazil from next year, adapting it to the local culture and international experience.

Grameen, created 21 years ago by economist Muhammad Yunus, was the first of a movement which has spread around the developing world, the best examples in Latin America being the Caja Social in Colombia and BancoSol of Bolivia.

With five million clients, four billion dollars in assets and 2,000 agencies, according to Alonso, Grameen has associates in dozens of countries on four continents.

In February last year, microcredits were the theme of a world conference in Washington, which gained the seal of approval from multilateral institutions, like the World Bank, governments and international organisations for this financial system dedicated to the poor.

The aim defined on this occasion was to mobilise 21.6 billion dollars, supporting a hundred million families world-wide with cheap credit by the year 2005.

Credit “is not only a business, it is also a human right,” stated Brazilian deputy Marta Suplicy, who attended the conference.

In Brazil, the movement is up against the obtacle of high interest rates. The people’s banks lend money at interest of more than one percent, and up to as much as four or five percent, per month.

The official banks started offering resources to microcredit organisations, but at minimum interest rates of 10.6 percent per year, which prevents them from making the loans cheaper. The conventional credit system charges interest of more than 10 percent per month, with a high level of non-payment.

In general, Brazilian microcredit ranges around an average of 1,500 dollars per client, with an upper limit of 4,000 dollars, which rises to ten times this amount for companies or co- operatives. Given the high interest rates, larger loans are a high risk business.

Another Brazilian problem is that the commerical banks “do not have a culture of funding any economic activity, as they are part of a megasystem of resource capture for only one client, the State,” said Alonso.

The persistent and elevated public deficit, currently at seven percent of the gross domestic product, makes the government into a monopoliser of national savings. The basic interest rate paid by the financial system is currently at 19.75 percent per year.

Interior Minister Pedro Malin, predicted in only two or three years Brazil could have interest rates at the international level of six to eight percent per year.

In these conditions, external resources like those offered by the Grameen Bank, at two percent, would be the choice alternative for expanding microcredit, concluded Alonso.