Development & Aid, Economy & Trade, Headlines, Latin America & the Caribbean

DEVELOPMENT-BRAZIL: Huge Market for Small Loans

Mario Osava

RIO DE JANEIRO, Jun 13 2003 (IPS) - In the poorest regions of Brazil, from the urban favelas or shantytowns to the arid, impoverished northeast, there is a potential demand for billions of dollars in microcredit to set up and expand small businesses, and even the large banks are beginning to take an interest.

Microfinance is relatively undeveloped in this South American nation of 171 million, but the new government of leftist President Luiz Inacio Lula da Silva sees it as a priority in boosting development and reducing poverty.

The Central Bank announced that it will soon promote an expansion of the offer of small loans to microenterprises and small businesses in both the formal and informal sectors of the economy.

A capitalist country with too little capital, like most countries in the developing world, Brazil’s economy is held up by the scarcity and high cost of credit. Financing of economic activity is equivalent to less than 30 percent of Gross Domestic Product (GDP), compared to more than 100 percent in several industrialised nations.

In consequence, interest rates run as high as 300 percent, which basically amounts to ”armed robbery,” in the words of Planning Minister Guido Mantega.

Although small informal sector businesses provide employment and a livelihood to millions of families, microentrepreneurs find it virtually impossible to obtain bank loans.

Microlending has been ”a blessing” for Maria Auxiliadora Silva Farías, who set up a small store seven years ago where she sells clothing, paper goods and trinkets out of a garage in Rocinha, Rio de Janeiro’s biggest favela.

Farías has taken out nine small loans to purchase merchandise, which enabled her to expand sales. She currently owes 4,123 reais (around 1,400 dollars) to Viva Cred, a microfinance institution founded in 1996 by the non-governmental organisation (NGO) Viva Rio to serve the residents of poor Rio de Janeiro neighbourhoods.

The numerous requisites that would-be borrowers must meet to obtain a bank loan, and the high interest rates charged by banks, put traditional loans out of the reach of informal economy merchants like Farías.

She pays Viva Cred 157 reais (some 55 dollars) a week to pay off her loan, at a 3.9 percent monthly interest rate.

”Things are difficult, because there’s no money on the streets,” she told IPS, referring to the current stagnation of the Brazilian economy. She also complained of competition from large chain stores that have opened branches in Rocinha, and from the new shops and kiosks that have mushroomed in the favela.

Despite its poverty, Rocinha is a big market, with a population of 56,000, according to the 2000 census (although community leaders put it closer to 150,000). Two banks and two microfinance institutions operate in the favela.

Some 2,500 businesses serve Rocinha, which is located near one of Rio de Janeiro’s most beautiful beaches.

Nivaldo dos Santos, the owner of a small fruit and vegetable shop, which has a good location at the entrance to Rocinha, is not complaining about the economic crisis. A 1,200 reais (415 dollar) loan that he renewed several times gave him an important boost at the start, but now signifies little for his business.

His shop currently does a turnover of between 8,000 and 10,000 reais (2,800 to 3,500 dollars) a month.

Dos Santos is even able to make small informal loans, on which he charges a 10 percent monthly interest rate – quite a bit higher than the loans he was granted, he admitted to IPS.

Viva Cred is one of 121 institutions that offer small loans in Brazil, according to Central Bank statistics. Microlending has grown in the past few years, and has even attracted two large private banks, but is still relatively undeveloped with respect to its potential and to the growth achieved in other countries.

The Central Bank estimates the potential demand for microcredit in Brazil at around 11 billion reais, or 3.8 billion dollars, equivalent to one percent of GDP and 50 times the amount currently lent.

Microfinance in Brazil is still tiny in comparison with Bangladesh, where the mechanism first emerged 27 years ago with the creation of the Grameen Bank, or compared to neighbouring countries like Bolivia, Colombia or Peru.

But that is partly because the financial systems of those countries are not as highly developed as that of Brazil, where microfinance NGOs were even able to ”convert themselves into banks,” Teófilo Cavalcanti, the superintendent of Viva Cred in Rocinha, explained to IPS.

Besides, the Brazilian government ”absorbs nearly all of the national savings to finance the public deficit, leaving very little for the productive sector,” and that drives interest rates up, he added.

Insolvency is another problem, because ”Brazil’s laws and justice system make it difficult to seize collateral put up against a loan,” Cavalcanti noted, adding that ”the culture of a country with a huge foreign debt condemns the creditor and tolerates the debtor.”

The function of microfinance is more social than economic in nature, and NGOs and cooperatives that offer microcredit provide financial support to enterprising residents of favelas, low-income neighbourhoods, and remote villages and towns, whose markets are of no interest to the banks, he pointed out.

Nevertheless, the state-owned Banco do Nordeste has become the second-biggest microlender in Latin America, only surpassed by Mexico’s Financiera Compartamos.

Crediamigo, the Banco do Nordeste’s small loans programme, accounts for around half of all microcredit in the country. Last year, it lent 111.3 million reais (38 million dollars) to 133 million microentrepreneurs, through 164 offices in the nine states of northeastern Brazil, the country’s poorest region.

Crediamigo has grown 40 percent a year since it was set up in 1998, the head of the programme, Stelio Gama, said in an interview.

But the expansion could be even greater than that, since there are an estimated six million potential microborrowers in Brazil, compared to the 250,000 people who have taken out small loans in the country, he added.

This year, Crediamigo is in a position to lend double the amount of loans granted in 2002, but the level of demand will depend on a resurgence of economic growth, because microbusinesses in commerce and services, which constitute the majority of borrowers, are the first to feel the effects of economic stagnation, said Gama.

Despite the country’s economic woes, the default rate on loans granted by Crediamigo is low – just 3.8 percent – as is typical of microcredit schemes around the world.

The system the bank uses is the ”solidarity guarantee”, by which the members of ”solidarity groups” of three to five people are jointly responsible for each other’s loans. That mechanism reduces risk, ensures loan repayment, and promotes mutual reliance and solidarity.