Creative Partnerships Promote Rural Credit in the Andes
The competitiveness and sizable growth of microlending in the Andean Region can be largely attributed to the favorable regulatory framework, but the creativity of the stakeholders in the industry has been an important factor as well. The supervisory authorities in the region’s financial sector have recognized the importance of microlending in the promotion of financial inclusion and have gradually created an environment that has been open to creativity and has enabled the different players to come up with financial services for previously underserved populations in rural areas.
They have emerged in the context of a rapidly growing agricultural sector and financial intermediaries in need of additional lines of resources to meet the demand generated by the value chains. With the support of FOMIN, ABACO has designed several second-story loan products to meet the financial needs of small growers. Several production chain initiatives have been developed in the case of products that have good market prospects as well as a reliable scenario for expected prices. Examples of such products are coffee, lima beans, grapes, hard yellow corn, asparagus, and amaranth. The new loan products include, inter alia, funds for assets, new crops, harvest/post-harvest, “productive counterflow,” and financing of the campaign itself. In four years, ABACO has increased its second-story portfolio by $30 million, reaching more than 50 intermediary partners and benefiting more than 14,000 new clients, with a delinquency rate of 0%.
In another case, as a response to a new law in Bolivia on financial intermediation mandates (2006/07), known in other countries as “non-bank correspondents,” PROFIN has been supporting the formation of several creative partnerships to expand rural financing. According to the regulations that govern these mandates, a regulated entity (the Principal) entrusts a natural or legal person (the Agent) with the performance of financial operations and services within an expressly defined territory for a given period of time. In all cases, responsibility for the operations rests with the Principal, who must analyze the risk and identify the safeguards that need to be in place. Through the creation of partnerships and mandate agreements between the financing entities and their “correspondents,” PROFIN has played a key role in attracting more than 69,000 new clients for financial services and expanding geographical coverage of these services in six departments. It has also helped to place US$79 million in new loans, raise more than US$13 million, and move US$1.6 million generated by auxiliary financial services—good results for an investment of US$1 million from FOMIN and US$5 00,000 in counterpart funds from COSUDE and DANIDA.
On a smaller scale, though large in terms of innovation, is the case of rural investment funds (FIR) under a shared risk scheme promoted by Pro-Rural in Bolivia with support from the IDB/FOMIN Social Entrepreneurship Program [Programa de Empresariado Social PES] Pro-Rural creates a business partnership with a producers association in which each of them invests risk capital. In addition, Pro-Rural makes a loan to the partnership, and, with the combined capital and debt, the association creates its own microlending institution to meet the credit needs of its members, with technical support and accounting and asset services provided by Pro-Rural. This is a specific financing system for supporting the associations’ agricultural activities, developing appropriate technology for the evaluation and assessment of credit risk, and applying efficient oversight practices, bearing in mind the associative nature of the investment. Pro-Rural participates in the proposed system not as a creditor or as merely an executor of the project, but rather as a (co-investment) partner with capital that is truly at risk, sharing both success and failure with the producers associations. This scheme has the advantage that the market for the output produced is the association itself, which makes automatic deductions against the loan and passes the payment on to the financial unit. So far, Pro-Rural has supported the creation of four FIRs—for cocoa, coffee, and quinoa—and has amassed a total portfolio worth US$2.4 million, 84% of it invested in agricultural activities involving nearly 900 growers, with a delinquency rate of 3%. The model appears to have good prospects for replication, and in fact a public-private investment fund evaluated it and approved an investment ten times larger than the amount originally provided by Pro-Rural to expand the scheme.
Although these cases are not a panacea for dealing with the shortage of high-quality financial services in rural areas, they are initiatives that are showing interesting results and good prospects for replication and expansion. By combining the creativity of entities that know the financial field with a willingness to assume risk, together with perseverance and great dedication (plus a little financial support), the partnerships that take advantage of the knowledge and expertise of each party can yield fruit that benefits all concerned, providing new services where none existed before.