Micro Finance in Nicaragua

For a broader view of Nicaragua's place in the Central American Micro Finance industry, please read the article by Carlos Arenas, Executive Director of WCCN. (click here!)

Carlos Arenas, Exececutive Director of WCCN with Alfredo Alaniz, President of ASOMIF

This morning in Managua we started our day with a visit to ASOMIF, the Institute of Micro Finance Organizations of Nicaragua. There are 20 NGO members of ASOMIF that provide micro credit in Nicaragua. The combined total portfolio of these 20 members is approximately $150 million. Currently, only nonprofit organizations are allowed to be members of ASOMIF. They are working to reform ASOMIF so that regulated institutions may also become members. When this happens, at least three other institutions intend to join ASOMIF. With these additions, ASOMIF would have a combined portfolio of approximately $300 million, serving 400,000 clients. ASOMIF provides assistance and training in accounting, loan processing, audits, and in the development of new products. They publish a magazine which provides financial statistics for all of its members. This publication provides transparency for the industry and allows members to assess their own statistics as compared to the industry.

Right now there is a lot of uncertainty as to whether micro finance organizations in Nicaragua should become regulated by the national government. The fear is that they could be treated like banks and misunderstood as an industry. The Executive Director, Alfredo Alaniz, had a lot to say about state regulation and the role of micro finance in Nicaragua, which has not been understood or supported by the Nicaraguan government in recent years.

One critique of Nicaraguan MFI's (micro finance institutions) has been what is perceived as an excessively high interest rate charged to borrowers, which can be approximately 24% to 36% annually. MFI's are criticized for charging high interest rates to the borrowers who can least afford it. But a closer look at this suggests a more complex situation:

• First, MFI's are the only institutions offering any credit to the poor in Nicaragua.
  
• Second, the annual rate may be very high, but a small shop owner may only take an inventory loan, for example, for a few months. Thus the cost of their credit may only be 4% to 9%. This might be perfectly acceptable for the micro business owner. Indeed, over and over end borrowers told us the credit terms were acceptable, and had helped them grow their businesses. The tailor in Quilali told us that without inventory loans from his local credit cooperative, it would have been impossible to purchase the cloth and supplies needed to operate his business. Before becoming a member of the credit cooperative (before its existence in his village), he explained to us that he was a drunk who hung around in the streets and did little work. He said his business really couldn't operate without access to credit to purchase material.
• And third, the cost of providing tens of thousands of very small loans carries a much higher transaction cost than a multi-million dollar loan to a single large corporate borrower. ASOMIF has determined that the combined portfolio of its members yields about 30 to 32% annually. The cost of funds for this combined portfolio is 10% to 12%, and the operating costs are 15% to 25%, depending on the individual member's portfolio. Looking at these figures, it is obvious there are no excessive profits being made, and should leave the debate open as to just how fair or unfair interest rates really are.

An interesting note is that because this year's Nobel Peace prize went to Muhammad Yunus of the Grameen Bank, it has re-opened possibilities for a meaningful dialogue between the Nicaraguan micro-finance sector and government officials. The peace prize has helped on some level to raise the credibility of the sector. One hopes this kind of impact is felt throughout the world.

Alex pays close attention to all that is said.