In Peru, Tiny Loans Add Up to Big Business
"I've worked two jobs for 15 years. It's nice to have my own business," she says, surveying the small cafe outfitted with bright new appliances and furniture, which she purchased with a 15,000 nuevo sol ($5,400) loan from MiBanco, Peru's largest microlender.
Sanchez's is among hundreds of new businesses to open here in recent years with the help of microloans.
Others are using their access to microcredit to improve already-existing small businesses. Zulma Mendoza, 46, pays 380 soles ($136) in monthly debt payments on the microloan that enabled her to purchase a high-tech machine for her hair salon that allows clients to try on different styles virtually. "We started with zero. We were five, and no one was taking a salary. Now even my two children work and get paid."
Latin America Leads on Microloans
Microloans have taken off in Peru, where informal employment is high and access to credit is low. The concept became widespread around the world through the efforts of the Grameen Bank of Bangladesh, and its pioneering founder, Muhammad Yunus, who jointly won the 2006 Nobel Peace Prize for their successful microloan program.
Now, Peru ranks No. 1 in the annual Economist Intelligence Unit survey of world's best business environments for microlending. Five of the top 10 countries are in Latin America.
Private capital has played a part in microlending for a decade, but it wasn't until Mexico's Banco Compartamos went public in 2007, generating $407 million, that interest in the business among investors became clear. With 1.75 million clients, Compartamos is Latin America's biggest lender. But the bank, which mainly lends to groups of women in rural areas, came under fire from Yunus in 2007 over interest rates that averaged 90%.
$4.5 Billion in Peruvian Loans
By contrast, in Peru, which has the largest microlending industry in Latin America, a competitive lending environment has driven down rates, while the average loan size has increased to $1,300, according to the Microfinance Information Exchange. More than 200 lenders made small loans totaling $4.5 billion in 2009, a sevenfold increase from 2000. Lionel Derteano, vice president at microlender Edyficar, estimates that the sector could expand by 40% annually in coming years.
"The banking system is very profitable, and yet there's a huge unserved market," says Enrique Ferraro, head of investments for Washington, D.C.-based nonprofit ACCION International, which holds a 15% stake in MiBanco and also holds publicly traded shares in Banco Compartamos.
Strong returns and an established set of norms are now attracting big commercial banks to the industry, according to Lucy Conger, co-author of The Mustard Tree, a history of microfinance in Peru.
"The regulation is excellent, and there is international recognition of that," she says. Borrowers face credit checks, and the savings deposits lenders use to steer capital into microloans are federally insured. "There is actually a successful channeling of resources from the cities out into the rural areas," Conger says.
Expanding in South America
Mineral exports and private investment are fueling strong growth in Peru, where the economy is projected to grow 8% this year, one of the fastest paces in the world. Still, Peru's poverty rate hovers around 33%, and only 25% of the population has formal access to credit, according to the country's banking regulator.
And BBVA Continental, Peru's second-largest bank, is finalizing its purchase of Financiera Confianza, another leading microlender, founded in 1992 to provide credit to women in rural areas, the Spanish parent company BBVA confirmed.
Says Luis Derteano, Grupo ACP's chairman: "Commercial banks have discovered that microfinance clients do pay, better even then middle-class clients because they appreciate this chance to improve their lives."