Peru: Expanding microfinance to rural areas
Microfinance organisations and banks in Peru are looking to expand operations in rural areas, where there is ample room for expansion, to combat slower growth in the microfinance segment of late.
Lending grew at 20% prior to 2009, but has slowed since then. As of September 2012, micro-lending had grown at a rate of 1.5% in Lima and 8-9% in surrounding areas, with only 7.8% of micro-loans distributed supporting agricultural activities. The largest percentage of loans (32.81%) is provided to small, non-agricultural businesses.
“There is an overabundance of microfinance offers in Lima,” Ramon Larrea, the general manager of Financiera Universal, a local micro-lending institution, told OBG. “In order to facilitate the growth of microfinance to the underserved, rural agriculture populations in Peru, the government should work with the private sector to support the growth – and viability – of a microinsurance sector within these areas.”
The prevalence of microinsurance in rural areas would help to alleviate lenders’ concerns regarding the ability of rural loan recipients to repay their loans. The financial health of farmers is subject to variables out of their control, such as weather, which makes microfinance institutions hesitant to lend to farmers, despite the potential growth opportunities in this segment of the market.
A lack of physical infrastructure presents another important challenge for microfinance lenders looking to expand to rural areas. Peru ranked 88th in the World Economic Forum’s 2012 Global Competitiveness Report in terms of infrastructure. This puts the country far behind other regional economic powers, such as Chile and Brazil. Government intervention is required to expand and improve upon the quality of the existing road network and connectivity to facilitate the expansion of the industry.
One potential factor that will help banks to reach more remote areas is the recent decision by Congress to pass a law that regulates the use of “electronic money”. The law, which comes into effect in 2013, will allow individuals to use their mobile phone to conduct cash transfers and pay bills.
Several banks, including BBVA Continental, Scotiabank, and Banco de Crédito, are working on developing “cellular wallet” services. Some of the larger microfinance lenders are also likely to develop mobile payment systems. It should be noted, however, that the Superintendency of Banking, Insurance, and Private Pension Funds put regulations into place that prevent banks and similar organisations from making loans against electronically transferred funds.
In order to make sure that mobile banking gets off to a strong start in Peru, regulators have created an incentive system whereby mobile phone users who choose to pay for purchases using their mobile devices will be exempt from the country’s general sales tax over the next three years.
Leaders from Peru’s microfinance sector are also collaborating with international micro-lenders to brainstorm effective strategies for reaching rural areas. On October 29, Agrobanco, a state-owned agricultural bank, held a seminar in Lima entitled “Financial Services for the Rural Poor”. Delegates from a number of countries, such as Colombia and Mexico, were present to discuss how to improve access to financing for further development of the agriculture sector.
At the moment, expanding financial services into rural lending appears to be particularly lucrative, as the saturation of the urban markets throughout Peru has led to increased loan delinquency. According to Larrea, the oversupply of loans in major cities “has caused previously responsible borrowers to become delinquent”.
In a recent bulletin published by the Peruvian Association of Microfinance Institutions, the non-performing loan (NPL) ratio was 5.28% in August 2012, up from 4.96% in 2011. MiBanco, in particular, saw a large increase in NPLs, from 3.61% in August 2011 to 4.64% in 2012. Larrea anticipates that the rise in NPLs is likely to be problematic for some lenders and could lead to a surge in mergers and acquisitions and overall consolidation of the microfinance sector.
At the moment, there is little doubt that the next wave of growth for the sector lies outside of Lima. While improved infrastructure and the introduction of mobile banking will support this expansion, microfinance lenders will be charged with the task of creating products that appeal to a new customer base.