Peru: Bringing people to the bank
Low banking penetration has led Peru’s retail financial sector to push banks and microfinance institutions into devising innovative strategies to expand their customer base.
While Peru’s GDP per capita increased from $3312 in 2006 to $5291 in 2011, very few Peruvians are taking this additional income to the bank. Peru’s banking penetration rate, measured as the percentage of households using one or more financial or banking instruments, is only 28%. This is far below rates in neighbouring countries such as Chile (70%) and Brazil (over 90%).
To boost the number of Peruvians buying banking products, banks and microfinance institutions plan to improve administrative efficiency to cut costs and thus lower interest rates on micro loan products. Currently, financial institutions serving Peru’s lower income groups have an efficiency rate of 50%. This means only 50% of every sol invested in microfinance is actually distributed to customers in the form of a loan; the remaining 50% is used to cover operational costs.
While this figure may seem high, it is not unusual in micro-finance. Banks and financial institutions incur greater costs associated with physically reaching more remote areas, and there is greater risk associated with distributing loans in cases where it is difficult to attain applicants’ credit history.
Financiera TFC, which began operations in 1997 as Volvo Finance Perú, recently told local press it plans to improve efficiency by building technology to increase knowledge of customers’ credit history and develop a mobile banking network. The latter strategy may prove to be the most effective. While few Peruvian households have bank accounts, 97% have mobile phones.
Banco de Crédito Peru (BCP) is also a leader in reaching out to un-banked Peruvians. “The financial system as a whole has only 6m persons,” Walter Bayly, the bank’s CEO, told OBG. “There are 6m people living in the city that earn over the minimum wage and don’t have any banking relationship whatsoever. The challenge is how to bring these individuals into the banking system.”
To do this, BCP is developing an expansive third-party banking agent system to handle distribution. The bank currently partners with small business owners such as grocers and hardware stores to form a network of more than 4600 banking agents across the country. Agents are capable of assisting customers in performing limited banking transactions, such as paying bills.
By outsourcing services to local agents, BCP significantly saves on the costs of setting up local branches. Customers also save by doing their banking close to home as opposed to commuting to the nearest urban centre.
While there has been some speculation concerning the impact of the global economic crisis on Peru’s banking penetration rate, to date these concerns look unfounded. Conversely, the crisis could actually increase consumer confidence in Peru’s banking sector: individuals who placed their money in checking and savings accounts throughout the crisis remained unscathed while those with investments in the Bolsa de Valores de Lima (the stock exchange) and mutual funds suffered losses.
A more likely challenge to the expansion of Peru’s retail banking sector comes from a consideration by lawmakers to impose interest rate ceilings on banks operating in the country. While the policy is meant to attract more banking customers by offering them lower interest rates on loans, rate ceilings could end up being counter-effective.
As mentioned, banks do incur higher costs and greater risks in distributing loans to customers in remote or low-income areas. These costs are usually accounted for in higher interest rates. With rate ceilings in place, banks may be unable to re-coup these costs and thus may be more likely to cut back on loan distribution in low-income areas.
Colombia’s experience with rate ceilings is indicative. In 2007, a rate ceiling of 33.93% annually was imposed on micro-finance institutions in the country. Research by the Consultative Group to Assist the Poor showed that in the years following this rate cap there was a slowdown in micro-finance penetration.
Going forward, banks’ efforts to improve administrative efficiency internally and develop new distribution channels are more likely to lead to increased banking penetration than rate ceilings. Even in the absence of rate ceilings, banks operating in Peru have every incentive to work towards lowering costs to reach a growing number of potential customers.