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INCLUSIVE GROWTH: THE CHALLENGE FOR DEVELOPMENT BANKING
evelopment financing from a socially inclusive perspective and the function and role of development banking were the key topic addressed by the Thirty-Seventh Regular Meeting of the ALIDE General Assembly, held at the Sheraton Hotel in Montevideo, Uruguay, on May 24 and 25. The event brought together 197 participants, 162 of them belonging to institutions in 19 Latin American and Caribbean countries; 9 from 7 countries outside the region (Canada, China, France, Germany, Holland, Spain, and the United States), and 26 representing 13 international organizations and cooperative institutions. Organized with the collaboration of Banco de la República Oriental del Uruguay (BROU), the Meeting was opened by Uruguay’s Minister of Economy and Finance, Danilo Astori. The Minister underscored the importance of studying the role of and challenges facing the development banking system in the present situation, in which it must be borne in mind that while our economic growth is essential, it is not enough, of itself, to produce development, which also involves basic concepts like social justice, through which more equity is sought, particularly for those who have suffered the consequences of the crises in our countries, and sustainable development that takes care to ensure environmental measures and safeguards the conservation of our basic resources.
the long-term resources) have among the world’s lowest levels of capitalization –in the neighborhood of 20%. These markets are markedly procyclical: credit grows faster than the product during boom periods and drops more heavily during crises, fueling the fluctuation of economic cycles. In addition, access to financial services is unequal, for less than 5% of the poor have access to credit and less than 15% to savings, in comparison with families that are not poor, in which case the figure are 8% and 33%, respectively. Evidence shows that market mechanisms alone have not been sufficient to promote access to financing and that, for that reason, public policies are needed to cope with market failures and to promote financial development. Furthermore, improving access to the financing system requires the participation of the development and the commercial banking systems, as well as of the capital market. In this case, development banking serves as an instrument for harmonizing commercial criteria with public policy in order to cope with problems associated with transaction costs and information asymmetries.
It was pointed out, in addition, that inclusion must be viewed from a threefold perspective: (a) as an ethical imperative and also one of economic right; (b) as a lever for development for both people and our countries; and (c) as an opportunity to do new It was stated at the Meeting that the low level of financial business and for innovation. Viewed in that way, financial inclusion inclusion in Latin America and the Caribbean is nothing more than the is a benefit for our countries that should be strongly promoted. reflection of financial markets with little development and depth. It was stressed that an inclusive financial sector requires Furthermore, inasmuch as our financial systems are basically bankoriented and short-term, the securities markets (which should provide universal access to all financial services at reasonable costs; strong
institutions guided by specific regulations; financial and institutional sustainability; and multiple service providers that will ensure competitiveness and transparency. It also calls for a general political context that includes: equitable growth, macroeconomic equilibrium, strong institutions, a healthy financial sector, competition, diversity and transparency. Likewise, interest rates that are in line with the microfinancial situation, where the ceilings on those rates limit the
access to loans by the most needy sectors; of a cost policy, because it is necessary to offset the higher costs associated with the smaller microfinancial operations with appropriate costs and the development of products to reduce other costs for institutions. It is important to recall, as well, that an inclusive financial sector should provide related non-financial services like training and information, among others.
DECLARATION OF MONTEVIDEO
We, the representatives of the Latin American and Caribbean development financing institutions, gathered in Montevideo, Uruguay, on May 24 and 25, 2007, at the Thirty-Seventh Regular Meeting of the ALIDE General Assembly, declare the following: 1. We reiterate our commitment to fight the existing poverty and social exclusion of large Latin American and Caribbean population groups that are failing to receive the benefits of the region’s growth and development and will not cease our efforts to get our institutions to confront this challenge with concrete action through financial inclusion. We believe that the massifying of access to credit under suitable conditions and with the use of appropriate technology, if possible, constitutes a means with a great potential for getting the lower-income sectors to share in the fruits of economic development and growth in a global economic context and that, in keeping with our institutions’ social mandate, it is our function and responsibility to develop mechanisms to permit the access of these important social sectors to the formal financial system. We are convinced that it is the duty of the State to create the necessary conditions for and promote the development of financial markets, as well as to intervene in and create --when the market fails to do so--, development financing institutions to finance the production and social sectors, always complementary to the activities of the private sector. The State should in no way give up this function, inasmuch as it has been proven, particularly in the region’s recent experience, that the market is not always the best alternative for reaching sectors with high social returns, which require long-term financing. We verify the fact that public banks exist in most countries of the world and that these banks frequently have a significant presence in and impact on their respective national banking systems and on the financing of the production and social sectors. For that reason, we call for these institutions to move toward the adoption of corporate governance practices that will protect their management from external intervention. We respect decisions that Latin American countries decide to adopt autonomously regarding their development financing model, inasmuch as we recognize that there is no sole development banking model, but that the latter is chosen in accordance with the needs, level of development and particular situation of each individual country. We reiterate our commitment to promote and support micro, small and medium-sized urban and rural enterprises, because they are one of the most important and rapid alternatives for job creation, poverty alleviation and social inclusion. In this connection, we reaffirm our conviction that it is necessary to broaden the range of resources and to reinforce our financing programs for micro, small and medium-sized enterprise. We express our concern over the negative effects that climate change and global warming produce in the lives of people throughout the world, particularly the most vulnerable population sectors --that is, the poorest. In keeping with this, we commit ourselves to be more careful in ensuring that the projects we finance are environmentally friendly, at the same time as we call upon international cooperation organizations and institutions to work jointly to confront this challenge to mankind. We recognize the importance of microfinance institutions as an instrument for enhancing the financial deepening and access of micro and small business to the financial system. For that reason, we assume the commitment to support their strengthening and to provide any assistance they may need on a basis of efficiency and self-sustainability. We are pleased that our Latin American Association, which will celebrate its 40th anniversary this coming January 24, 2008, is firmly established among the development financing institutions as their representative body and their spokesman with international organizations, governments and society, and that it promotes the unity and reinforcement of banks and development financing institutions in order to improve their contribution to economic and social progress and to our countries’ integration, and for that reason commit ourselves to provide all our support to build the Association up as the Regional Forum par excellence for the analysis and debate of issues concerning Latin American development financing and as a suitable mechanism for cooperation and the development of joint Latin American development banking initiatives.
10. Lastly, we express our special appreciation to Banco de la República Oriental del Uruguay, and to the authorities and citizens of Montevideo, for their warm hospitality extended during this Thirty-Seventh Regular Meeting of the ALIDE General Assembly. Montevideo, Uruguay, May 25, 2007
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Taken from BNamericas Latin America and the Caribbean is experiencing some of its strongest economic growth ever, finishing in 2006 the most vigorous three-year period since the 1970s. Moreover, the overall economic outlook for the region in 2007 does not differ substantially from a year ago. However, Latin America's erratic growth has stopped short of reducing poverty and inequality. In a region rich in natural resources and human capital, income distribution is more unequal than anywhere else in the world and nearly a quarter of the population lives in poverty, roughly the same as in the late 1980s. With such challenges for human development, the role of development banks in the region is key. Although there have been some failures and cases of misuse of public funds, there are also success stories in Latin America's development banking sector. BNamericas spoke to Rommel Acevedo, executive secretary of Latin American Association of Development Financing Institutions (ALIDE), about the challenges faced by development banks in the region and their outlook for the future. BNamericas: In Latin America, a number of development banks BNamericas: Which are the main challenges facing Latin that were not financially viable failed, were closed and privatized. American development banks? Acevedo: Development banks must pursue macroeconomic goals What's your view on this? Acevedo: During the 80s and 90s, as former such as employment, education, social housing, IDB president Enrique Iglesias has repeatedly among others, but at the same time, they must said, Latin America experienced what he meet microeconomic conditions or be financially called a "banquicidio", or the closure of several viable. public banks. The most extreme cases took BNamericas: Does it mean there is no more place in Bolivia and Peru. In Peru, under the room for banks that are not financially viable? autocratic regime in 1991, banks attending Acevedo: Development banks cannot afford only industry, mining, housing and rural sectors to look at one side of the coin, pursuing social were closed. goals. Development must be financially viable. BNamericas: However, many banks in Latin And financial viability is crucial when banks need America were closed after cases of misuse to meet their funding needs in domestic and of funds were detected. international markets. Acevedo: In many cases, it's true funds were BNamericas: Let's suppose development misused. Public sector banks were vulnerable banks are well managed and without corrupt to political influence. It is true, as has been practices. Do you think Latin American said, that some loans financed acquisitions of development banks can be financially viable? 4x4 vehicles instead of capital goods for small-sized agriculture Acevedo: Yes, I do. I also think development banks will adapt to producers. There have been corrupt practices at many public sector upcoming needs. In Asia, Europe, both regions where there are institutions due to political or economic influence. highly developed countries, there are very important public sector BNamericas: How can the vulnerability of public sector banks to banks. Examples are Spain's Instituto de Crédito Oficial, which political influence be avoided? supports SMEs in exports, and Germany's KFW, which plays a key Acevedo: First, banks must be financially viable, second, they role in supporting small-sized companies. shouldn't have to depend on government resources. BNamericas: How much does competition from commercial BNamericas: Could you mention an example? banks affect development banks' performance? Acevedo: There are a number of development banks that generate Acevedo: I think it's good development and commercial banks profits for governments, such as Chile's BancoEstado. An official from complement their activities. Second-floor development banks are BancoEstado told me if the bank had made losses for the clear examples of complementary activities since they provide resources to other financial intermediaries for development government, it would have been privatized a long time ago. purposes, to meet SMEs financial needs, to capitalize microfinance BNamericas: Considering there is strong competition among institutions. financial institutions in many Latin American countries, how Chile's BancoEstado and Peru's Banco de la Nación, have a strong much room there is for development banks? presence in locations where private sector banks have no Acevedo: Development banks can make a significant contribution by branches. This has enabled BancoEstado to gain clients and offer financing activities unattractive to private sector banks or too risky to microfinance products. be served by the private sector. These are the areas where BNamericas: Some private sector banks have started to attend development financial institutions can play a significant role. clients previously served by public sector banks. If that's the BNamericas: But if private sector banks are not attending these niche case, do you think it's better for development banks to exit markets, it suggests they aren't profitable. their markets rather than competing with commercial banks? Acevedo: Development banks must obviously pay a lot of attention to Acevedo: If private sector banks target a market previously served market evolution and business profitability. by public sector banks, I don't think public sector banks should exit their markets. If that's the case, the market has the final say and
INTERVIEW WITH ROMMEL ACEVEDO, SECRETARY GENERAL OFALIDE
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there will be obviously competition among private sector and state-run banks. However, this competition would not be generated by public sector banks. BNamericas: So you don't think development banks should compete with private sector banks for clients already served by private sector banks? Acevedo: I don't agree with the idea of public sector banks entering a market already well served by private sector banks. Private sector anks can enter markets already well served by public sector banks,
which means state-run banks could decide to exit their markets if commercial banks prove efficient. BNamericas: So the main goal for development banks is to create markets? Acevedo: Exactly. Many people believe state-run banks hold up market development. But development banks are not here to distort markets, they create markets. And what is the market? Private sector agents. So development banks are here to facilitate the activities of private sector agents.
APPLICABILITY OF PREBISCH’S THINKING IN THE TWENTY-FIRST CENTURY
Close to 300 people gathered this past May 21st in the auditorium of Banco de Desenvolvimento de Minas Gerais (BDMG) to discuss Latin American economic and social development with renowned specialists, in the light of the thinking of Argentinean economist Raúl Prebisch (1901-1986), considered the most influential economist in the region’s economic thinking. At the initiative of the Government of Minas Gerais State, the Seminar was organized by Banco de Argentinean economist that he considers basic were his nature of and skill as an educator and his enterprising spirit as creator of important institutions like the Central Bank of Argentina, founded during the crisis of the 30s, and the Economic Commission for Latin America and the Caribbean (ECLAC), among others. He also emphasized the so-called “Manifesto of 1949”, a document prepared by Prebisch for the United Nations, in which he pointed
In order: Aécio Neves, Governor of the State of Minas Gerais, Enrique Iglesias Ibero-American Secretary, Jose Luis Machinea , Executive Secretary of CEPAL , Fernando Henrique Cardoso, of Brazil; and Julio María Sanguinetti of Uruguay presidents fomers respectively
Desenvolvimento de Minas Gerais (BDMG), ALIDE and the Economic Commission for Latin America and the Caribbean (ECLAC) and was attended by former Presidents Itamar Franco --the present Chairman of the BDMG’s Board of Directors-- and Fernando Henrique Cardoso, of Brazil; and Julio María Sanguinetti of Uruguay. Other distinguished speakers were economists Enrique Iglesias, Ibero-American Secretary of the Ibero-American General Secretariat (SEGIB) and José Luis Machinea, Executive Secretary of ECLAC. Enrique Iglesias defined Raúl Prebisch as a visionary, a pioneer in the region’s development. Some of the characteristics of the great
out the region’s most telling development problems, which had an enormous impact because it synthesized all of his innovative thinking. In his opening address, Aécio Neves, Governor of the State of Minas Gerais, stressed that it is essential to understand Latin America’s true situation in order to foresee a better future for the region. In this connection, he underscored the dedication of Raúl Prebisch, a defender of what is known today as social liberalism, which points up individual and property rights, but also trusts in the State’s planning role, as an instrument for economic progress and the promotion of social justice.
INTERVIEW WITH LUIS REBOLLEDO SOBERON, PRESIDENT OF PERU’S CORPORACIÓN FINANCIERA DE DESARROLLO S.A. (COFIDE)
1. What is your vision of the development banking system in COFIDE supports profitable projects and its contribution centers on Peru, where economic growth is sustained, boosting production chains and assisting the but strong social pressures --above all in the microfinance system, financial technological interior-- clamor for more social inclusion? innovation and entrepreneurial development Development banking in Peru must operate with programs through our Information, Simplification an absolute awareness of the country’s social and Entrepreneurial Formalization Center, problems. It must be made very clear, however, (COFIDE CENTER) and projects like that of the that social pressures must be met through Voluntary Development Promoters (CGVD) that specific social programs, public investment, bring the supply and demand for labor into education, and health, among other things. The contact with specific projects. 2. This new government in Peru has put major social problems can only be resolved through State policies that get to the root of the problem with long- forward some interesting ideas, like the Highland Exporter term solutions. Like any other development bank in Latin America, Program, support for Micro, Small and Medium Business,
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productive decentralization and regional development, among others. What does COFIDE plan to do to support all of these government initiatives? COFIDE is actively involved in the cited programs in the context of its development financing. The Highland Exporter is an innovative program that seeks to develop production chains in Peru’s highlands by bringing together producers (peasant communities), entrepreneurs with export experience and the State to create the infrastructure for and provide the necessary technical assistance to boost the almost 50 projects scheduled for 2007. COFIDE will help structure the financial operations and will furnish the resources to make these projects a reality. COFIDE’s traditional function is to support micro, small and medium business. When it was turned into a wholesale bank, it continued to support this sector with financing through the banking and nonbanking system supervised by the Office of the Superintendent of Banking and Insurance (SBS) and some of this sector’s growth can be attributed in part to COFIDE’s assistance. Insofar as productive decentralization and regional development are concerned, COFIDE is working through the Chambers of Commerce (17) located throughout the country to advance training and administrative simplification and formalization programs and to identify projects suitable for financing by the Corporation.
remind you that COFIDE is a wholesale bank, which makes it difficult for it to contribute directly to the solution of the process of increasing bank access and use in the country. Even so, we are doing something. Through our work with the Chambers of Commerce throughout the country, we are implementing training, simplification and formalization programs that help convert informal businesses into formal enterprises, so that they can obtain their sole taxpayer’s registry number (RUC) and open a bank account in the retail financial system. In addition, COFIDE has been carrying out a program called Loan and Savings Unions (UNICAS), which cultivate and promote family saving to create production units that are initially self-financing and later accede to the formal financial system. COFIDE has set up 110 UNICAS in Northern Peru with over 9,000 people, involving them in bank operations, which raises bank access and use among sectors that were initially excluded. We have decided to replicate this model in 2007 in regions of Ayacucho, Huancavelica and Puno to help fight poverty and promote saving and bank access and use.
5. Any development strategy that is put into practice in the country recognizes the importance of small and medium business. Have there been any innovations or are any new programs planned to support this entrepreneurial sector? COFIDE is a leading institution in the 3. One of the major weaknesses of the development of financial technology. Latin American countries is their lack of We have developed and are boosting infrastructure and Peru is no exception. our Structured Financial Products Its investment needs are large. Do you (PFEs), whose analysis no longer think COFIDE should play a part in this centers on the subject of credit, but on field? How should it act? What should the production chain that will guarantee it do in the sphere of infrastructure repayment of the loan. It consists of development? Peru is doubtlessly heavily lacking in typical project financing in which the infrastructure, which explains the so-called social exclusion to some operation is initiated with a coordinator who gathers the producers, degree. The government has launched a vast investment program in identifies the market, establishes relations with the suppliers and this area and is implementing specific projects to contribute to town provides the technical assistance required by the project. connectivity, provide the most distant zones with energy for business and enterprise development, and supply water through the Water for In this context, COFIDE is developing the financial engineering for the project’s implementation and is interesting banks and Everyone Program, in its effort to alleviate extreme poverty. We in the Corporation are seeking ways to participate in projects of microfinance institutions in carrying out the retail financing operation this kind, but are limited by our status of wholesale bank, which with funds supplied by the Corporation. The producer produces in a impedes us from assuming direct risks. We are considering some context in which its market is assured and almost all of the risks amendments to our establishing law to enable us to participate have been mitigated, turning the PFEs into successful financial directly in coinvestment and cofinancing operations with multilateral products that will further one of the government’s key programs, like organizations through concession financing and public – private the Highland Exporter projects. projects. In the degree to which these changes are made, COFIDE 6. In your opinion what should the relationship be between will play a highly active role in infrastructure development. 4. Levels of bank access and use are comparatively lower in development banking and private banking? What roles should Peru than in the other Latin American countries and this each play in this matter? situation is even more serious in the country’s interior. What Historically, relations between the public and private sectors have efforts is the Corporation making with respect to financial been complex and even controversial. In the financial terrain, private banking has been hard put to understand that development decentralization? The low level of bank access and use in Peru is a matter of banking completes the work of financing the production sectors permanent concern that has to do with the widespread informality of efficiently. As defined in recent years, development banking fulfils entrepreneurial activities in our country. However, I would like to the function of resolving market failures, difficult access to credit,
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the problem of asymmetrical information and participation in higher- manufacturing and trade.The financial technology being developed risk sectors. by COFIDE to benefit the Municipal and Rural Savings Banks and EDPYMES, seeks to facilitate access to credit and reduce resource Peruvian development banking and private banking today are costs in order to boost the sector’s growth, as well as the execution complementing each other’s role and perfecting criteria, such as, for of subordinate operations to build up equity and raise its leverage example, that of a single banking offer, which should be interpreted level. not only as their coexistence in the same marketplace or locale, but in accordance with the sectors they serve. In this case, development 8. What is COFIDE’s outlook for the next few years? banking works with microbusinesses that fall outside the scope of To continue growing and to continue being Peru’s major action of private banking and for that reason their work is development bank, by boosting our financial and non-financial products. complementary. On the other hand, we are implementing the “development financing In the area of our financial products, we will continue our system,” which consists of different levels of coordination among intermediation operations by channeling resources through the officials of institutions involved in the area --in other words, Banco de financial system; we will continue forming trusts, either credit, la Nación, AGROBANCO, Highland Exporter and COFIDE. The management or guarantee, by facilitating operations and reducing committees of presidents, general managers and risk and finance risks; we will foster the growth of our structured financial products managers are all contributing to a well-coordinated effort that includes for the development of production chains; we will make our financial relations with the private banking system. operations more sophisticated by adding coverage operations with derivatives and will seek to amend our establishing law so that we 7. The microfinance industry, which in its early days enjoyed can assume a retail bank’s risks in national development projects considerable COFIDE assistance, today has been consolidated through syndicated operations to support the implementation of as one of Latin America’s best experiences. What more can the infrastructure and other concessions. Corporation do to support microfinance development in Peru? COFIDE continues to actively further the development of microfinance And insofar as our non-financial operations are concerned, we will institutions. Training, equity building, access to credit and the promote decentralization, business formalization, and our Volunteer reduction of interest rates are our main objectives in this important Development Promoters Program and will further our socialsector. Our interest is in supporting micro and small business, using financial support programs through the Únicas. fund allocation criteria different from those of the commercial banking system and this methodology has been appropriately developed by The outlook for COFIDE is very good. All we need to bring to bear microfinance institutions. are our efforts, imagination and the conviction that we will do Through this specialized system, COFIDE is assisting different everything well. production and service sectors, like agriculture, mortgage,
AGRICULTURAL FINANCING PRODUCTS AND SERVICES IN BRAZIL’S BANCO DA AMAZONÍA
Banco da Amazonía (BASA) is a Federal commercial development bank subject to the development policies of the Brazilian Amazon region. It has a 116-agency network that enables it to cover the nine states in that region by serving 94% of the municipalities located in those states. The Bank is one of the region’s most important financial agents, contributing 84% of Amazon development credit. The Bank’s lending policy seeks to promote regional development by extending coverage to all geographic areas and their respective inhabitants. In other words, it has an implicit financial inclusion target that will, in turn. step up the people’s production capacity. It is precisely in this latter aspect that the Bank prioritizes infrastructure financing, support for entrepreneurial innovation and labor training assistance, so that it will be capable of producing greater added value. The projects to be financed should promote job and income creation in the region and, of course, should also be technically, economically and financially viable. In addition, they should be limited to activities within the sphere of the region’s sustainable development. It should be added here that in order to gain further flexibility and coverage, the proposals will not be subject to cadastral limitations, but, however, as a competitive element, they are required to observe pertinent health, environmental and other legislation. BASA has implemented different programs that have resulted in innovative experiences. Such is the case of the reforestation program that proved to be significantly helpful in diversifying the productive base, as did promoting the implementation of agroforestry systems in family agriculture, which enlarged the area sown with eucalyptus. The Bank has also promoted production chains linking family farming with agroindustrial units, the most noteworthy experiences being those involving vegetable oils and biodiesel. Enhanced productivity and competitiveness were the result of the application to stock raising of modern methods involving the transfer of
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embryos and genetic improvement. It is important to stress here that these interventions were carried out bearing in mind the sustainable management of the region’s resources. Among BASA’s main lines of credit is rural credit which, as Table N°1 shows, includes a wide range of subprograms designed to cover the needs of specific sectors, at terms and costs appropriate for the type of investment to be financed. The terms for the different types of financing range from 5 to 12 years and are granted mainly for
Program Special Agricultural Financing
infrastructure like refrigeration equipment, tractors, processing and treatment equipment and machinery, and irrigation. The interest rates charged are in the neighborhood of about 8.75% to 13.5%, the Bank’s key characteristic being that it tends to set its rates in accordance with the amount of the loan and the size of the enterprise; smaller businesses are charged lower interest in order to promote this enterprise segment.
Table N°1: BASA Rural Credit Objective
Interest rate 13.5% 8.75%
Various agricultural activities, from the modernization of refrigeration to the purchase of small animals. Agricultural modernization Incentivate soil rectification, recovery of degraded and conservation of natural cultivated pasture land and systematic organization of resources fertile valleys, in order to increase grass production. Agricultural Tractor Fleet Procure agricultural tractors and associated Modernization implements and coffee processing equipment. Irrigation incentivation Develop economically and environmentally sustainable irrigation farming; and expand storage capacity in rural landholdings. Development of Fruit Growing Finance investments to enhance productivity and production, as well as improvements in the quality pattern and in marketing conditions for fruit products. Agribusiness Support the development of, inter alia, farming, aquaculture, poultry breeding, flower growing, sheep and goat breeding, and milk cattle breeding. Development of Cooperatives Enhance the competitiveness of the Brazilian to Add Value to Agricultural cooperative agroindustrial complex by modernizing the Production production and marketing systems. Commercial Planting and Support the planting and upkeep of groves for Grove Recovery industrial use; recomposition and upkeep of areas for forestry conservation; and planning and upkeep of forestry species for wood production.
Finances up Maximum to: term 100% 5 years 100% 5 years, 2 of grace 6 years 8 years, 3 of grace 8 years, 3 of grace
9.75%-12.75% 80%-100% 8.75-10.75% 8.75% 100% 100%
12 years, 2 of grace 12 years
As a retail bank, BASA’s loans should be applied directly in the preoperational expenses. Each cooperative is able to obtain institution’s offices. The Bank performs the pertinent loan analysis in financing of up to $R20 million (US$ 9.5 million). keeping with the abovementioned Table N°2: BASA Agroindustrial Credit credit policy and demands the Program Objective Interest Finances Maximum necessary guarantees. Generally, rate up to: term those guarantees are required on FNO-Agroindustry Finances all of the goods and services LTIR + 70% the basis of fiduciary property or needed for business establishment, Spread are chargeable to the goods being expansion, modernization, financed, whether such equipment environmental adjustment and is acquired individually or relocation. collectively. Another important FAT- Proger Urbano Promotes micro and small business 16.33% 100% up to 8 years, 3 aspect is that the Bank offers development by improving access to US$180 of grace advisory assistance from the very credit thousand initial stages of the credit process FAT-Cooperatives and Promotes development of micro and 15% 90% up to 8 years, 3 Associations small business production cooperatives US$430 to help entrepreneurs organize of grace and associations thousand their technical and financial bids.
LTIR: long-term interest rate
In the case of the cooperative development program, BASA acts as an institution that intermediates resources from the Banco Nacional de Desenvolvimento Económico e Social (BNDES). The purpose of the program is to build up cooperative associations in the different agroindustrial clusters by financing productive commercial and infrastructure projects. The Bank finances everything from the investment study or project to the procurement of fixed assets (including civil works and machinery), working capital, training and
BASA also provides targeted support to small agribusinesses in its geographic area of operation (see microbusiness classification table). The lines operated by the Bank are funded with resources from the Worker Support Fund (FAT), the Northeastern Financing fund (FNO) and BNDES. In the latter two cases, the resources are used mainly for project financing and, particularly in the case of the FNO, for building up physical infrastructure for production units. BNDES resources, for their part, emphasize the financing of
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production and marketing, with a view to supporting the positioning and consolidation of production units. Table N°2 shows BASA’s own lines (being designed) that operate with resources provided by the abovecited funds. These point up the Bank’s inclination to support micro and small business access to credit and the strengthening of their associations. By way of example, in the case of FAT-Cooperatives and Associations, loans are granted for a term of up to 8 years, with financing that can cover as much as 90% in the case of fixed investments and up to 40% for working capital. billion. Of this amount, 93.5% was funded by FNO resources. A total of 34,371 loans were allocated from this portfolio, with the rural and agricultural sectors being the most benefited mainly because of the region’s socioeconomic structure. These funds were channeled for the purpose of reducing inequalities and promoting social inclusion. In addition, the financing of activities carried out by smaller production units was prioritized, particularly family-based agricultural production.
Insofar as portfolio A credit line that is of Classification of Beneficiaries of BASA Programs quality is concerned, growing importance Size Gross Annual Operating Income Foreseen the loans made by the among the Bank’s Micro: Up to US$ 50 000 Bank, except for those operations is the line Small: Between US$ 50 thousand and up to 100 thousand financed from FNO designed for the tourist Medium: Between US$ 100 thousand and up to US$ 640 thousand resources, are for the sector. These loans Large: Above US$ 640 thousand most part low-risk. A are intended to finance Beneficiaries are classified by size according to their gross annual operating income breakdown shows that fixed and working foreseen, as based on their projected production capacity. 83% of the loans have capital investments, from the establishment, expansion or modernization of tourist an AA, A or B rating, 6.5% have a C and D rating and 10.9% have undertakings to the promotion of production chains linking up different an E and H rating, being classified as higher risk. Almost the entire sectors. Up to 100% of the investment requirements are financed, rural portfolio, amounting to about 38% of the Bank’s total loan the terms are up to 10 years, priority is given to ecotourism projects portfolio, has a low risk rating, with only 5.07% being considered s and investments are aimed at ensuring self-sufficient electric energy high risk, thus revealing the efforts made by the Bank in the area of generation. BASA’s development loans in 2005 amounted to US$ 3.5 risk management.
FONDO DE GARANTÍA PARA PEQUEÑOS EMPRESARIOS (CHILEAN GUARANTEE FUND FOR SMALL ENTREPRENEURS)
The Guarantee Fund for Small Entrepreneurs (FOGAPE) is a (a) institutions compete by guarantee coverage rate. The rights are government fund established to guarantee a given percentage of the allocated in order of smaller to larger coverage, with the maximum loan capital granted by both public and private financial institutions to coverage being 80% of the unpaid principal; eligible small entrepreneurs that have no or insufficient guarantees to (b) eligible institutions may disburse credits subject to the guarantee for its back up applications to DIAGRAM N°1 effective term (2 months financial institutions for FOGAPE OPERATION at present). Minimum working capital and/or level of use of the rights: investment project financing. FOGAPE: DELIVERS FEES, 80% of the award; MANAGER (BANCOESTADO) CHARGES AND COMPETITIVE COLLECTS (c) Up to a maximum of BancoEstado, supervised by BIDDING GUARANTEES 10 times the Fund’s net the Office of the GUARANTEES RIGHTS worth may be Superintendent of Banks and ELIGIBLE FINANCIAL INSTITUTIONS committed. Its present Financial Institutions (SBIF), LOAN APPLICATIONS AND PAYMENT OF LOANS, FEES commitment is in the manages the Fund. It should GRANTING OF LOANS AND ACTIONS TO COLLECT neighborhood of 9 for a be added here that according net worth of to the legal provisions, the approximately US$ 60 Manager (BancoEstado) • SMALL ENTREPRENEURS million; (d) beneficiaries must hold bidding • EXPORTERS must pay a fee of up to competitions for the •GROUPS OF ELIGIBLE SMALL ENTREPRENEURS 2% a year on the guarantee rights among guaranteed sum. eligible institutions, which Operator-based Model: Commissions may be may be awarded those rights It evaluates, decides upon and grants loans subject to the guarantee. differentiated by in accordance with their bids. FOGAPE’s guarantee award institution and risk operation may be summarized in the following steps: limitations, such as claim level and past due indebtedness; and (e) processed loans are formalized by computer for the Manager.
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The institution to which the guarantee rights are awarded may use in accordance with the regulations of the Office of the Superintendent of Banks and Financial Institutions, on the basis of its cash flows. In Table N°1: Definition of FOGAPE’s Target Public other words, FOGAPE targets formal Type of Beneficiary Maximum Level of Sales businesses only, which also constitutes an Net annual sales of no more than US$ 476 Small Agricultural Entrepreneurs incentive for small businesses to become thousand. formalized. Net annual sales of no more than US$ 850
Small Non-Agricultural Entrepreneurs
FOGAPE guarantees loans financing of from fixed assets to working capital, provided that Organizations of Eligible Small Entrepreneurs these are directly related to the cited activity. By way of example, in the case of small agricultural and non-agricultural entrepreneurs, investment projects are Average FOB export value (*) equal to or less financed for, inter alia, the procurement of Exporters than US$ 16.7 million a year over the two machinery, equipment, premises, and immediately preceding calendar years. furnishings, and plant construction, for them to process loans for eligible small entrepreneurs according to example. Items related to working capital could include the the regulations, over the maximum term defined in each bidding procurement of raw material, payment of wages and salaries, and competition. The current term is 2 months. In this way, loan the procurement of goods. Financial debt refinancing is excluded. applications subject to the Fund’s guarantee may be made directly to A special aspect is that guarantees are also provided for financing the financial institutions to which the rights have been awarded, incorporation and/or contributions to production companies including BancoEstado, and in the latter case the application may be (associated with the applicant’s line of business), such as the submitted at any of the offices that serve the country’s small and establishment and incorporation of a small business. microbusinesses.
Unlimited annual sales. Even so, at least 2/3 of the natural persons who comprise them should reach the maximum sales levels indicated for small entrepreneurs.
The case of organizations of eligible small entrepreneurs, for which Among the advantages of operating with FOGAPE guarantees are production infrastructure items mainly are guaranteed, such as that they make it possible to give direct access to credit to small equipment and irrigation and/or drainage projects, is worth special entrepreneurs who do not possess the necessary guarantees to apply mention. Lastly, in the case of exporters, only working capital is to the eligible institutions, in such a way that working capital needs financed, which includes letters of credit, the purchase of raw and investment projects may be financed. The FOGAPE system materials, and PAE (?), etc. does not demand additional guarantees; however, inasmuch as the final evaluation is up to the financial institutions, the latter are Generally speaking, FOGAPE guarantees up to 80% of installment authorized to request complementary guarantees, should they loans that range from one year (for exporters) to up to 10 years for consider them necessary. FOGAPE’s target public is small investments in fixed assets. The maximum loan amount is up to entrepreneurs, whether natural or artificial persons, from any economic sector that produces goods and/or TABLE N°2: LOANS AND GUARANTEES BY TYPE OF BENEFICIARY. services. In order to be identified as a Type of Loan microentrepreneur, such persons must observe the Maximum coverage guarantee rate Term Beneficiary amount criteria preestablished by law (see Table N°1). For loans of up to US$ 136 thousand: Organizations of small entrepreneurs are also eligible - 80% for loans for over 37 months and/or to benefit, whether organized as non-profit artificial businesses that have been operating for less than persons, partnerships or user organizations provided Small agricultural one year. non- US$170 - 70% for loans for up to 36 months, provided that for in Water Codes (water use communities, and 10 years thousand the business has been operating for more than commnities associated with water drainage works, agricultural entrepreneurs one year. water channel associations or other user - For loans of between US$ 136 and US$ 170 organizations that are credit subjects). As in the case thousand: 50%, regardless of the minimum term and the age of the business. of individual entrepreneurs, most of those who make US$163 1 year, up these groups must fulfill the requirements Exporters 80% of the loan thousand renewable summarized in Table N°1. A sector of growing importance in the Fund’s activity are exporters, Organization of US$816 80% of the loan 10 years thousand identified as persons that have exported for an Small Entrepreneurs average FOB value equal to or less than US$ 16.7 million a year over the two immediately preceding calendar years. An US$ 120 thousand for small entrepreneurs, US$ 136 thousand for entrepreneur should have a large enough payment capacity to cover exporters and up to US$ 816 thousand for organizations. Details the loan being applied for and to demonstrate the business’s viability. are set out in Table N°2. An element of particular interest is that in order to be a beneficiary, an entrepreneur must be formally registered with Chile’s Internal FOGAPE guarantees two types of loans: so-called traditional loans Revenue Service (SII). A risk rating of the business must be and stand-by loans. Traditional or effective loans refer to those that performed by financial institutions with A1, A2, A3, B and C1 ratings, provide direct financing for a business’s needs, according to the
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abovecited objectives or lines, and which represent a disbursement of FOGAPE use has climbed steadily over the past 6 years. From a funds at the moment they are granted. The maximum term for this level of 200 credit operations a year and 3 banks making use of that type of financing can be up to 10 years for small entrepreneurs and instrument in 1998, by 2004 there were over 34 thousand operations and in 2006, eligible organizations and 17 financial institutions one year for exporters. BAR CHART N°1 EVOLUTION OF THE NUMBER OF INTERMEDIARY INSTITUTIONS were operating with a Stand-by loans, for their part, FOGAPE guarantee. are a method of financing that does not involve a This can be attributed to disbursement of funds at the 0 18 17 17 17 15 16 the joint efforts of moment they are granted, but 15 financial institutions, the which can become effective most important groups loans. Examples of stand-by representing micro and loans are credit lines, 7 small business and the factoring contracts, Fund management, a performance bonds and 3 function performed by letters of credit. The BancoEstado. The maximum term is set in each 0 number of intermediary bidding competition and at 1998 1999 2000 2001 2002 2003 2004 2005 2006 institutions rose from present is two years. 1998 to its maximum As for the costs, guarantee beneficiaries must pay a utilization fee level in 2003. Starting in 2004, however, as can be seen in bar that can reach up to a maximum of 2% a year on the guaranteed chart N°1, mergers among financial institutions resulted in a capital. At present, that commission is set according to each restriction on the participation of some institutions due to high financial institution’s risk and is collected by the granting financial claims levels. institutions themselves in accordance with the type of loan made. In FOGAPE shows growing activity, as also reflected in the value of the case of effective loans, the fee is charged and apportioned with loans guaranteed (see bar chart N°1). These amounted in 1998 to the same frequency as the loan interest (balance due), while the almost US$ 5 thousand, while by 2005 the figure stood at US$ 521 commission for stand-by loans is charged in advance for the full thousand, showing steady growth, particularly starting in 2000. commitment period.
ALIDE PARTICIPATED IN THE ECOSOC REGIONAL CONSULTATION
At the invitation of the United Nations Economic and Social Council, The Meeting was mandated by the United Nations to study the trends in and progress of ALIDE participated in the international cooperation for ECOSOC Regional Consultation development, in order to of the Annual Ministerial Review arrive at policies and for Latin America and the recommendations to Caribbean, held in Brasilia, Brazil, promote more effective on May 17 and 18, whose central cooperation. It proved to be topic was "Challenges of highly interesting to identify Financing Poverty and Hunger gaps and obstacles that in Eradication in the Region.” Dr. Rommel Acevedo, Secretary the light of the practical General of ALIDE, made a measures and policy presentation in the first panel, on options recommended could the Analysis of traditional truly be coherent with the financing instruments and their Millennium Targets agreed innovations, in which the other by the countries. It should be added that, in participants were Daniel Titelman, F r o m Rig ht to l e f t : Rom mel Ace ve do, G e neral S e c re t ary o f A LI D E; keeping with United Nations Head of the Development Studies José Luis Machinea, Executive Secretary of CEPAL; Everton procedures and regulations, Unit of the Economic Commission Vieira, Subsecretary of Political Subjects of the Ministry of Outer Relations of Brazil; Nikhil Seth, Director of the Office the Meeting was open to the for Latin America and the of Coordination of the Economic and Social Council of the participation of United Caribbean (ECLAC) and Mirela United Nations Daniel Titelman, Chief of Development Studies Nations organizations, Pereira da Silva, from Brazil’s Unit of CEPAL international financial and Institute of Applied Economic trade organizations, and Research. The speakers in the second panel on Innovative financing sources for poverty eradication international and regional organizations, as well as of sectors were Ricardo French-Davis of ECLAC and Ana Peliano from Brazil’s representing the private sector and civil society Institute of Applied Economic Research.
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NAFINSA RECEIVES NATIONAL QUALITY PRIZE
Nacional Financiera’s efforts to diversify and update its support programs for the country’s micro, small and medium business on the basis of financing, training and technical assistance services, was recognized this year with the awarding of the National Quality Prize. . This recognition, conferred by President Felipe Calderón on the Head of NAFINSA, Mario Laborín, is the country’s most important award for organizational excellence and serves as a model for contributing to the development of competitiveness in Mexico.
NEW MEMBERS OF ALIDE
The Brazilian institutions, Caixa Econômica Federal (CAIXA) and Banco da Amazônia (BASA), and Nicaragua’s Fundación para la Promoción del Desarrollo Local (PRODEL) joined our Latin American Association.
CAIXA ECONOMICA FEDERAL
The Caixa, the federal Government’s most important public policy agent, is a wholly-owned public enterprise that plays a basic role in promoting urban development and social justice in Brazil, thereby helping improve the quality of life of the Brazilian people. Maria Fernanda Ramos Coelho is the Caixa’s President.
BASA is actively involved in the development of Brazil’s Amazon (area made up of the Northern Region, Mato Grosso State and part of Marañón State), where it operates as a commercial and development bank. Mâncio Lima Cordeiro is in charge of the Bank’s Presidency. PRODEL channels financial and nonfinancial resources to make them available to local intermediaries that promote microeconomic and housing development, by building up capacities in a search for social equity and the collective benefit. The President of the institution is Raúl Zabalaga Estrada. Welcome!
TC INVEST, Invest (The Turks and Caicos
Islands Investment Agency) has joined ALIDE as an Active Member. The institution is a government agency whose objective is to promote the Island’s development by attracting new offshore investments, stimulating an enterprising spirit among its residents and promoting the financing of the local population. Mr. Conrad C. Higgs, the Chief Executive Officer, is responsible for the Presidency. Welcome!
Contains the presentations made and discussions held during the First Regional Consultation on “Challenges of the National Development Banks,” promoted by the United Nations, ALIDE and Peru’s Corporación Financiera de Desarrollo S.A.. It examines the evolution of the role of national development banks (NDB), with a broad and distinctive vision of Latin American and Caribbean problems, retrieving their complementarity with private agents and the need to make them more effective. Attention is also drawn to the importance of defining their functions more precisely to bring these into line with global trends.
RETHINKING THE ROLE OF NATIONAL DEVELOPMENT BANKS: FUNCTIONS AND FUTURE CHALLENGES
ALIDE launched the 2007 edition of the Databank in a CD-Rom containing institutional and financial information about more than one hundred Latin American and Caribbean development financing institutions, including their operations and business and the parameters they use to rate micro and small businesses.
ALIDE 2007 ©
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