Nicaragua: Government Back in the Microfinance Business?

UNCLAS SECTION 01 OF 02 MANAGUA 002393

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/CEN, WHA/EPSC, AND EEB/IFD
TREASURY FOR SARA GRAY
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR

E.O. 12958: N/A
TAGS: EFIN EAID ECON PGOV NU
SUBJECT: Nicaragua: Government Back in the Microfinance Business?

REF: Managua 1783


1. (SBU) Summary: The National Assembly has approved two bills
creating a National Development Bank (NDB). A state-owned
institution, the NDB will operate as a first story financial
institution providing small loans to both urban and rural Nicaraguan
producers. The GON will provide USD 8 million to capitalize the
NDB. While the Assembly did not set an interest rate ceiling on the
bank's lending portfolio, it did place restrictions on its use for
government projects and by government employees. The NDB's
activities will be dominated by the GON's new USD 5.1 million "Usura
Cero" (Zero Usury) program designed to provide credit to urban women
wanting to start businesses. Both NDB and Usura Cero will compete
with Nicaragua's existing private microfinance institutions (MFI),
numbering as many as 300. National Assembly deputies believe that
the restrictions on who can access NDB loans and what they can be
used for will ensure that the NDB can operate effectively and not
become a source of petty cash for political patronage. In our view,
given the nature of Nicaraguan politics, and the upcoming 2008
legislative elections, the NDB and Usura Cero may well quickly
become little more than political (and campaign) slush funds. End
Summary.

A New Development Bank for Nicaragua
--------------


2. (U) On October 2, the National Assembly approved two versions of
the bill creating a National Development Bank (NDB) and establishing
its operating structure. Both versions establish the NDB as a
state-owned bank that will make small loans to Nicaraguan urban and
rural producers, but will take no deposits. Starting in 2008 and
spread over four years, the GON will transfer USD 8 million to
capitalize the institution. The legislation sets no interest
ceilings. The bank cannot finance government projects, make loans
to GON employees or relatives, or lend more than 10% of its capital
to any single borrower. The NDB will be able to work through
financial intermediaries, such as microfinance institutions, in
areas of the country where it does not have offices. The names of
all the candidates for the Board of Directors will be submitted to
the President and the National Assembly for approval. The bill
provides for future private sector and/or NGO capitalization of the
NDB, granting any non-state stakeholder representation on the
board.


3. (U) The two versions of the bill differ primarily in the make-up
of the Board of Directors, and must be reconciled during a full
session of the Assembly before a final law can be sent to President
Ortega for signature. The FSLN version of the bill states that the
NDB board should include a president and vice president, who are not
active in any political party and will serve five-year renewable
terms. Other members of the board include three representatives
from the major productive and agricultural chambers; one
representative from the Atlantic Coast; as well as the Ministers of
Finance, Trade, and Agriculture. The National Assembly will approve
all board members by a simple majority. (Note: A simple majority is
50% +1 of a quorum. A quorum requires that at least 47 of 92
members of the Assembly be present. End Note.)


4. (U) The ALN version of the bill would have the NDB operate more
like a private bank. In this version, the NDB would be supervised
by the Superintendent of Banks, and would be audited by a non-state
entity if it begins to experience losses. To limit the influence of
the Executive Branch over the NDB, the three ministers would serve
only as advisors to the Board. The president and vice-president
would be approved by at least 47 votes in the National Assembly
(known as a qualified majority). In an attempt to reduce possible
Venezuelan influence on the bank, the ALN bill also places
restrictions on donations to the NDB, including the use of donations
as capital.

Zero Usury
--------------


5. (U) The NDB will also administer the GON's new "Usura Cero" (Zero
Usury) program. Touted as an urban version of "Hambre Zero"
(Reftel),the program provides credits to urban women wanting to
start a business. Loans will average USD 300 and carry an interest
rate of 9% (4% ceiling, plus 5% for to cover inflation). (Note:
Currently, the cheapest microfinance loans are 20%, while private
sector dollar-denominated consumer loans average 11%. End note.)


6. (U) Usura Cero has already begun operations under the supervision
of the Ministry of Trade and Industry. So far, 500 women from
Managua have received loans from the USD 2.25 million 2007 allotment
to the program. With a 2008 budget of USD 5.1 million, Usura Cero
is expected to reach 7,600 beneficiaries, representing the largest
single component of NDB activities. The Usura Cero program requires
that its administrative staff be composed of 70% women and 30% men,
with preference given to business administration graduates under the
age of 24. It is unclear how the Usura Cero program requirements
will affect the staffing and operations of the NDB.


7. (U) While the GON has stated that Hambre Cero, and now Usura
Cero, will take the place of pre-existing agricultural and business
development programs in the Rural Development Institute (IDR) and
the Institute for Small and Medium Enterprise (INPYME),both
institutions retain most of their funding and their programs in the
2008 budget.

Competition to Private Sector Microfinance?
--------------


8. (U) The combination of the budgets for the NDB and Usura Cero
(USD 7 million in 2008) will create an institution that competes
with the majority of existing microfinance institutions (MFI),most
of which are operated by non-governmental organizations (NGOs).
Nicaragua's entire MFI market is comprised of more than 300
registered institutions, reaching 300,000 clients and handling over
USD 400 million a year. The Usura Cero loan program will likely
compete with the smaller, NGO backed MFIs, which make small loans
(USD 200-500) and carry higher operational cost and risk levels.
Loans from these institutions average interest rates of up to 40%,
well above the 9% Usura Cero will charge.


9. (U) The NDB's non-Usura Cero loans will compete more closely with
Nicaragua's five largest MFIs. These institutions recently became
full-fledged banks under the supervision of the Superintendent of
Banks, offering a full range of banking services, including credit
cards and deposits. They represent almost two-thirds of the MFI
market. Two of the largest, Findesa and Banco ProCredit, each
manage about USD 100 million in loans. The average loan from these
institutions is USD 5,000, but loans can be for as much as USD
200,000. Until the first NDB board decides on interest rate and
loan size policy, it is difficult to say how much of a threat the
NDB's regular operations will be for these MFIs. The Minister of
Agriculture stated that he believes unmet demand for microcredit to
be USD 300 million, leaving "plenty of room in the market."

Historical Context
--------------


10. (U) The NDB will be the first state-owned bank in Nicaragua
since 2001 and the first development bank since the 1990s. In the
1980s, the Sandinista government nationalized all banks, including
the National Development Bank of Nicaragua. The bank continued to
operate as a state-run institution into the 1990s, when it failed as
a result of poor management and too many non-performing loans.


11. (U) The idea of creating another state-owned development bank
has been floating around for several years. Two FSLN deputies
revived the idea in September of 2005, but the bill was sidelined by
other political priorities. As part of their campaign platforms
during the 2006 presidential election, the two left-leaning parties
(MRS and FSLN) proposed national development banks to provide
credits to small and medium-sized producers (mostly agricultural).
In contrast, the two liberal parties (ALN and PLC) proposed the
creation of a Development Institute that would manage the funds made
available by IDR and INPYME.

Comment
--------------


12. (SBU) During the National Assembly debate, members of all
parties emphasized their determination to create a bank that
responds to market forces and does not succumb to the pitfalls which
have plagued state-owned development banks throughout Latin America.
They believe that the restrictions on who can access the loans and
what they can be used for will go a long way to ensuring that the
NDB can operate effectively and not become a source of petty cash
for political patronage. Given that everything in Nicaragua quickly
becomes politicized, National Assembly delegates claims that the
bank will remain "untainted" come across as disingenuous. In our
view, with the 2008 legislative elections just around the corner the
NDB and the Usura Cero program may well quickly become little more
than political (and campaign) slush funds.

TRIVELLI