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