EL SALVADOR MICROFINANCE SECTOR 2007: MOVING TOWARDS

UNCLAS SECTION 01 OF 03 SAN SALVADOR 001909

SIPDIS

DEPT PLEASE PASS OPIC JWOZNIAK

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON ES
SUBJECT: EL SALVADOR MICROFINANCE SECTOR 2007: MOVING TOWARDS
REGULATION


1. SUMMARY. A recent visit to three leading micro-finance
institutions shows a booming market serving a broad client base
ranging from street vendors to medium enterprises. Microfinance
organizations are also seeking to become regulated financial
institutions, which will allow them to take deposits and finance
their operations at lower rates. Despite some regulatory hurdles,
the outlook for the sector looks positive, though increased
competition may lead to future consolidation. END SUMMARY.


2. During a September 6-7 visit, Overseas Private Investment
Corporation (OPIC) Senior International Economist Joseph Wozniak and
Econoff visited ABANSA, El Salvador's private bank association, and
three leading local microfinance institutions: Accovi, AMC, and
Apoyo Integral. All three institutions have received support from
OPIC through its relationship with Seattle-based Global
Partnerships.

SECTOR OVERVIEW
--------------


3. El Salvador's regulated financial sector is divided into two
categories of institutions: Banks and Non-Banking Financial
Institutions (NBFI). While the laws governing both categories are
largely the same, they differ in two key areas. First, NBFIs must
meet a 15 percent reserve requirement, while banks must only
maintain a 12 percent reserve. Second, while they may offer deposit
(savings) accounts, NBFIs are not allowed to issue current
(checking) accounts. Unregulated institutions, including most
microfinance operations, may not hold deposits.


4. Unregulated institutions may become regulated through a formal
process, which includes meeting the reserve requirement, upgrading
information technology infrastructure, and meeting the
Superintendent of the Financial System's reporting requirements.
The process is both expensive and time-consuming, and few
unregulated institutions have completed it. Accovi, AMC, and Apoyo
have all received support from USAID's financial sector program to
help become regulated institutions.


5. According to Carlos Caceres, Executive Director of ABANSA, the
microfinance sector is dominated by two groups. Cajas de Creditos,
which he described as private worker banks, are limited
responsibility cooperatives which have been operating in the country
for more than 70 years. They typically offer $500-1000 loans to
their members. Non-governmental organizations (NGOs) offer a wider
variety of loan services, but are not as established. NGOs also
tend to support the very poorest segment of the market. In
Caceres's view, the sector is so large that even with the large
number of Cajas de Creditos and NGOs not everyone can get a
microfinance loan.


6. ABANSA supports institutions becoming regulated in order to
formalize what had previously been a largely informal sector.
Caceres stressed that formalized lending is far better than "the
street," where loan sharks can charge exorbitant interest rates.

ACCOVI
--------------


7. Accovi, a San Vicente-based cooperative, has successfully become
a regulated NBFI. General Director Nelson Alvarado stated that
Accovi's financial indicators are actually better than most
commercial banks, and they currently have a 22 percent reserve.
Accovi's ten branches are concentrated primarily in the eastern and
central regions. Accovi currently has 18,000 associates, who pay a
$5 fee per month to the cooperative, and 33,000 non-member savings
account holders. In addition to banking services, the associates
also receive free doctor visits, discount pharmaceuticals, and
educational opportunities (e.g., computer classes). Five percent of
earnings is dedicated to these non-banking social services.


8. Accovi's minimum loan size is $50, and their average loan is
$4,500. Their largest loan - a special client - is $250,000.
Microfinance loans make up 7 percent of Accovi's portfolio, with a
loan size of up to $600 and an average interest rate of 30 percent.
Ninety percent of their loans are in the "small and medium
category," with loans ranging from $600-20,000 and a typical
interest rate of 12%.


9. Accovi offers three types of loans: consumer, enterprise, and
housing. Thirty-seven percent of Accovi's total portfolio is
housing loans, including both mortgages and home improvement.
Mortgages require a 15% down payment with a 12% interest rate.


10. While still receiving some outside financing, Accovi now funds
many of its loans through deposits. Alvarado complained that, as an
NBFI, the Superintendent considers Accovi "more risky" than a bank,

SAN SALVAD 00001909 002 OF 003


even though Accovi is "more liquid than most commercial banks. " He
would also like to see the laws changed to allow NBFIs to offer
current accounts, so that Accovi could better compete with
commercial banks while remaining a cooperative. Accovi's growth
strategy is focused on small and medium enterprise loans, where they
must compete directly with commercial banks.

AMC
--------------


11. San Miguel-based AMC (Adel Morazan Credito) is 90 percent owned
by the Adel Morazan Foundation, a private development organization.
According to Executive Director Wilson Salmeron, AMC has a special
request pending to approve this single large shareholder before it
can become regulated, but it hopes to complete the process by the
end of 2007. AMC's current capitalization is $4 million and it
offers points of service in 17 locations across the country.


12. AMC has over 13,000 outstanding loans, 11,900 of which are
considered "micro," with an average loan size of $600. Micro loans
go to individuals, families, or businesses with ten employees or
less. Most micro loans are to individuals or businesses in the
agriculture or services sectors or for housing. Housing loans may
be as large as $10,000. Accovi's average interest rate is 28.5%,
with a 34% rate on micro loans and a 16% rate on housing loans. The
term varies with the type of loan. AMC has been averaging 40
percent growth per year and sees its greatest potential continuing
to be the micro sector, even after regulation.


13. Thirty percent of AMC's clients receive remittances. Since it
cannot capture deposits, AMC offers a "pass through" service on
remittances, charging a $2 commission on up to $1,500. Remittances
may be used as collateral for loans.


14. Salmeron sees two major benefits from regulation. First, AMC
will be able to receive financing at a 5% interest rate, versus its
current 9.5%. Second, AMC will be able to diversify its funding;
Salmeron projects that 10 percent of future funding will come from
deposits, and an additional 30 percent will come from other sources
(Adel Morazan will retain a 60 percent stake).

APOYO INTEGRAL
--------------


15. Apoyo Integral was formed as part of the Fundacion Salvadorena
de Apoyo Integral, a private development foundation. According to
President Luis Castillo and General Director Carlos Viteri, Integral
currently has a total capitalization of $7 million and 22 branches
across the country. Sixty percent of its financing comes from
international sources, while 40 percent is domestic. Both Integral
and the foundation receive substantial support from the Duenas
family, one of the wealthiest families in El Salvador. Integral
hopes to become regulated by the end of 2007. The Superintendent is
currently reviewing its systems and reports.


16. Integral's micro sector includes loans from $25-10,000 at
interest rates from 15-45%. Integral divides the sector into three
sub-sectors: survivor, simple accommodation, and expanding
accommodation. Survivor loans (e.g., street vendors) are $25-100
loans with a 1-3 month tenor. Simple accommodation loans target
businesses with less than 10 employees and sales of $20,000-$50,000
per year. Expanding accommodation loans target businesses with
sales of $50,000-$70,000 per year. The average micro loan is
$600-700.


17. Integral also lends to small enterprises (sales up to
$700,000/year),but does not offer loans to medium enterprises. An
average small enterprise loan is $18,000 at a 15% interest rate.
Integral also offers loans up to $50,000 for housing, with a 15%
down payment on mortgage loans.


18. Integral estimates that 30% of its clients receive remittances,
which may be used as collateral. Castillo noted, however, that
Integral is only processing about 3,000 remittance payments per
month, and the trend is heading down. He attributed this in part to
immigration issues in the U.S. and in part to current problems in
the U.S. housing market.


19. According to Viteri, Integral has enjoyed 60% growth over the
last year. Viteri views the urban market as oversaturated, and
Integral's current strategy is focused on the rural and semi-rural
markets, especially in the northern territories and the border
regions. They also plan to offer insurance products and credit
cards after regulation. They will continue to offer technical
assistance to clients (especially those receiving housing loans)
through the Foundation. Castillo sees two principal benefits from
regulation. First, the institution gains credibility. Second, they

SAN SALVAD 00001909 003 OF 003


will be able to receive financing at lower interest rates.

COMMENT
--------------


20. All three institutions complained of regulatory headaches,
seemingly arbitrary reporting requirements from the Superintendent,
and high costs to become regulated institutions. All three,
however, view the long-term benefits of regulation - deposits,
credibility, and cheaper finance - as outweighing the short-term
pain. While their growth projections look positive, increased
competition, especially as international commercial banks enter the
sector, and the challenge of maintaining efficient operations during
expansion will likely lead to future consolidation within in the
sector.


21. OPIC Joseph Wozniak has cleared this cable.

BUTLER