July 2002
PDI/BNDES
La biografía de la Panelista se encuentra en la última página
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Brazil represents a significant market for microfinance, considering the sheer size of the country in physical, population, and economic terms. Brazil has the world's fourth-largest land area, which spans 8.5 million square kilometers.
1 It is the fifth most populous country in the world, with over 174 million inhabitants.
2 And with a total GDP of R$ 1.18 trillion (US$ 503.9 billion) in 2001, Brazil has the largest economy in Latin
America, as well as the eighth-largest economy in the world.
3 Brazil’s socioeconomic characteristics would also suggest an environment conducive to microfinance. Income inequality in Brazil is among the most pronounced in the world —the wealthiest 10% of citizens receive 48.9% of total income. This skewed distribution means that despite the country’s wealth, Brazil has the highest number of impoverished citizens in Latin America.
4 This high incidence of poverty would generally suggest that a large share of the population would have a need for microfinance products.
Despite this seemingly propitious environment, and with the added curiosity that Brazil was the birthplace of
Latin America’s first modern microcredit program in 1973, 5 microfinance in Brazil has experienced relatively slow growth to date and achieved low penetration (less than 2% of the country’s estimated eligible 8.2 million microentrepreneurs). Few microfinance institutions (MFIs) have achieved significant scale, with the exception of Banco do Nordeste. Even this program, however, has recently begun reviewing its client statistics to determine the cause of a troublingly low loan renewal rate.
Several factors have traditionally been cited as an explanation for the relative underdevelopment of the
Brazilian microfinance industry, including the harsh macroeconomic climate before the stabilization of hyperinflation of 1994; a strong tradition of government-subsidized credit programs; an inadequate regulatory framework, despite recent advances; a highly sophisticated consumer credit market; and the absence of a microfinance “demonstration effect.”
This paper aims to offer insights that will allow MFI managers to understand more fully their market context, as well as suggestions about how specialized MFIs can maximize success within this challenging environment. It is important to note that the characterization of the market, as well as the paper´s recommendations and conclusions, are meant to be interpreted as consistent with the strategy adopted by the Brazilian National Development Bank (BNDES) in its support for the microfinance sector, especially through the Institutional Development Program (PDI).
SUPPLY OF FINANCIAL SERVICES IN BRAZIL
Exploring the overall financial sector in Brazil is a crucial step in understanding the microfinance industry in
Brazil. Unlike many countries where microfinance has achieved high rates of penetration, Brazil has a sophisticated financial sector that is highly developed technologically and that offers a wide range of services. This overall environment has shaped both the options facing specialized microfinance institutions and the perceptions of their clients, actual and potential.
The banking sector in Brazil is by far the largest in Latin America, and is also relatively advanced. While the number of banks in Brazil has declined from 750 in the early 1970s to around 150 today, some of the remaining banks have developed highly profitable and expansive operations.
6 The three largest private banks —Bradesco, Itau, and Unibanco—earned record profits in 2001 amidst economic difficulty, and demonstrated returns on capital higher than most top US banks. Unlike in other Latin American countries, domestic banks have dominated in Brazil. In addition to their profitability and market dominance, local banks are relatively advanced in terms of product offerings; for example, they are market leaders for insurance and investment management products. Customers of Unibanco on average purchase six bank products, approximately double the amount of the strongest banks in Continental Europe.
1 Schonb erger, “Microfinance Prospects in Brazil,” 2001.
2 IBGE Web Site, June 2002.
3 Brazil data from Boletim do Banco Central do Brasil, June 2002; comparisons from Schonberger, 2001.
4 All preceding statistics in this paragraph are from Schonberger, 2001.
5 The pilot program Projeto Uno, many of whose staff were later recruited to launch CEAPE-Pernambuco, provided working capital loans to microentrepreneurs, operating under the now well-accepted principles of cost-covering interest rates, minimal documentation
6 requirements and agile service.
This paragraph is adapted from “King of the Jungle,” Economist, March 14, 2002.
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It is important to note that although the banking sector in Brazil is advanced, the commercial credit market remains less developed. Years of hyperinflation shifted attention away from credit activities, as banks and other financial players could earn considerable profits on a variety of inflation-related activities. The importance of credit to banks increased after the Real Plan in 1994 reduced inflation rates, and credit operations continue to grow rapidly: private sector loans grew by about a quarter last year, after growing two-thirds in 2000.
7 The most dramatic growth recently, however, has been not in loans to businesses, but in consumer lending to individuals.
Bank products provide an important point of reference from which to understand the variety of other types of credit more widely available to microentrepreneurs. While Brazilian commercial banks generally are reluctant to offer lump-sum disbursements of credit to small or microbusinesses, there are a number of services available to account holders, whether business or personal, that can be used to finance working capital needs. Basic checking accounts may be the most sought-after bank product, because they enable account holders to purchase goods with postdated checks. Accounts with overdraft protection (“cheque especial”) are convenient, although expensive. Factoring is another example, in which banks provide funds in exchange for the accounts receivables of client companies.
8
The banking sector is increasingly viewing lower-income markets as a growth opportunity, and several leading banks have explicitly established moving down-market as a core business strategy. In an attempt to attract 50 million additional individuals to the banking sector, banks are leveraging alternative channels to open new points of service.
9 One interesting point to consider is that most MFIs in Brazil use traditional banks as the channel for disbursing loans and accepting payments. This practice is in part reflective of the omnipresence of banks in the Brazilian economy —unlike in many other countries, individuals do not need to have bank accounts to make payments to other parties using bank offices or automatic tellers.
Other credit providers
In addition to a highly developed banking sector, there are numerous other sources of credit —some of which are widely accessible to microentrepreneurs. Some products target the poor; for example, many financeiras 10 offering consumer credit impose loan limits of R$ 2,000, even less than the average loan sizes of many MFIs in the South and Southeast regions of Brazil 11 . Other frequently used substitutes include consumer credit offered by financeiras, credit cards, store credit (by installment), supplier credit, agiotas or moneylenders, and funds or access to credit obtained through family and friends. While some of these products are out of reach of most microentrepreneurs, others are specifically targeted at the lower-income population.
Supply of microfinance
Within the broader market context discussed in the previous section, the microfinance industry - defined as specialized institutions or programs that were created with the explicit goal of providing financial services to microentrepreneurs - currently plays a minor role in the Brazilian financial sector. To provide some context for the size of the microfinance market, consider that the total active microcredit portfolio is almost R$ 139 million, compared to an overall personal credit market of R$ 60 billion in 2001.
12
In the past few years, the number of specialized MFIs operating in Brazil has expanded rapidly. The PDI program estimates that the local microfinance industry consists of 121 institutions serving a total of 158,654 active clients (Figure 1). These statistics alone suggest that the microfinance industry in Brazil is composed of small institutions with an average of 1,311 active clients. Brazilian MFIs have a combined active portfolio of R$ 138.8 million, suggesting an overall average loan size of R$ 875.
7
8
Op cit.
It should be noted that aside from banks’ factoring services, there are also 720 factoring companies in Brazil that are members of the
National Association of Factoring; these members had a total portfolio of R$ 18.7 billion in 1999. These factoring companies primarily buy businesses’ accounts receivables, provide immediate funds for post-dated business checks, and provide loans for capital goods for
9 businesses through post-dated checks. (Gallagher, et al. 2002.)
“Em todo lugar,” Exame, May 1, 2002.
10 Financeiras are regulated financial institutions that typically offer products with fewer guarantees but at higher costs than banks.
Several major financeiras are owned by traditional banks.
11 PDI/BNDES diagnostic study of Banco do Povo Juiz de Fora, 1999; Planet Finance rating report for Portosol, 2002. Both are confidential reports available only with the respective microfinance institution’s permission.
12
Overall personal credit market data from Boletim do Banco Central do Brasil, June 2002. This figure represents non-housing personal credit made by the private sector.
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Figure 2: MFI Market in Brazil (2001) *
North
Number of MFIs: 3
Active Clients: 653
Active Portfolio: R$ 0.9 MM
Northeast
Number of MFIs: 28
Active Clients: 115,582
Active Portfolio: R$ 69.1 MM
Center-West
Number of MFIs: 8
Active Clients: 10,095
Active Portfolio: R$ 11.1 MM
Southeast
Number of MFIs: 50
Active Clients: 18,197
Active Portfolio: R$ 29.2 MM
Brazil
Number of MFIs: 121
South
Number of MFIs: 32
Active Clients: 158,654
Active Portfolio: R$ 138.8 MM
Active Clients: 14,127
Active Portfolio: R$ 28.4 MM
Source: Independent research conducted by the authors.
* Government microfinance initiatives distributing loans through separate institutions in each municipality (such as Banco do Povo de
Sao Paulo or Banco do Povo de Goias) are counted as one MFI.
The overall microfinance industry in Brazil has grown substantially in recent years. In the last two years alone, the number of current clients served by the industry has more than doubled from 76,700 to 158,654, while the active portfolio of the industry has more than tripled from R$ 43.4 million to R$ 138.8 million.
13
However, the majority of this growth stems from just one MFI: Banco do Nordeste expanded from 35,322 current clients in December 1999 to 85,309 current clients in December 2001.
14 While some other MFIs are also growing quickly, many are experiencing slow growth or even a decline of current clients . An analysis of
20 of the largest Brazilian MFIs shows that on average, institutions have experienced annual current client growth of 14% since 1999. Eight of these 20 MFIs have negative growth rates, indicating that they actually have fewer current clients today than two years ago. Although many new MFIs have been created in Brazil, few have achieved significant scale. Numerous factors —some explored later in this paper—pose challenges to the microfinance industry and limit the emergence of sizeable MFIs. Nine MFIs in Brazil presently serve more than 2,000 current clients.
After studying existing estimates about the number of microenterprises in Brazil, it was determined that developing a comprehensive model based on several types of Instituto Brasileiro de Geografia e Estatisticas
(IBGE) studies would be necessary in order to obtain an accurate and appropriate estimate 15 . According to this model, nearly 16.4 million microenterprises 16 exist in the Brazilian economy today.
In a recent Consultative Group to Assist the Poorest (CGAP – an international donor consortium for microfinance administered by the World Bank) study of microfinance industries in Latin America, 17 Robert
Peck Christen defines potential demand for microfinance as the number of microenterprises that would both demand and be eligible for microfinance products. This paper applies Christen´s discount factor of 50%, assuming that half of microenterprises in Latin America demand and are eligible for microfinance products.
This assumption is admittedly crude; it is employed at this point to enable a direct comparison of Brazil’s
13
1999 figures are from Goldmark, et al. 2000.
14
Banco do Nordeste is a state development bank based in Ceara, and is described later in this section. These data from Banco do
Nordeste web site.
15
Independent research conducted by the authors.
16
Microenterprises are defined as firms with fewer than 5 employees, including urban formal and informal microenterprises and small rural farms.
17 Christen, "Commercialization and Mission Drift: The Transformation of Microfinance in Latin America,” 2001.
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penetration rate with other Latin American countries in Christen´s report. Using this methodology, potential demand for microfinance is 8.2 million microenterprises in 2002.
The microfinance industry in Brazil has a penetration rate of 2.0% of potential demand. In other words, for every 100 microenterprises that would want and be eligible for microfinance products, only two are currently served. This penetration rate varies substantially by region —the Northeast, which has already been noted for its high rate of microfinance activity, has a penetration rate of 4.6%.
On the other hand, in the Southeast and North regions, the penetration rate of microfinance is 0.6% and 0.1%, respectively.
The penetration rate of microfinance in Brazil is far lower than in many other countries in Latin America.
MFIs in Chile, Peru, and Paraguay have penetrated roughly 25-35% of potential demand, and El Salvador and Nicaragua have penetration rates of roughly 70%.
18 In an extreme case such as Bolivia, the microfinance market has become so saturated and competitive that its penetration rate is calculated by
CGAP to be 163% —technically impossible using a strict definition of penetration, but here indicating that some microenterprises may take loans from multiple institutions or that some “ineligible” microenterprises manage to attain loans. These comparative statistics show that even the Northeast region of Brazil, which boasts substantially greater microfinance activity than other regions, has a low penetration rate compared to many Latin American countries.
19
Qualitative discussion of demand
When taken in consideration with microfinance demand studies, the low penetration rate may in fact suggest that there remains an expansive opportunity for growth of the microfinance industry.
Several recent demand studies 20 , using qualitative research techniques, have identified a wide range of unmet needs for financial services among low-income Brazilian microentrepreneurs. In urban markets 21 , perhaps due partly to the dominance of consumer and installment credit modalities, what seems to be important to these clients is how services are offered.
The demand studies in urban areas revealed some clear preferences and needs that are common among microentrepreneurs around the world, including: rapid funds, minimal guarantee requirements, simplified documentation, and a convenient location. However, other preferences demonstrated in these demand studies are more peculiar to the Brazilian context, such as for (1) buying time, not money; and (2) smaller payments over an extended period of time. Several studies have found that microentrepreneurs are inclined to prefer supplier or installment credit to the “lump sum” loans typically offered by MFIs. Research on microentrepreneurs in several urban regions found that focus group participants made a distinction between purchasing on credit, which is considered a negotiation of time; and taking a loan, which is considered a financial transaction.
22 Studies have also shown that Brazilian microentrepreneurs strongly prefer products that offer lower payments for extended periods of time (frequently as long as 12 to 24 months). Among focus group participants, this need in part reflected a high level of indebtedness —longer payment periods and smaller monthly installments fit microfinance clients’ household economics, as they allow loan payments to be added to an existing schedule of installment credit payments for items ranging from shoes to the family refrigerator.
Additional issues relevant to microfinance that were raised by the urban demand studies included the lack of awareness about existing MFIs, the relative importance of popular culture (e.g., soap operas) in influencing
18 Christen, 2001.
19 It should be noted that several other countries in Latin America also have low microfinance penetration rates, including Argentina,
Mexico, Uruguay and Venezuela (penetration rates for these countries not provided by the CGAP report). Westley, 2001 (as cited by
Rosales, 2002). provides an estimate of the penetration rates in these countries: 0.3% in Argentina (1998), 0.7% in Mexico (1998),
0.5% in Uruguay (1998), and 0.1% in Venezuela (1999). These figures are not directly comparable due to methodological differences.
While it appears that microfinance institutions in Latin America have not penetrated large countries (all but Uruguay are considered large), it should not be concluded that microfinance can only be successful in small countries: Indonesia, a country where BRI and other microfinance players have been tremendously successful, has an even greater population than Brazil.
20
I t is crucial to point out that these studies are preliminary in nature, and also findings should not be assumed to hold across regions of
Brazil. See Brusky, et al ., “Understanding the Demand for Microfinance in Brazil: A Qualitative Study of Two Cities,” PDI/BNDES, 2002; and Gallagher et al., “O Mercado de Credito para Pessoas de Baixa Renda no Municipio do Rio de Janeiro,” DAI-Brasil, APD-RIO,
2002 .
21 Research into rural microfinance demand in Brazil has also concluded that there is unmet demand for financial services, although the demand profile appears to be strikingly different. For details, see Brusky, Bonnie, “Prospecting the FUNDAF market: an overview of dem ands, competition and client satisfaction,” consultant report to Visão Mundial, PDI/BNDES 2002.
22 Gallagher, 2002.
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consumer behavior, and the fact that low-income clients were accustomed to purchasing goods and services associated with both sophisticated marketing campaigns and extensive distribution networks.
It should be noted that Brazilian microentrepreneurs have a different level of experience with financial products than, say, their counterparts in countries such as Bangladesh, Bolivia, or Indonesia that are home to commonly cited microfinance success stories. It seems the “yellow pajamas” myth used to describe initial microfinance demand in many countries —with customers so eager to obtain microfinance products that they would even stand outside in yellow pajamas if required —does not apply to Brazil.
23 The Brazilian market generally demonstrates supply-side characteristics of an emerging microfinance industry, such as limited coverage and outreach of MFIs. However, the demand-side characteristics of a developed microfinance market better describe the Brazilian reality —sophisticated customers who can be demanding with respect to product attributes, and who are acquainted with advanced technologies and marketing techniques. In order to attract and maintain sophisticated clients, MFIs will have to expend effort and invest considerable resources in order to understand their needs and develop customized products to serve them.
This section briefly discusses some of the external variables that have been cited as obstacles to the growth of the microfinance industry.
24 Four challenges are presented in order of importance: (1) the regulatory environment; (2) the lack of a “demonstration effect”; (3) the macroeconomic environment; and (4) crowding out by public sector credit lines.
Regulatory environment
There have been considerable advances in Brazil’s regulatory environment for microfinance in recent years.
Even with the substantial recent advances (such the creation of the SCM institutional form and excluding
OSCIPs from the Usury Law 25 ), it is important to recognize that the regulatory environment continues to present a significant challenge to MFIs in Brazil. Financial regulations in Brazil contain substantial prudential controls and are also notorious for changing with dizzying frequency. Tax and labor laws are complex and add to the list of negative incentives or operating restrictions that MFIs face. In addition, until now, clear information has not been widely available about any of these elements.
There are laws and regulations restricting the types of products that many Brazilian MFIs can offer.
Specialized MFIs in Brazil are prohibited from offering a wide range of products, such as savings and insurance, that are offered by many of their international counterparts. Banks, on the other hand, have more flexibility with product offerings.
Another area that is closely regulated in Brazil is the source of funds. The previously mentioned prohibition on offering savings products is one example —MFIs may not accept deposits, a funding source that has numerous advantages such as low financial costs, wide availability, and relative stability.
26 Also, current law requires that a large proportion of demand deposits and savings deposits be used in rural and housing credit programs.
27 Foreign investors also may be discouraged from investing in the Brazilian microfinance industry, as they face currency restrictions and prolonged registration processes. To date, fund source regulations have not led to an overall capital shortage for MFIs, as public sector funds have been widely available.
However, there are some drawbacks to MFI reliance on public sector funds, including slow approval cycles and strict conditions defining appropriate use.
There are numerous other regulatory obstacles facing the microfinance industry in Brazil. While substantial steps have already improved Brazil’s regulatory environment for microfinance, MFIs will probably continue to consider the legal context a formidable obstacle. Clear information has not been widely available about what activities are currently permitted for MFIs, or about possible steps that MFIs can take to gain regulatory permission for other activities. The resulting confusion has two major impacts on Brazilian microfinance: (a) institutions have difficulty protecting themselves from legal liability and as a result many are more risk-
23 Rhyne, Elisabeth, “Mainstreaming Microfinance: How Lending to the Poor Began, Grew, and Came of Age in Bolivia“, 2001.
24 For an earlier discussion of some of the issues discussed in this section, see Schonberger, 2000; Goldmark, 2000; and Dichter, 2002.
25 SCM is a new, specially licensed financial intermediary which can offer microcredit but is not allowed to mobilize savings. OSCIP is a form of NGO. The Usury Law prohibits non-regulated organizations (such as NGOs) from charging interest rates above 1% per month.
Though not strictly enforced, this law creates uncertainty for many NGOs.
26 Wisniski, “Microsavings Compared to Other Sources of Funds,” 1999 (CGAP)
27 Parente, 2000 as cited in Dichter, 2002.
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averse; and (b) advocacy efforts are stalled since it is more difficult to take stock of what needs to be changed in the regulatory environment.
Lack of Demonstration Effect
The lack of a “demonstration effect” is another challenge facing the Brazilian microfinance industry. In the international context, numerous institutions have served as examples of success for the microfinance industry including BancoSol in Bolivia, Bank Rakyat Indonesia (BRI) of Indonesia, and the Grameen Bank of
Bangladesh.
28 These and other widely successful institutions have substantial demonstration effects on the microfinance industries in many countries: they provide proven strategies, operating models, and business practices from which other MFIs can learn; and their financial performance startles bankers and others in the private sector, thereby encouraging entry into the microfinance industry. Unfortunately, not only is it difficult for international MFIs to serve as examples of success for Brazil, but also local MFIs have not been able to achieve a demonstration effect.
One reason for the absence of MFIs that have demonstration effects in Brazil may be related to the lack of standardization and transparency in the microfinance industry.
29 Brazilian MFIs neither follow standard accounting rules, calculate performance indicators in the same way, nor make financial results publicly available. As a result, managers may have difficulty knowing relatively how well their institutions are performing, and which MFIs should be considered examples of success. For example, Banco do Nordeste has not had a demonstration effect on the Brazilian market: although the institution has a large client base and is experiencing rapid growth, limited transparency of financial results and operations prevents other
MFIs from knowing whether they should trust what the bank says about its own performance. Another factor inhibiting a local demonstration effect is the similarity of product offerings and operating models in Brazil — limited experimentation makes it difficult for MFIs to learn from the successes and failures of others.
Macroeconomic Environment
The macroeconomic environment in Brazil poses another challenge to the microfinance industry. This challenge was particularly significant during the era of hyperinflation, which affected both the demand for and supply of microfinance. Yet even as the macroeconomic situation has improved, microfinance has grown relatively slowly compared to other credit products. International research 30 suggests that MFIs can succeed amidst moderate inflation and recession, but interest rates may pose a challenge to microfinance demand in
Brazil. In sum, the macroeconomic environment is certainly a challenge facing microfinance in Brazil, but this factor alone cannot explain the limited development of the industry.
Crowding Out by Public Sector Credit Lines
Although public sector credit lines may pose some challenges to microfinance in rural areas, they do not appear to have a major impact on the overall microfinance industry. The availability of cheap credit provides a competing source of funds in rural areas, and relaxed collections policies also affect the mindset of potential microfinance clients. In urban areas, however, public sector credit lines do not appear to significantly affect microfinance activity.
In rural areas of Brazil, there are numerous public sector programs offering credit, such as PRONAF
(National Program to Strengthen Family Agriculture). Public sector credit lines focused on agriculture comprise a relatively large share of public bank activity. For example, Banco do Brasil (the largest public bank in Brazil) extends 49% of its loans to the agricultural sector, while private banks extend only 15 to 20% to the sector.
31 These loans are often subsidized and sometimes even have negative real interest rates.
Accustomed to receiving cheap credit from the public sector, rural clients do not automatically assume that loans must be paid back.
32 Under these conditions, the mindset associated with public sector credit lines
28 Although the Grameen Bank’s performance has been controversial within the microfinance community due to its high subsidy level and lack of financial transparency, it has still successfully shown that the poor can indeed be creditworthy and that MFIs can reach substantial scale.
29 The general points about transparency stated here are adapted from: “Microbanking Bulletin: Focus on Transparency,” November
2001. This publication explai ns that “transparency in microfinance implies that information about the performance of an (MFI) is provided candidly and completely, and that people who see that information have a common understanding of what it means.”
30 See, for example, Christen, et a l., “Maximizing the Outreach of Microenterprise Finance: The Emerging Lessons of Successful
Programs,” 1994, Barnes, “Microfinance Program Clients and Impact: An Assessment of Zambuko Trust, Zimbabwe,” 2001, and
McGuire, et al. “Effects on Microfinance of the 1997-1998 Asian Financial Crises,” 1998.
31
Baer, 2001. (As cited by Dichter.) This discussion of the impact of rural government subsidized credit lines is adapted from Dichter,
2002 and Goldmark, et al. 2000.
32 Brusky, et al. 2002.
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could pose an obstacle to microfinance institutions wishing to penetrate rural areas, although it is worth noting that thus far few MFIs have made deep incursions into such regions.
In urban areas, however, public sector credit lines do not appear to affect significantly microfinance activity.
Although there are a host of programs targeting microentrepreneurs such as PROGER (Development
Program for Employment Generation and Income), it is widely acknowledged throughout the Brazilian financial sector that almost no resources from these directed lines of credit actually reach informal microenterprises –defined as those with four or fewer employees. The largest potential impact these credit lines might have on MFIs is related to image – to the extent that PROGER and other programs are referred to as “microcredit,” this may confuse potential MFI clients.
This section explores five strategies that can help MFIs to succeed within this challenging environment for microfinance. These recommendations are based on the premise that MFI managers who adopt appropriate strategies can overcome obstacles facing microfinance, thereby improving performance and increasing growth. These five strategies, presented in order of logical flow not importance, are: (1) focusing on lowerincome microentrepreneurs, (2) developing tailored products addressing client needs, (3) promoting understanding of products through effective marketing, (4) exploring alternative distribution channels, and (5) forming a viable long-term strategy.
Focus on lower-income microentrepreneurs
The microfinance industry in Brazil faces an overwhelming opportunity —a vast number of lower-income microentrepreneurs who have relatively few credit options within their reach.
33 The goal of sustainability should not be understood as conflicting with a focus on lower-income clients; on the contrary, some of the most successful MFIs in the world serve the very poor, and do so profitably. There is a strong business case for Brazilian MFIs to move down market.
Currently, many Brazilian MFIs may not effectively reach the lower-income segment of the market. In fact, many institutions primarily serve microentrepreneurs with relatively high incomes —though few of them do so intentionally. Some profit-seeking institutions, such as SCMs, actually do explicitly target higher-income microentrepreneurs. But many other MFIs also choose implicitly to serve similar higher-income microentrepreneurs by either (1) imposing guarantee requirements, or (2) expending insufficient effort to reach lower-income microentrepreneurs:
Adopting an explicit down-market focus could yield MFIs substantial benefits. First of all, lower-income microentrepreneurs represent a large share of the potential market for microfinance. Although it is difficult to define precisely what salary range would define a “lower-income microentrepreneur,” it is worth noting that
48.4% of the overall economically active population in Brazil earns two minimum salaries or less (i.e., currently less than R$400) per month.
34 In addition to expanding the market for microfinance products, there is another major benefit of focusing on lower-income microentrepreneurs: reducing competition from substitute credit products. As discussed earlier, several more formal credit options —such as bank checking overdraft services and credit cards —have requirements that place them out of reach of many lower-income microentrepreneurs.
In order to grasp these and other benefits of reaching down market, MFIs may choose to explicitly focus on lower-income microentrepreneurs —and adopt appropriate practices that support this choice. These practices would likely include finding alternatives to current guarantee requirements and increasing concentration on lower-income entrepreneurs during client acquisition efforts. Alternatives to current guarantee requirements might include solidarity groups, step loans, consumer credit histories, and tapping into community structures, such as churches and neighborhood associations. In addition to developing these or other methods as alternatives to guarantee-based lending, it would be important to concentrate
33 The term “lower-income microentrepreneur” is used in this section to describe those microentrepreneurs who have incomes too low to qualify for access to formal microfinance substitutes such as banking services (e.g., check overdraft service). Note that the definition of lower-income microentrepreneurs will likely vary regionally due to different requirements and/or availability of services.
34 As mentioned earlier, “lower-income microentrepreneur” includes those who have incomes too low to qualify for access to formal microfinance substitutes such as banking services (e.g., check overdraft service). Note that the definition of lower-income microentrepreneurs will likely vary regionally due to different requirements and/or availability of services.
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more on lower-income microentrepreneurs during client acquisition efforts. An explicit decision to focus on lower-income microentrepreneurs that is communicated clearly within the MFI may help —it would encourage loan officers to spend the extra time necessary to find and pursue this clientele. In addition, it would be helpful to get community leaders and other influential individuals from lower-income communities involved in promoting microfinance products.
Develop tailored products addressing client needs
Microfinance has been referred to as perhaps the only industry in the world that has managed to survive and even grow over time while using a product-driven approach. Indeed, MFIs in many countries for years offered just one product –short-term working capital loans—with the assumption that microentrepreneurs had no other access to financing and that this was the product they needed. Today, in saturated markets like
Bolivia and Paraguay, competition has forced MFIs to reevaluate their overall marketing strategies and, consequently, begin shifting their orientation toward client needs.
35 In some markets, this shift has resulted in positive developments such as expanded product offerings, improved service, and lower interest rates.
In addition to meeting the needs of customers, this expansion of microfinance product offerings is economically advantageous for MFIs. This approach offers advantages such as: higher revenues per customer, a reduction in customer acquisition costs (as a percentage of total revenues), and improved loan delinquency rates (from customers with proven payment histories and access to risk management products such as insurance). An overall expansion of product offerings is not only being increasingly adopted by highly performing MFIs abroad, but is also being embraced by the international banking industry.
36
In Brazil, the microfinance industry has focused to date on traditional microcredit. In terms of product offerings, there is a high degree of similarity across MFIs, with an emphasis on two main products: working capital loans and investment loans. A new variation of a working capital loan recently adopted by several
Brazilian MFIs is checkcashing, or “troca de cheque,” which allows microentrepreneurs to obtain cash in exchange for post-dated checks they have received from customers.
As discussed in the section on microfinance demand, recent studies have identified a wide range of unmet needs for financial services among low-income microentrepreneurs in Brazil. Product-specific findings from these preliminary demand studies are summarized below:

How services are offered may be as important as what is offered: for example, installment credit was the preferred modality for virtually all needs except for agricultural and investment loans.

Participants expressed great need and desire for risk coverage, in order to protect themselves from numerous risks including illness and funeral expenses.
37

Microentrepreneurs needed credit for a broad range of expenses, such as educational and housing costs.

While some respondents in studies have lamented the low returns available on savings accounts, there has not been a strong indication of demand for savings products.
It is important to note that specialized MFIs in Brazil are not equipped operationally to offer a number of the products listed above, even if the regulatory atmosphere were more permissive. However, taking a longterm view of the development of the industry, it is clear that offering a wider array of services could help MFIs to not only attract, but also maintain clients —a particularly salient issue given the low loan renewal rates demonstrated across most MFIs in Brazil, including fast-growing institutions such as Banco do Nordeste.
38
Even today, it is possible for MFIs to enter into partnerships with service providers (e.g., licensed insurance brokers) in order to expand offerings to customers.
Given the limitations facing specialized MFIs in Brazil, it may be advisable to begin with the adaptation of existing products. The process of adapting products serves as the first step in shifting towards a customer needs-based approach to product development. This approach is a fundamental component of business strategy, and should be driven by findings from customer research. This process requires a considerable investment of both time and resources. The implementation steps necessary to adapting existing products
35 Rhyne, 2001.
36 For a discussion of the financial services concept, see Robinson, “The Microfinance Revolution,” 2001, or Rutherford, “Raising the
Curtain on the ‘Microfinancial Services Era,’” 1999. Unibanco data from Economist, March 22, 2002.
37
Brusky, et al., 2002.
38 From discussions with international consultants working with Banco do Nordeste.
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or introducing new options may not be simple. In addition, the new product development process will almost always involve trade-offs, in which MFIs must choose among such factors as risk, short or long-term revenues, or operational complexity.
Create marketing strategies emphasizing customer needs
There is a general consensus among Brazilian MFIs that a limited knowledge of microfinance by customers is a major obstacle to industry growth.
39 This section explores how MFIs can tackle this obstacle by creating sophisticated marketing strategies using effective messaging and media.
Microfinance institutions in Brazil experience an overall lack of both awareness and understanding of their products in the marketplace. Loan officers frequently complain that few potential clients they approach have actually ever heard about microfinance. Even among those potential clients who have heard about microfinance, few people demonstrate a sufficient understanding about MFIs or how their products are differentiated from other credit types. Unfortunately, limited resources typically restrict the ability of MFIs to address this lack of awareness and understanding.
While individual MFIs typically cannot afford mass media advertising, they still can play a substantial role in improving awareness and understanding of the specific products they offer. By creating a sophisticated marketing strategy, an MFI can heighten its success in attracting clients.
40
Sophisticated marketing strategies often use messaging that emphasizes how a product specifically meets the needs of its customers. To illustrate this point, consider the example of an MFI that develops a product with fast approval and disbursement time to meet a need for urgent funds observed in the PDI demand study.
41 Instead of solely seeking to build awareness of this product, a sophisticated marketing strategy would strive to build understanding among target customers about how the product’s attributes meet the need for urgent funds. For example, the product’s advertising might explain that it is well suited to meet customer’s pressing financial needs, use imagery associated with speed, and—highly important—provide specific details such as “cash in hand in just 48 hours.” By directly appealing to the needs of these customers observed in customer research, marketing materials have a high likelihood of sparking customer interest.
Sophisticated marketing strategies also often choose media that are specifically aimed at target customers.
For example, instead of using television or other types of mass media, an MFI targeting lower-income microentrepreneurs might advertise at bus stops if it believes that these clients typically use public transportation.
42 While an industry push through actual participation in mass media entertainment could deliver the familiarity and legitimacy that Brazilian MFIs want, individual MFIs typically do not have sufficient resources to use this channel to boost understanding —and not just awareness—of products. Although one
Brazilian NGO found that its number of phone calls from potential clients spiked after advertising on television, the vast majority of these additional calls were from people looking for consumer credit or housing loans.
Employing a marketing strategy with aspects such as those discussed above would likely enable MFIs to achieve greater impact with currently budgeted funds. In addition, evidence suggests that many institutions would benefit significantly from expanded marketing resources. MFIs could probably also learn from the skillful marketing techniques of fast-growing financial players such as consumer lenders or credit card companies, although these lessons would need to be sifted carefully in order to ensure that MFIs do not acquire similar negative reputations.
43
Explore alternative distribution channels
Distribution is another area that MFIs in Brazil may want to explore as an opportunity for growth. Using alternative distribution channels in addition to loan officers could offer benefits such as extended reach, the ability to offer new products, and cost savings. In order to realize these benefits, MFIs in Brazil can develop creative partnerships with a wide range of alternative channels.
39 Quinta Rodada de Interlocucao Politica do Conselho da Comunidade Solidaria, March 2001.
40 For an in-depth discussion of marketing best practices of MFIs across the world, see Grant, 1999.
41 Brusky, et al. 2002.
42 Example based on an author’s observation that a consumer lending company in the South had rented advertising space at virtually every bus stop in the city center in May 2002.
43 Negative impressions of Brazil ian “financeiras” discussed in Brusky, et al., 2002.
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Microfinance institutions in Brazil have typically used their own loan officers as an almost exclusive distribution channel for client acquisition.
44 Although loan officers are also used to distribute microfinance products in the international context, the Brazilian context presents several challenges. One challenge is that the relatively high cost of loan officers in Brazil limits the ability of MFIs to expand their operations. This high cost is related to local MFIs’ frequent use of university-educated loan officers. Another challenge related to the use of loan officers is that credit is not typically sold door-to-door in Brazil. More commonly, credit is obtained within stores (for example, consumer appliance stores often have their own financeiras on premises) or at long lines in traditional banks. As a result, customers unaccustomed to having loan officers offering credit at their doors may be unreceptive to —and sometimes even suspicious of—this practice.
Loan officers have an essential role in microfinance distribution, but the challenges associated with their use in the Brazilian context suggest that MFIs may also benefit from using alternative distribution channels.
Many MFIs already use banks for disbursements and to receive loan payments. However, this practice is costly and may hinder the ability of MFIs to achieve profitability —the fixed fees that banks charge per transaction (R$ 2-5 each) reduce the margin on loans to customers. Another drawback is that banks are often not an ideal channel for customers, as they almost always have long lines, may be inconveniently located, and also may not be a comfortable environment for some customers.
45 Last, considering that some microfinance clients in Brazil might actually be eligible for banking services, accepting payments at banks is in effect sending clients to the competition.
A vast number of possible alternative distribution channels are available to Brazilian MFIs —just a few examples are stores, suppliers, gas stations, cellular companies, or even newspaper stands. The benefits that MFIs could realize from partnerships with alternative channels include extended reach, expanded product possibilities, cost savings, increased convenience for customers, and the potential for a wider financial role.
It is also interesting to note that the regulatory environment in Brazil is relatively flexible with respect to distribution. MFIs may actually find that developing partnerships with alternative distribution channels is an attractive alternative to regionalization: it may be more cost effective to increase penetration in existing markets through additional channels as an alternative to opening new branches, which imply a greater cost burden. In any case, it is clear that leveraging alternative distribution channels is a tremendous opportunity within the reach of Brazilian MFIs.
Develop a viable long-term strategy
Success in the Brazilian microfinance industry will ultimately hinge on the development of a long-term strategy focused on growth and sustainability. In the current microfinance industry in Brazil, many MFIs have had difficulty developing viable long-term strategies focused on growth. Some institutions focus exclusively on immediate goals, without planning extensively or adopting business practices needed to achieve longterm growth. Other MFIs may simply not be particularly ambitious; for example, it is common to find MFI executives who do not exhibit a strong interest in growth. Even profit-seeking institutions such as SCMs rarely precede their entry into microfinance with long-term business plans and large accompanying investments to launch operations. The norm is to enter the industry slowly and cautiously, introducing the standard microcredit product and hiring additional loan officers as the need arises.
At present, existing MFIs have a vast market of potential customers within their reach, of which 98% are yet to be penetrated. If existing MFIs do not grasp this opportunity, the market may transform under their feet.
Traditional banks currently offer microfinance substitutes, but may soon offer microcredit as well. A few powerful banks (Unibanco and Banco Real of ABM-Amro) have recently announced plans to enter the industry. This development would propel microfinance industry growth overall, but the impact on specialized
MFIs is not entirely clear.
Current MFIs in the industry must take decisive steps to ensure that they are able to withstand the challenges —or perhaps even maximize the opportunities—associated with the entry of banks into the microfinance sector. These steps include the development of long-term strategies and implementations
44 The use of banks as a channel for accepting payments is discussed in the next paragraph.
45
Many microfinance clients have indicated that they feel uncomfortable in banks for a variety of reasons, related to their overall exclusion from the banking sector. Microfinance clients are often not familiar with automatic tellers, and thus face long lines if paying at a bank.
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plans to accompany them. These strategies may include partnerships with other institutions. Figure 2 illustrates a variety of strategic options available to specialized MFIs, considering two variables: whether or not Brazilian banks decide to enter the microfinance market aggressively, and whether MFIs choose to take a reactive or proactive stance towards banks and other large institutions that may be interested in their market segment. The options are listed in only an illustrative form, which is intended to provoke debate and introspection by MFIs about future strategic plans.
Figure 2: Strategic options for the threat or opportunity posed by banks
Banks seek to microfinance enter market actively

Discontinue current use of banks as distribution channel

Compete head to head

Pursue clients listed in the
SPC

Lower interest rates

Align with other MFIs

Be a pilot arm

Serve as loan analysts or collectors

Serve as client interface

Merge

Act as a step loan – preparing clients to work with banks

Compete in niche markets

Teach microfinance methodology
Banks passive, are


Move further down market
Pursue alternative distribution channels

Adapt marketing messages and media to banks

Help unserved clients build a credit history (serve as bridge to banks)

Work through other channels
(grocery stores, etc.)

Develop relationships with banks by being their clients (i.e., MFIs invest and hold money in banks) not interested in microfinance
MFIs resistant or reactive MFIs collaborative or proactive
In addition to the challenges associated with fostering growth and developing long-term strategies, Brazilian
MFIs also face issues relating to sustainability. For institutions focused on offering credit products, charging cost-covering interest rates is essential for achieving sustainability. In the international context, MFIs typically charge higher interest rates than formal alternatives in a given market, given the high operating costs associated with offering microcredit. In Brazil, this relationship is reversed —some MFIs position themselves in the marketplace as institutions that offer lower rates than the competition. If an MFI feels pressure to compete with interest rates offered by banks, then a question arises about its target market: why is the MFI serving clients that have banks as an available option? Recent studies conducting ratings of the financial performance of several Brazilian MFIs revealed that most institutions charged interest rates insufficient to ensure institutional sustainability.
46
In her recent book on microfinance in Bolivia, Elisabeth Rhyne writes about the dramatic transformation of that country’s financial services industry:
“As recently as the late 1980’s, the banks and financial institutions of Bolivia regarded the country’s majority low-income and indigenous people with disdain, if they thought of them at all. They offered them few services and discouraged them from entering their banking halls.
A decade later, hundreds of thousands of these same people were the hotly contested customers of banks, financial institutions and credit programs, all vying for shares of this
46 Ratings conducted by Planet Finance, 2002.
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new market. In cities and larger towns across the country virtually anyone with an ongoing economic activity could get a loan.” 47
Brazil does not promise to be so simple. The sheer size and nature of the market —and of the corresponding financial sector —mean that more diverse and sophisticated services already exist, many of which are specifically targeted at low-income people. The specialized microfinance institutions currently operating in
Brazil have yet to prove that they can reach the scale or profitability levels of Bolivia’s star performers. Even if they can, the “transformation path” that was followed in Bolivia—NGOs that became regulated financial institutions later in their life —may not be relevant in Brazil or other countries. In addition, a host of other environmental factors discussed earlier in this paper, such as the regulatory context, pose significant obstacles to the rapid development of the microfinance industry.
Despite these challenges, demand research has clearly shown that there are large numbers of low-income entrepreneurs, and individuals in general, who are currently unserved by the formal financial sector and have a wide range of unmet needs. Existing mechanisms such as installment credit —some of which operate in very informal ways —help Brazilians get by today, but do not offer a long-term or comprehensive tool that
Brazil’s poor can use to generate income, protect themselves from shocks, or better manage their scarce financial resources.
In the same way that leading institutions in Bolivia have served as the research and development arms of the world’s microfinance industry, existing MFIs in Brazil should see themselves charged with a much larger task than simply replicating what has worked in other markets. If the industry is to grow and flourish in Brazil, microfinance products have to be further adapted to the specific needs of Brazilian clients, and creative approaches to distribution and marketing must be developed. Most importantly, the further down-market MFIs can move, the larger is the opportunity – and the more daunting the challenge.
Lara Goldmark, Mestrado em Economia Internacional com especiali zação em estudos da América Latina. Larga experiência na área de desenvolvimento, tendo trabalhado em quase todo os países da América Latina. Sua experiência nesta área culminou com seu trabalho de coordenadora no BID durante quatro anos, responsável por projetos no Brasil, Haiti e em El Salvador. Hoje representa no Brasil a Development Alternatives Inc. (DAI), onde exerce função de conselheira técnica do Programa de Desenvolvimento Institucional para Microfinanças – PDI do BNDES. É autora de várias publicações, entre elas “Entendendo as microfinanças no contexto brasileiro”, distribuído no V Foro interamericano de microempresas do BID (set/02), e “Garantias das Microfinanças: manual básico e revisão das experiências na América Latina e Caribe.
47 Rhyne, 2001.
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