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Huge
Market for Small Loans
Mario
Osava
RIO DE JANEIRO, (IPS) - In the poorest
regions of Brazil, from the urban
favelas or shantytowns to the arid,
impoverished northeast, there is a
potential demand for billions of dollars
in microcredit to set up and expand
small businesses, and even the large
banks are beginning to take an interest.
Microfinance is relatively undeveloped
in this South American nation of 171
million, but the new government of
leftist President Luiz Inacio Lula da
Silva sees it as a priority in boosting
development and reducing poverty.
The Central Bank announced that it will
soon promote an expansion of the offer
of small loans to microenterprises and
small businesses in both the formal and
informal sectors of the economy.
A capitalist country with too little
capital, like most countries in the
developing world, Brazil's economy is
held up by the scarcity and high cost of
credit. Financing of economic activity
is equivalent to less than 30 percent of
Gross Domestic Product (GDP), compared
to more than 100 percent in several
industrialised nations.
In consequence, interest rates run as
high as 300 percent, which basically
amounts to ''armed robbery,'' in the
words of Planning Minister Guido Mantega.
Although small informal sector
businesses provide employment and a
livelihood to millions of families,
microentrepreneurs find it virtually
impossible to obtain bank loans.
Microlending has been ''a blessing'' for
Maria Auxiliadora Silva Farías, who set
up a small store seven years ago where
she sells clothing, paper goods and
trinkets out of a garage in Rocinha, Rio
de Janeiro's biggest favela.
Farías has taken out nine small loans
to purchase merchandise, which enabled
her to expand sales. She currently owes
4,123 reais (around 1,400 dollars) to
Viva Cred, a microfinance institution
founded in 1996 by the non-governmental
organisation (NGO) Viva Rio to serve the
residents of poor Rio de Janeiro
neighbourhoods.
The numerous requisites that would-be
borrowers must meet to obtain a bank
loan, and the high interest rates
charged by banks, put traditional loans
out of the reach of informal economy
merchants like Farías.
She pays Viva Cred 157 reais (some 55
dollars) a week to pay off her loan, at
a 3.9 percent monthly interest rate.
''Things are difficult, because there's
no money on the streets,'' she told IPS,
referring to the current stagnation of
the Brazilian economy. She also
complained of competition from large
chain stores that have opened branches
in Rocinha, and from the new shops and
kiosks that have mushroomed in the
favela.
Despite its poverty, Rocinha is a big
market, with a population of 56,000,
according to the 2000 census (although
community leaders put it closer to
150,000). Two banks and two microfinance
institutions operate in the favela.
Some 2,500 businesses serve Rocinha,
which is located near one of Rio de
Janeiro's most beautiful beaches.
Nivaldo dos Santos, the owner of a small
fruit and vegetable shop, which has a
good location at the entrance to Rocinha,
is not complaining about the economic
crisis. A 1,200 reais (415 dollar) loan
that he renewed several times gave him
an important boost at the start, but now
signifies little for his business.
His shop currently does a turnover of
between 8,000 and 10,000 reais (2,800 to
3,500 dollars) a month.
Dos Santos is even able to make small
informal loans, on which he charges a 10
percent monthly interest rate -- quite a
bit higher than the loans he was
granted, he admitted to IPS.
Viva Cred is one of 121 institutions
that offer small loans in Brazil,
according to Central Bank statistics.
Microlending has grown in the past few
years, and has even attracted two large
private banks, but is still relatively
undeveloped with respect to its
potential and to the growth achieved in
other countries.
The Central Bank estimates the potential
demand for microcredit in Brazil at
around 11 billion reais, or 3.8 billion
dollars, equivalent to one percent of
GDP and 50 times the amount currently
lent.
Microfinance in Brazil is still tiny in
comparison with Bangladesh, where the
mechanism first emerged 27 years ago
with the creation of the Grameen Bank,
or compared to neighbouring countries
like Bolivia, Colombia or Peru.
But that is partly because the financial
systems of those countries are not as
highly developed as that of Brazil,
where microfinance NGOs were even able
to ''convert themselves into banks,'' Teófilo
Cavalcanti, the superintendent of Viva
Cred in Rocinha, explained to IPS.
Besides, the Brazilian government
''absorbs nearly all of the national
savings to finance the public deficit,
leaving very little for the productive
sector,'' and that drives interest rates
up, he added.
Insolvency is another problem, because
''Brazil's laws and justice system make
it difficult to seize collateral put up
against a loan,'' Cavalcanti noted,
adding that ''the culture of a country
with a huge foreign debt condemns the
creditor and tolerates the debtor.''
The function of microfinance is more
social than economic in nature, and NGOs
and cooperatives that offer microcredit
provide financial support to
enterprising residents of favelas,
low-income neighbourhoods, and remote
villages and towns, whose markets are of
no interest to the banks, he pointed
out.
Nevertheless, the state-owned Banco do
Nordeste has become the second-biggest
microlender in Latin America, only
surpassed by Mexico's Financiera
Compartamos.
Crediamigo, the Banco do Nordeste's
small loans programme, accounts for
around half of all microcredit in the
country. Last year, it lent 111.3
million reais (38 million dollars) to
133 million microentrepreneurs, through
164 offices in the nine states of
northeastern Brazil, the country's
poorest region.
Crediamigo has grown 40 percent a year
since it was set up in 1998, the head of
the programme, Stelio Gama, said in an
interview.
But the expansion could be even greater
than that, since there are an estimated
six million potential microborrowers in
Brazil, compared to the 250,000 people
who have taken out small loans in the
country, he added.
This year, Crediamigo is in a position
to lend double the amount of loans
granted in 2002, but the level of demand
will depend on a resurgence of economic
growth, because microbusinesses in
commerce and services, which constitute
the majority of borrowers, are the first
to feel the effects of economic
stagnation, said Gama.
Despite the country's economic woes, the
default rate on loans granted by
Crediamigo is low -- just 3.8 percent --
as is typical of microcredit schemes
around the world.
The system the bank uses is the
''solidarity guarantee'', by which the
members of ''solidarity groups'' of
three to five people are jointly
responsible for each other's loans. That
mechanism reduces risk, ensures loan
repayment, and promotes mutual reliance
and solidarity
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