US-Brazil Trade Finance: Challenges and Solutions

 One big task for microfinance in Brazil in the future will be to grow the portfolios of its small-client microfinance institutions. Another is to change the way microfinance works so that it can get money, for example by accepting deposits. As early as June 2003, a big part of microfinance in Brazil rested on special sources of funding like government banks or donors (table 2.9). When the BNDES lent money, they used the TJLP rate, and when CreditAmigo lent money, they used the exchange deposit rate, which is close to the SELIC rate.39 Some predictions said that this would cause demand for microfinance to very quickly exceed supply.40 These rates have been a lot less than what small businesses in Brazil have to pay for cash. Microfinance groups with more experience, like CEAPE, which is an NGO, say that money is a great problem. Even though SCMs can gather resources, they have to follow the same rules as financial institutions and lose their tax-exempt status as a charity. They also have to pay the high taxes that financial institutions have to pay. In addition, there are standards for reporting and supervision.

New rules have made it easier for people to get loans from banks

But there are some restrictions, such as maximum loan sizes and interest rates. There was a big one-time rise in the cost of paying microfinance loans above the small threshold sizes, which may be hard for some microfinance firms to keep up. The different loan size thresholds will make loan fragmentation and return loans more likely. Microfinance in Brazil is having a hard time getting more money without putting such strict limits on how much can be given. One thing that could be looked into is the fact that deposits can't be collected by any kind of microfinance group in Brazil right now. This is related to the question of what products are available. Many countries allow deposit mobilization so that microfinance institutions can offer their customers savings products, which is a basic and popular need for many of them. It also lets microfinance institutions get more money, which is good because they can get in touch with more potential customers. Thus, the 147 banks that the Microbanking Bulletin kept an eye on hit 9 million borrowers but 29 million savers. It's possible that this is the only surefire way for Brazil's microfinance industry to grow significantly. Of course, letting deposits be gathered comes with risks, especially for the small and likely defenseless customers of the microfinance institutions in question. If Brazil chooses to go this route, it will need to change the way it supervises things and add safety measures at the same time. These problems will be talked about in more detail later in this chapter. Additionally, it is worth mentioning that in many countries, microfinance institutions that take deposits need to be regulated. On the other hand, credit-only microfinance institutions do not need to be regulated (Christen and Rosenberg 2000; Van Greuning, Gallardo, and Randhawa 1999). In Brazil, it was hard to get microfinance resources other than charity funds for a long time, until the above-mentioned changes to the law in 1999 and 2001. SCMs can now get wholesale funds from banks, but they are still not deposit-taking institutions. They do have to follow the rules set by the Central Bank and are usually supervised by it, as we've already talked about. In this case, the rules are stricter than in other countries because the institutions have to follow financial rules even though they don't take deposits. 

Brazil's microfinance sector should think more about models 

That gradually increase the market-based financing of microfinance institutions, with formal banking institutions playing a bigger role in wholesale financing. This is especially important because of limits on deposit-taking and institutional capacity. Several arrangements are possible, depending on the institutional ability of the microfinance institutions involved. In some cases, the microfinance institution could only be a point of contact for end customers. In others, it could be given the job of doing preliminary credit risk analyses. In still others, it could be a full financial middleman that does its own risk assessments, gives out loans, and takes on the related credit risks. These kinds of models make it possible for banks to get involved in microfinance while also lowering the costs of doing so. But it's been slow for banks to give large amounts of money to SCMs. In 2001, these kinds of funds were only given to one microfinance institution. They were given to RioCred, a microfinance institution based in Rio, by Fininvest, a consumer finance branch of the private bank Unibanco. As of now, it is an SCM called MicroInvest, and its stock is split 75:25 with the International Finance Corporation (IFC). Also, with help from Acción International, ABN AMRO Bank has started a test lending NGO called Real MicroCredito. 

Finally, the Caixa Econômica Federal (CEF) tested a connection with a Rio microfinance company called SindCred

Still, SindCred's only job so far has been to find the client and do a quick credit risk study. If SindCred shows that it has the institutional strength to do so, CEF might think about a deal where SindCred takes on all the duty and risks of lending money. In some countries, like India, government-backed apex development banks play a big, indirect role in giving second-tier banks wholesale loans. These banks then offer microfinance directly through their own programs or by working with NGOs. NABARD, the world's largest development bank, started the SelfHelp Group–Bank Linkage Program in 1996 as a way for banks to meet their priority sector lending responsibilities to the rural sector.