Should the NICA Fund expand to other countries?
By Carlos Arenas
WCCN's Executive Director
As the NICA Fund closes in on the benchmark of ten million dollars lent out in Nicaragua, WCCN’s board and staff have started to seriously consider the possibility of expanding our microfinance operations to other countries. In this article, I would like to elaborate on the reasons why this kind of strategic move could be fundamental for WCCN’s future, and what countries look most promising for expansion.
It is important to clarify from the beginning that any expansion to other countries, starting perhaps with neighboring countries in Central America, would not mean that WCCN is planning to shift entirely from Nicaragua to other countries. As I will show in this article, Nicaragua is, and would continue to be, our main focus. In fact, not only is Nicaragua the place we know the best, and a place where we have a lot of experience working, but it also has the largest and most successful microfinance industry in Central America (see Table 1, below), and one of the most well-developed in Latin America as a whole.
Reasons to expand
WCCN has been involved in microfinance since 1991, long before microfinance became as popular as it is today. That year, WCCN accepted the invitation from the Nicaraguan Council of Protestant Churches (CEPAD) to become involved in microfinance to respond to a need in Nicaragua: the lack of credit after the privatization of the state-owned bank sector at the end of the Sandinista revolution. That was the origin of the Nicaraguan Community Development Loan Fund (NCDLF). The NCDLF, and then the NICA Fund, were designed by WCCN as investment vehicles with the idea of responding to that urgent need. However, many things have changed in microfinance. The NICA Fund has grown significantly, and the industry has also evolved and matured.
It is important to remember that one of the reasons to launch the NICA Fund in 1999 was that the NCDLF’s level of risk was very high, as a result of working under a model that only allowed us to lend to a single microfinance organization in Nicaragua, CEPAD-PRESTANIC. That situation explains why it was very important for WCCN to create the NICA Fund and start lending to several microfinance organizations. As everyone knows, the best way to avoid concentration of risk is to diversify. To date, the NICA Fund has kept a very well-diversified portfolio in Nicaragua, by lending to 15 different microfinance organizations and credit unions. As the NICA Fund continues growing, country risk has become an important issue to take into account, as the NICA Fund’s risk is still concentrated in a single country. This has been the main reasoning behind the idea of planning to expand to other countries.
Aside from managing risk, the NICA Fund monitors the social impact of the portfolio, such as percentage of the fund lent out in urban and rural areas, and gender and geographic breakdown. These important social impact indicators will remain fundamental to the character of the NICA Fund, regardless of the countries in which we lend.
Where to expand?
There are many elements to consider in deciding a good place to expand our microfinance operations. WCCN staff is currently developing feasibility studies regarding the possibility of expanding to other countries. Considering that WCCN would like to diversify its lending operations as soon as possible, it seems that the easiest and most logical place to start this expansion process is to move to our closest neighborhood, the rest of Central America. However, at this point, this doesn’t necessarily mean that we want to limit our geographic spectrum of possibilities for the future to that specific region.
In my view, there are four principle elements WCCN should consider when deciding where to expand operations:
1) A need for microfinance services. We have witnessed first-hand the power of microfinance as a tool the working poor use to raise themselves out of poverty. The need for these services can be measured in several ways. For instance, if we specifically focus our attention in Central America and consider the poorest countries in the region besides Nicaragua, we will find that, from this single point of view, expanding to Honduras, El Salvador and Guatemala are the most obvious alternatives (see Table 2, below);
2) A need for additional capital. The country (or countries) WCCN expands into must be looking to scale up their microfinance industry.
3) An institutional and legal framework. Countries must have laws that favor operations of organizations like ours.
4) Solid and transparent microfinance organizations. WCCN’s partner microfinance organizations must have a deep and proven social commitment that make it worthwhile to partner with and lend money to them.
What is the next step?
If WCCN is able to move ahead with this idea of initially lending in other Central American countries, it will start doing so by using its own equity, not money from our investors. The reason for this is simple. Currently we are bonded by the legal promise to our investors to use their money for the exclusive purpose of lending it to microfinance organizations in Nicaragua. Only when current notes to investors mature could we gradually invite our investors to authorize us to invest their money in microfinance programs in other countries besides Nicaragua.
We will keep you posted about this exciting strategic change. As you can imagine, it may inaugurate a series of institutional changes as we prepare to commemorate our 25th anniversary next year!