Country diversification is on the way!

By Carlos Arenas
WCCN Executive Director

During the last week of August, several WCCN staff and board members attend­ed the Fourth Central American Confer­ence on Microfinance in Guatemala City. This important event takes place every two years in a different Central American country, and it is the main gathering for microfinance institutions that work in this region. Having just returned from that trip, we feel very confident that WCCN is not only heading in the right direction, but that our diversification strategy is sound and progressing as planned.

WCCN’s representatives visit FONDESOL, a Guatemalan microfinance agency. FONDESOL is a prospective WCCN partner. Photo by Ruth Garrido.

In this article, I would like to explain why country diversification is important for WCCN’s loan fund, and share with our read­ers the steps we are taking to advance our country diversification strategy. I also want to comment on what we have learned so far in this process, and explain what is next for WCCN as we diversify to other countries.

Why is country diversification important?

To address the challenges that WCCN/the NICA Fund faces, diversification has be­ come a serious consideration. These chal­lenges can be summarized into two types.

This summer, we have seen a series of politically motivated attacks against the microfinance industry in Nicara­gua, some of them directly instigated by President Ortega. In spite of things calming down at the time of writing this article, the attacks against the microfinance industry have caused a great deal of concern and have had a profound resonance among microfinance funds that work in Ni­ caragua (see public letter signed by microfinance credit providers in Nica­ragua, next page). With that in mind, it would be irresponsible for us not to do our part to develop a diversifica­tion strategy to mitigate political risk, in case things in Nicaragua become more complicated.

The other challenge is actually a very exciting one. WCCN is in talks with MicroPlace, a web-based investment vehicle that will make it possible for anyone in the U.S. to invest online in our loan fund with small amounts of money—as low as $100. Through this partnership, we are anticipat­ing a significant increase in funds invested in WCCN/the NICA Fund. Currently, there are only two other microfinance funds that have notes available through MicroPlace: Calvert Foundation, one of the leading in­stitutions in the socially responsi­ble movement in the U.S., and Oiko­credit, a worldwide fund with head­quarters in the Netherlands.

As a re­sult, if things progress as we plan, we will soon join two of the main pro­viders of funds for the worldwide microfinance industry. For WCCN, a web-based platform is not just an excellent opportunity to increase the size of the fund, as important as that is. Rather, the main factor that at­tracted us to MicroPlace is that it of­fers the opportunity for democratiz­ing investment opportunities to ev­eryone. As a fund that offers lending opportunities not only in Nicaragua but in other countries, WCCN’s loan fund will be even more attractive for potential retail investors. As a result, our country diversifica­tion strategy will, little by little, trans­form WCCN’s loan fund into a player in the global microfinance industry. Un­til now, our loan fund has been tied to a single country, Nicaragua. After wit­nessing the success and the not-yet-fulfilled potential of microfinance as a development tool, we are committed to taking it to other countries where we can find a need for microfinance services to empower the working poor and a well-developed microfinance in­dustry within which to work. As I ex­plained in an article in the previous edition of the newsletter, we do not want to be limited by geography, but we have selected Central and South America as our immediate target for expansion.

What steps have been taken so far?

We started our diversification strategy by writing a plan of action. Some parts focused more on actions or changes that need to happen inside the organi­zation, such as conducting a financial analysis making budget projections, analyzing our human resource capaci­ty, and identifying all the necessary in­stitutional changes. The other set of ac­tions focused more directly on moving forward with the diversification strate­gy, such as the need to conduct market and legal feasibility studies in the se­lected countries, and developing rela­tionships with potential new partners.

In fact, staff has already conducted market and legal studies on the microfinance industries in Honduras, El Sal­vador, and Guatemala. Based on finan­cial indicators and our own experience evaluating microfinance institutions, we found at least 26 organizations that could potentially become partners of WCCN’s loan fund.

The second step was to start develop­ing channels of communication that would allow us to build a relationship with each of those 26 organizations. That is why WCCN sent several repre­sentatives to the Fourth Central Amer­ican Conference on Microfinance. In the three days we were there, we had meet­ings with more than half of the organi­zations we identified as potential part­ners. As a result, we have identified at least 10 organizations that are interest­ed in partnering with WCCN in the near future. Obviously, all of them share our social mission, run financially sound microfinance programs, and have a very important impact on the borrow­ers they serve.

What have we learned in this process?

Let me mention four main lessons so far. The first is that we should have started this process three or four years ago. Perhaps we were not ready at that time, but the opportunity was there. If you think about the fact that WCCN has been working in microfinance for seventeen years, and was a pioneer in this industry, why limit ourselves to a single country and let other funds fill that need, knowing that not all of them have our social focus? If our loan fund has been successful and we feel proud of our accomplishments and impact, why not expand our operations to oth­er countries where we could do good work, like we have in Nicaragua?

The second thing we have learned is that there are mixed opinions among our investors about the idea of ex­panding to other countries. Some are very supportive of the idea, while oth­ers are not. It seems that the main con­cern is that if we start lending in oth­er countries we would lose focus while the needs in Nicaragua are still huge. As I said in my article in the last is­ sue of Nicaraguan Developments, Nica­ragua is and would continue to be our main focus. If country risk does not deteriorate further, we are not expect­ing to reduce the size of our portfolio there, which is currently a little over nine million dollars. If things prog­ress as planned, and our public expo­sure through MicroPlace contributes to significantly increasing our invest­ment, that would allow us not only to expand operations in other countries, but even to continue the average rate of growth that we have had in Nicara­gua over the last five years.

The third lesson is the microfinance in­dustry in Central America is amazing­ly diverse. We have been happily sur­prised by the quality and outstand­ing social impact some of the organi­zations we have met with have in Hon­duras, El Salvador and Guatemala. The microfinance industry in these coun­tries has a rich mix of lending models, with a very important weight on group lending rather than individual lending, which is the case in Nicaragua. Finally, we have been reminded once again about the importance of the work done jointly by WCCN’s board and staff. By having the necessary guidance and the strong support of our board of directors, our diversi­fication strategy has proved to be very sound, realistic, and feasible. Microfinance has become a competi­tive industry, and organizations with all kinds of interests and backgrounds are arriving in the field. As our board president mentioned in the previous issue of Nicaraguan Developments, we need to stick to our mission to maintain our own profile, and not be just one more credit provider.

What is next?

We are in the process of scheduling due diligence analyses of the microfinance organizations in Honduras, El Salva­dor and Guatemala that have also ex­pressed interest in getting loans from WCCN’s loan fund. As I mentioned, we also need to make several changes to WCCN as an institution, and we will keep you updated on these as well. We have a lot of work in the months to come and a lot of decisions to make. Your support and encouragement is very important for us at this time.