A New Beginning for Microfinance in Nicaragua

By Carlos Arenas, WCCN Executive Director

The Nicaraguan National Assembly approved into law the promotion and regulation of its microfinance industry. Although the law was eight years in the making, final approval on June 9, 2011, surprised the industry.

The approval of a microfinance law at this time is also the result of pressure from the International Monetary Fund (IMF). The IMF did not support or participate in any drafts of the law but grades a well regulated microfinance industry favorably during their ongoing country evaluations.  The Nicaraguan government recently introduced a draft to the National Assembly that became the backbone of the law, which resulted from consensus between the government and the private sector.

The approval of the microfinance law definitively impacts the microfinance industry in Nicaragua. Lacking specific regulations, the industry has been caught in the middle of several political and legal controversies. The new law also could help the industry recover from a severe crisis during the last three years.

The Nicaraguan Association of Microfinance Institutions (ASOMIF), the umbrella group of the main microfinance institutions, applauds the new law. Executive Director Alfredo Alaniz said, “We view the adoption of the law as a triumph for ASOMIF, as this is the culmination of a process that lasted nearly eight years. We hope that the regulatory framework creates a new base for microfinance activities and that it becomes a stimulating factor for the standardization, and also strengthens the institutional and corporate governance.” 

I will summarize the main topics addressed by the new law, reflect on the current status of the microfinance industry in Nicaragua and highlight issues about the future of microfinance in Nicaragua. 

Main topics in the new microfinance law

1. The new law defines and/or resolves several issues central to the debate about the microfinance industry in Nicaragua:

1. What is considered microfinance: According to the new law, microcredit is defined as “small loans, not higher than 10 times the GDP per capita (or around US $10,000).”

2. Interest rates: This was the most controversial issue during the last eight years of discussion about the need for a microfinance law in Nicaragua. For several years, most Nicaraguan politicians from the two main political parties were inclined to set ceilings to the interest rates that microfinance institutions could charge. However, the law approved allows free negotiation of interest rates, a change the microfinance industry particularly welcomes.

3. Microfinance customers’ rights: The law protects microfinance customers’ rights to a high degree, reflected, for example, in requirements that   microfinance institutions clarify interest rates and develop a claims-processing mechanism. 

4. Judicial issues: Pressure from the non-payment movement led the judicial system to refuse to process legal actions taken by microfinance institutions against defaulting borrowers. The new law clarifies issues in current civil laws, such as which legal actions microfinance institutions can take against defaulting borrowers.

5. Savings: The new law specifies that microfinance institutions cannot take savings from the public under any modality.

2. The new microfinance law creates the National Commission for Microfinance (Comisión Nacional de Microfinanzas/CONAMI) to provide industry oversight and promotion under the direction of a five-person board appointed by the Nicaraguan president and confirmed by the National Assembly. The president delegates two members and the private sector – in consultation with the main microfinance organizations – proposes two. The executive president of the entity serves as the fifth; this is a full-time position and also serves as the commission’s legal representative.

CONAMI is charged with:

• Regulating and supervising microfinance institutions.
• Authorizing its registration and functioning.
• Resolving clients’ complaints regarding microfinance institution services.
• Developing the microfinance law through setting general rules.
• Promoting activities related to microfinance, with CONAMI administering a newly created Fund for the Promotion of Microfinance (FOPROMI) funded by international cooperation agencies’ loans, donations and the national budget.

3. The new microfinance law dictates the organization and operation of microfinance institutions. The main rules include the following.

1. Minimal equity level: To be registered as a microfinance institution an organization should have a minimal equity level of US $200,000, and its microfinance portfolio should be at least 50% of the total assets.

2. Two different kinds of legal status allowed: Legally a microfinance institution could have a nonprofit or a for-profit status. However, if a nonprofit microfinance institution wants to transform into a for-profit institution, it should first dissolve, liquidate and cancel its nonprofit legal status.

3. Capital reserve: The for-profit microfinance institutions should allocate at least 15% of net profits to establish a capital reserve.

Evolution of the microfinance industry

Microfinance institutions in Nicaragua today differ from their status three years ago. A large majority were severely impacted by the crisis mainly caused by the infamous non-payment movement and the global economic crisis.

As we have reported in previous issues of Grassroots Connections, the non-payment movement was a politically motivated movement of several microfinance institutions’ borrowers actively campaigning against them. Originally, President Ortega’s support helped the movement expand quickly. Later, the National Assembly approved a moratorium law benefitting non-payment movement members and calling for renegotiated loans in better terms than those for non-defaulting borrowers. However, because non-payment movement leaders sought loan forgiveness rather than loan renegotiation, few took advantage of the law.

Non-payment movement actions and the moratorium law revived the culture of non-payment in Nicaragua, which was very common during the 1980s. The expanded non-payment culture impacted credit activities of state-sponsored programs, commercial banks, nonprofit microfinance organizations and credit unions. Although mostly inactive now, the non-payment movement sometimes offers to support President Ortega’s re-election if the government assumes participants’ debts with microfinance institutions. Industry experts expect the new microfinance law to result in the non-payment movement dissolving completely.

The evolution of ASOMIF’s members during the last three years reveals that – between 2008 and 2010 -- at least 85,401 people have been left behind without credit, and $63.6 million dollars have not been disbursed among borrowers. At the same time, 24 branches of microfinance institutions have been closed (Table No. 1).

Table No. 1: ASOMIF’s members 2002-2010

If we look at the evolution of the portfolio among ASOMIF members during the last five years we can see that the first institutions affected by the crisis were ACODEP, FODEM and FUNDENUSE to a lesser extent. These three organizations reduced their portfolios in 2008 while most of their peers continued growing. By 2009 the crisis had touched almost everyone, and most of their lending portfolios decreased, with the notable exception of FDL. At the end of 2010 total lending portfolios continued decreasing in most of the organizations, with the notable exception of PROMUJER, which almost doubled its portfolio. The most dramatic reduction took place at FJN, which has stopped lending and is only administering a small portfolio for some of their creditors (Table No. 2).

Table No. 2: Comparative lending portfolio of ASOMIF’s

members 2006-2010 (in thousands of dollars)*

Note: For comparative purposes this table does not include four groups that joined ASOMIF in 2010. When the new groups are added, the total lending portfolio in 2010 increased to $182.4 million. In 2006 and 2007, the table does not include CARUNA, which left ASOMIF in 2008.

General speaking, lending portfolios are decreasing for three main reasons. First, the organization is having problems with the quality of their portfolio and their external founders are taking a more conservative approach or have decided to leave the Nicaraguan market. Second, given the tough environment, the organization takes a more conservative approach and lends only to well known clients, which was the case of PROMUJER between 2008 and 2009; as a result, it came back very strong and in 2010 doubled its lending portfolio. Finally, it could be a combination of the two reasons previously explained: quality of portfolio and a more conservative approach.

We are happy to report that WCCN has been able to navigate the crisis. We have been able to support our partners such as FDL, PRODESA, PROMUJER and Leon 2000, which have continued performing fairly well despite the circumstances.  A few other partners still are under close observation. Unfortunately during the crisis we were forced to end our partnership with several institutions, such as FUNDENUSE, PRESTANIC, CEPRODEL, San Antonio Cooperative, FODEM and FJN. We hope to resume partnerships with some in the future if their financial performance clearly improves. Unfortunately, some are winding down operations, so our relationship will end.

What is next for the microfinance industry?

Experts are cautiously optimistic about the future of the microfinance industry in Nicaragua for several reasons:

• The worst of the crisis is over.
• The microfinance industry and Nicaraguan government learned from their mistakes.
• The new microfinance law closes any space for the non-payment movement to maneuver.
• The new law limits some state agencies that have been intervening with microfinance institutions in questionable and unhealthy ways.
• The Nicaraguan government likely will begin considering the microfinance industry an ally in their fight against poverty instead of an enemy or rival.

WCCN expanded beyond Nicaragua three years ago as a way to diversify our portfolio given the risks we saw in its microfinance industry. Other international credit providers in Nicaragua without enough experience already have left. We want to continue operating in Nicaragua, and we hope the approval of the microfinance law will set the tone for a new beginning for the industry.