Brazil microfinance off to a rocky start

Ten years ago, Almir Araújo ran a bar in a room of his self-built house in Heliópolis, a sprawling favela, or shantytown, on the outskirts of São Paulo.

Today, a couple of chaotic streets from his home, he runs a Lan House, a business like a cyber cafe where people can pay to use a computer with internet access and a local network, and a DVD rental shop.

“Guess who was in the other day?” he says to the agent from Real Microcrédito who has brought the Financial Times on a visit. “Rose.”

Rose was the agent who gave Mr Araújo his first loan, of R$250 ($106), to stock his bar. “I knew nothing,” he remembers. “She taught me all about how to keep track of stock and sales, how to work out what my potential was.”

Three years ago, Rose approved a R$10,000 loan when Mr Araújo rented the space to open his DVD store, to buy shelves and stock. A year later, she approved a R$20,000 loan to help him buy the premises.

“I owe my success to Banco Real,” he says. “They grow with you according to your potential. If you have the structure to borrow R$1,000, that’s what they will lend you. If you can handle R$20,000, they will lend you that.”

With typical interest rates of 3.5 per cent a month and lower non-performance rates than the wider market, the bank insists that Real Microcrédito is a solid business proposition, thanks in large part to the close relationships it builds with customers such as Mr Araújo.

Microfinance has been growing steadily in Brazil for years. But in 2002 when the government encouraged banks to lend to the poor as consumers, the results were less positive.

The government created simplified bank accounts for the poor, allowing banks to lend 2 per cent of their reserve requirements – the share of their deposits they must park interest-free at the central bank – at maximum interest rates of 2 per cent a month.

But the huge size of the market, the huge demand for credit and, above all, the fact that banks knew these poor customers even less well than their middle-class ones meant the sector stumbled badly at first. It has since regained some ground.

Banco Popular do Brasil, for example, set up as a subsidiary of government-controlled Banco do Brasil, has since been reabsorbed into its parent.

It failed to meet targets across the board and, especially, rates of non-performance were much worse than expected.

Now Robson Rocha, head of Banco do Brasil’s low-income division, says the bank has learned from its mistakes and the operation should soon be turning a profit.

Simultaneously, however, many banks and other institutions launched a drive into correspondent banking. Brazil now has a correspondent network of 95,000 outlets.

One factor holding back the growth of low-income banking in Brazil is that the poor are used to paying high interest rates – often of 5 to 8 per cent a month for loans from retailers for white goods, for example, and 12 per cent a month or more from high street lending operations.

The poor often pay more attention to the size of monthly instalments than to the total interest charged, so are less easy to attract with more competitive rates.

Copyright The Financial Times Limited 2009

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