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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 8 / January 2005 |
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Microfinance in Brazil: Unibanco's ExperienceBy Mauricio Jose Serpa Barros de Moura Brazil appears to possess the perfect conditions for microfinance to thrive for many reasons: it has the highest concentration of income in South America; 60 million Brazilians (or 33% of the total population) live on less than US$1 dollar per day; only 54 million people have checking or savings accounts; and the country has a well developed financial market in terms of retail banking. However, the microcredit sector in Brazil has not reached a relevant level of growth. "Despite the tremendous potential of microfinance," writes Brazilian financial columnist Celso Ming, the sector has failed to take off." Today, there are 171 institutions performing traditional microcredit in Brazil. Most of them are non-governmental organizations (NGOs) and small programs with an average of 1,300 clients per institution. The total number of active clients is 230,000 and the total portfolio is approximately US$60 million. Only one Brazilian private bank currently offers microcredit services: Unibanco, which operates jointly with the International Finance Corporation of the World Bank (IFC-World Bank) to offer microcredit in poor communities in Rio de Janeiro, Sao Paulo and Porto Alegre. Unibanco is the third largest bank in Brazil, with 17 million clients, and operations throughout the country. The case of Unibanco raises a simple question: why has Unibanco leapt into a market that most retail bankers consider too risky and too expensive - especially when it could offer other, more profitable credit products? The answer lies in the type of credit offered to low income entrepreneurs in Brazil. Despite the small size of the microcredit sector, low income people have gained access to financial services, particularly credit. For example, retail and department stores provide a tremendous amount of credit to the low-income segment of the population to finance the acquisition of durable goods, like televisions and refrigerators. Seventy million store cards have been issued by retailers, while only 45 million people hold traditional credit cards (MasterCard, Visa and Amex) and checking accounts. Furthermore, 40% of the people that have store cards in Brazil live on less US$3 dollars per day. While some retailers offer credit, others have joined mainstream financial institutions. For example, two important low income retailers, Ponto Frio and Magazine Luiza, have joined Unibanco in offering services to five million clients. Credit is accessed based on the traditional mechanism of requiring formal proof of income. However, most new applicants cannot present proof of personal income, an account balance sheet, or any formal kind of credit guarantee. Furthermore, the current trend in the Brazilian labor market is towards a decrease in formal employment (registered job), and an increase in the number of microenterprises. Data from the Brazilian federal government indicates that the population without formal employment registration increased from 38% of the active economic population in 1991 to 51% in 2004. The Central Bank has estimated that 16 million of microenterprises exist. Of those 16 million, 80% do not have formal legal constitution, 46% do not have any accounting or financial statement and 85% have no access to the traditional banking credit. Despite this increasing demand, there is not enough of a supply of credit to meet the real demands of low-income entrepreneurs. In such a context, microcredit plays an extremely relevant role. Unibanco is meeting this demand by offering credit to small entrepreneurs that do not have formal proof of income. The most significant difference between these services and the traditional model of credit is in the process. This is not done through the traditional methods of modeling and credit scoring, but instead relies on the loan officer. The loan officer visits the entrepreneur's business and collects key information about the business activity and the entrepreneur. This information helps establish the sustainability of the business and real risks of default. Under this system, clients with similar characteristics are receiving loans that are four times larger through the microcredit offering, with a lower default-rate. "For the first time I have found the right credit at the right moment and it was through microcredit. I have finally started to get loans that were really positive for the development of my small business" said Vera Alves, a Unibanco microcredit client who makes and sells cakes and candies in a very poor community in Rio de Janeiro. Thus, the microcredit process is meeting entrepreneurs' demands more effectively, and better controlling the risk of the client as well. The main difficulty faced by microcredit suppliers in Brazil is developing a credit model that can be applied on a larger scale. The clients of this segment present some characteristics that make it difficult to apply statistical or mathematical models. First, the personal and professional issues in terms of finance do not have a clear borderline, which makes it difficult to understand the destination of the credit after the disbursement. Second, most of these clients cannot formally prove their sources of income. While Brazilian banks and department retailers are offering credit to the low-income segment, this mechanism only functions properly when the client can formally prove their source of income. For this reason, the development of a process of credit offer based on personal contacts is a great advance, and is a fundamental step to building credit models on a larger scale. Banks could develop a profitable model to reach the growing class of low income entrepreneurs. The goal of Unibanco, that already has experience and largely operates with the low income segment, is to be the pioneer in fully meeting the demands of the microcredit market. This would be a breakthrough in portfolio growth in the increasingly competitive Brazilian financial market. To reach this goal, a fully developed microcredit operation is essential. No other private retail bank in Brazil has done this before, but Unibanco and the IFC-World Bank believe that this is possible and relevant for the country's economic development.
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