3. Microcredit in Ecuador
3.4. Feasibility Analysis of Microfinance Models in Ecuador
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Miguel de Sucumbios28 (ISAMIS), and government institutions such as the National Direction of Housing Cooperatives (DINACOOP)29 and the Ministry of Social Welfare (MBS). The Cooperative had ambitious prospects for expansion especially to rural areas of Ecuador's eastern region. This expected progress never happened and they needed to find a different way of expansion of their biggest project. The “Cooperative of Savings” and “The Lago Agrio Cooperative”30 are merged into a single entity called “Cooperative Savings and Credit Grameen Amazon”, which has offices in three different cities.31
In order to also help the poor, in 2006, an agreement was signed between the FUDECE, the National Finance Corporation of Ecuador (CFN) and the MBS to deliver the “social welfare bonus”32.
3.4. Feasibility Analysis of Microfinance Models in Ecuador
There have been significant efforts in Ecuador, from the government and international agencies, to encourage microfinance industry as a way out of poverty. There are different understandings of microfinance or microcredit and also between micro-business, poverty and extreme poverty in the country. This forces the microfinance industry to grow by covering some areas of the population, but not all of them. The purpose of this thesis is to realize if the poorest people in Ecuador (people who live under the poverty line and do not possess a stable income or live in deplorable conditions) have access to small loans in order to start
28 San Miguel de Sucumbios is a small city in the Amazon of Ecuador
29 Retrieved from: www.dinacoop.gov.ec
30 Lago Agrio is a small city in the Amazon
31 Sucumbios, Pichincha and Esmeraldas
32 The social welfare bonus is USD 50/month that the government provides to single mothers, elderly, disabled people.
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their own sources of income; and if not, create a way to facilitate access to income generation.
From this research, it seems that the microfinance sector is mostly commanded by traditional banks (branches), and some under other influential groups (religious or social). According to the Foundation for International Community Assistance (FINCA International)33, 64 per cent of the Ecuadorian population is financially excluded, which means that this part of the population lacks of a bank account at any financial institution. Consequently, the part of microfinance which is serving the customers under the traditional banking system is not reaching these financially excluded people.
The government defined and developed the microfinance industry in 2001, with the support of the USAID and the implementation of the SALTO Project. Currently, the most important benchmark for the government in the microfinance industry is “The Financial Rural Network (RFR)”. Both, definition and benchmark are related to the more than 1.5 million existing micro-enterprises in the country and how to enhance and channel credit for them.
The SALTO supports the government to reform the Banking Law, including the microfinance main norms. Then, around eight Micro Finance Institutions (MIFs) are supported to create their branches under this financial framework. For instance, Banco Solidario34 and Banco del Pichincha35 (through their “CREDI FE” micro loan program). According to The Superintendency of Banking and Insurance (SBS), microcredit is developed and covered not only in cities but also in the countryside. They indicate that Banks (with their branches) are providing microcredit mostly in the urban areas; while cooperatives savings’ most important
33 Retrieved from: http://www.finca.org/where-we-work/latin-america/ecuador/
34 Solidary Bank is one of the largest banks in Ecuador https://www.banco-solidario.com/
35 Pichincha Bank is one of the largest banks in Ecuador https://www.pichincha.com/
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targets are rural areas. All of these institutions are regulated by the Banking law. With this law financial collateral is needed and “a microenterprise loan finances a business with a source of repayments from production, commerce or service activities”36
The Financial Rural Network (RFR) is formed by six bank branches such as the CREDIFE;
35 cooperatives such as “Cooprogreso”37 or “Maquita Cushunchic”38; and 11 NGOs. Bank branches and cooperatives focus on microenterprises and their growing through loans for buying machinery, vehicles or commercial properties, construction, increasing working capital, fixed assets, infrastructure improvement, and others. The requirements for these loans are mostly the same in all financial institutions. Some of the very basic requirements are the customer and collateral tax and personal identification numbers, bank and trade references and others such as mortgage guarantee (depending on the amount). The amount goes from USD 600 to USD 20,000. However, many, if not most, of the poorest people in Ecuador do not have a personal identification number or a tax identification number.
Certainly, and according to the government information, the Microfinance industry in Ecuador has increased from the creation of the legal framework under the financial system. Some of the most important reasons of this change, among others, are: the transformation of the National Productive Matrix Policy (created and adopted by government regulations) and the return of many emigrants caused by the crisis in Spain.
The National Productive Matrix Policy in Ecuador is the way and strategies how the
36 SBS Superintendency of Banking and Insurance
37 Cooprogreso is one of the most important cooperative savings in Ecuador.
www.cooprogreso.fin.ec/
38 Maquita Cushunchic is an important cooperative in Ecuador www.maquita.com.ec
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and final destination of goods and services produced. The most important challenge of this policy is to strength the local production by reducing imports in raw material as much as in finished products.The transformation of the productive matrix involves change from a primary goods exporter to an efficient producer. The result creates high added value products for exportation and for local consumption.39 Many businesses have started in this way to meet the government goal of reducing imports and increasing local production through microenterprises with the support of microcredit.
From 1995 Ecuadorians started to migrate mainly to Spain. When Spain faced the financial, employment and housing crisis around 2010, many Ecuadorians returned to the country with some savings to purchase properties. Owning properties is important to apply for a maximum of USD 20,000 microcredit loan. From the loan they started their own small business and thus generating demand for the Microfinance industry.
On the other hand, NGOs such as CARE ECUADOR40, FODEMI41, FEPP42 or CEPESIU43 are basically working in social assistance programs and supporting low-income micro-entrepreneurs (especially farmers) who need the money to invest and grow their
39 Retrieved from:
http://www.planificacion.gob.ec/2013/01/matriz_productiva_WEBtodo.pdf
40 The Cooperative for American Remittances to Everywhere works for development and humanitarian aid projects http://www.care.org.ec/
41 Microenterprise Development Fund http://fodemi.org/
42 The Ecuadorian Fund Populorum Progressio http://www.camari.org
43 Specialized in providing services to rural small-scale economic units in the urban areas http://www.cepesiu.org/p/inicio/
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businesses. The first one, CARE, is working on nutrition education, forestry and irrigation projects in the mountains. The second one, FODEMI, is focused on micro-entrepreneurs, facilitating loans quickly with minimal guarantees and requirements, but the loan still requires financial collateral. The third one, FEPP has a social purpose, supporting and developing farmers. The last one, CEPESIU, is specialized in providing services to rural small-scale economic units in the urban areas through support developing agencies and productive projects in the agricultural and tourism businesses. NGOs are mainly working with farmers, creating small enterprises or projects in the social field and providing them social assistance, improving their cultivated land, and promoting their products by creating fairs or different events.
Yunus in his book “The Banker to the Poor” explained that not all farmers are the poorest people in any country, but very small farmers or laborers are. In Ecuador only people who had covered their basic needs are able to have land, become farmers or have small shops; in general these people are not extremely poor. Since NGOs are focus on help farmers, they are not strictly working only with the poorest people in the country. That means that neither the financial institutions nor the NGOs are covering the poorest to the poor in the sense of helping them generate their own businesses and sources of income.
The official Replica in Ecuador had worked in the capital city (not rural areas). There has been no information about it since 2002 neither in Grameen organizations nor Ecuadorian sources. It is assumed that due to their discipline and administrative problems in the year 2000, they made the entire repayment to the World Bank and reported to the Grameen Trust and then stopped their operation in 2002.
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The FUDECE is working mainly with women in some religious groups established in big cities of Ecuador such as Quito and Guayaquil. From the USD 1.5 million of the current portfolio, more than USD 1.4 million is managed by religious groups in urban areas. This means that borrowers are primarily segmented by their religions, so outside of these religious groups those in extreme poverty struggle to access microcredit despite the fact that they are the most in need of this service.
After the research of this thesis, it has been shown that there is still a part of the Ecuadorian population who does not have access to microcredit as a tool against extreme poverty. This part is the society´s most vulnerable people who face not only economic problems but social disadvantages. However, to create a mechanism to provide credit to this part of the population is not an easy task. It requires a combination of existing strategies, adaptation of current ideas and creation of some innovative approaches to get good results. Based on the Grameen Bank model, the next chapter is an adaptation of this functionality into the Ecuadorian reality through some critical success factors.
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