DEVELOPMENT-BRAZIL: Micro-Lending Provides Options for the Poor

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Jan 22 2001 (IPS) - Many of the motorcycles zooming up and down the narrow, steep streets of Brazil’s largest “favela” or shantytown, Rocinha, operate as informal “taxis” that are not only affordable, but are the only transport capable of moving people around the crowded Rio de Janeiro neighbourhood.

A large part of the roughly 80 “motorcycle-taxis” providing services to the more than 100,000 residents of Rosinha have been financed by Vivacred, a local non-governmental organisation (NGO) founded in 1997 to provide loans to the micro-enterprises comprising Brazil’s booming informal economy, which have no access to credit.

The loans range from 260 to 5,200 dollars, and enable entrepreneurs to build or expand businesses like small tailor’s or dressmaking shops, corner stores, barber shops or even dentist or lawyer’s offices, said Vivacred’s Teófilo Cavalcanti Neto.

The office in Rocinha was just the first of four branches that Vivacred has opened in Rio de Janeiro shantytowns. By October, 5,513 loans had been granted, for a total of 4.85 million dollars.

The default rate is extremely low, compared with any other economic activity in Brazil, including the banking industry: a mere 2.5 percent of loans go unpaid.

Vivacred is one of the micro-finance institutions that have cropped up in Brazil in recent years, with the initial support of city governments, the Inter-American Development Bank (IDB), the United Nations children’s fund (UNICEF), international NGOs and private entities.

The micro-lending movement supporting the generation of jobs and income for poor populations through personal initiative and self-employment arrived somewhat late to Brazil, a country of 168 million with many pockets of poverty and an enormous informal economy.

The micro-credit movement and its methodology took shape in Bangladesh, through the Grameen Bank created 24 years ago by economist Muhammad Yunus. In Latin America, micro-lending became widespread in countries like Colombia and Bolivia, prior to taking root in Brazil.

It was Valdi de Araujo Dantas, a former consultant to the NGO International Action in Colombia, who first brought the idea to Brazil, founding the Centre of Support for Small Enterprises (CEAPE) in the southern Brazilian city of Porto Alegre in 1987.

The initial project has now expanded into a network of 13 centres, independent of each other but employing the same methodology of lending money to a “solidarity grouping” of three to five “co-guarantors” who assume joint responsibility for the loans of each of the group’s members.

The CEAPE office in the northeastern state of Pernambuco stands out for the number of loans extended: 57,657 in eight years of operations, for a total of 31.2 million dollars. But it also currently posts a high default rate of 15 percent.

The high level of bad debt was the result of a lack of oversight and monitoring during a period of expansion of the number of loans, according to the executive director of CEAPE, José Ventura, who assumed his post nine months ago with the mission of working out such problems, after retiring from the state-owned Bank of Brazil.

CEAPE also served as the inspiration for the Porto Alegre mayor’s office, which created the Portosol Community Credit Institution five years ago. By November, Portosol had granted 13,794 loans, for a total of 12.2 million dollars, with a default rate of 3.81 percent.

But Portosol is not a public entity, and must be self- sustaining and obtain returns in order to expand, Rosa Santana, the institution’s administrative director, pointed out.

That means the interest rate is high, at 3.99 percent a month. However, that covers all costs, and no “interest on interest” is charged, as per the general practice in business and the banking system, she added.

Portosol’s success has become one of the hallmarks of the governing-style of the leftist Workers Party, which has run Porto Alegre for the past 12 years and aims to extend the micro-lending initiative to the 187 municipalities under its control since the mayors elected in the October municipal elections took office on Jan 1.

Several mayors from other parties along the political spectrum have also taken up the idea of micro-lending.

Another micro-finance initiative, the Women’s Bank, created 11 years ago by trade associations, has set up branches in seven of Brazil’s 26 states.

Although not only women receive micro-credit in the northeastern state of Bahia, men account for just eight percent of the clientele, said general manager Estelita de Oliveira Falcao. Small beauty salons, craft industries, eating establishments and corner shops or street stalls present the highest demand for loans, while the bank’s default rate stands at just three percent.

But the Women’s Bank, like Portosol and Vivacred, grant credit mainly to individuals, unlike CEAPE, which issues group loans. According to Portosol’s Santana, southerners are individualists, and the few “solidarity groupings” financed by her institution are comprised of enterprising migrants from the northeast.

CEAPE director Ventura, however, said that it is necessity more than cultural differences that drives people to opt for group loans, “the only way to gain access to credit for the very poor, who have nothing to offer in collateral.”

Micro-lending has grown especially fast in the northeast, Brazil’s poorest region. The state-owned regional development bank, the Bank of Northeastern Brazil, launched its own programme in 1998, and by last December had extended 407,806 loans totalling 130 million dollars. It expects to grant another 2.7 million new loans over the next four years, said Rita Valente, the coordinator of the Crediamigo microcredit programme.

The National Bank of Economic and Social Development (BNDES), Brazil’s largest development bank, has also been involved in micro- finance since 1997, but in an indirect manner, offering funds to NGOs specialising in micro-credit to enable them to broaden their financing capacity.

Last year it shelled out around 41.5 million dollars to 25 micro-lenders in 16 states. The loans are repayable in eight years, at 9.25 percent interest – the lowest rate currently available in Brazil.

The aim is to increase the volume of loans and fuel the creation of “micro-lending societies”, effectively drawing in the private business sector, to ensure the continuity and self- sustainability of the micro-finance trend, said Luiz Barreto, the head of the BNDES micro-credit division.