Micro credits have changed the financial habits of D and E sectors

In the past, micro and small corporations depended on loans until banks realized they had become inaccessible to popular sectors of the population. Step by step, they have begun shifting their focus, but there is still much to do.

The appearance of micro credits changed the financial habits of D and E classes and the perception banks had of granting loans to lower income citizens.

“The opening of micro credits to the non-banking public is important because financial entities have realized that lower income classes do pay and pay in time. They are responsible and are interested in growing”, says Luis Vicente León, director of Datanálisis. In this sense, the financial sector has realized that this is an important niche, because certainly, E and D sectors can concentrate up to 80% of the entire population.

And certainly, banks have had difficulties in simplifying the procedures to grant credits faster in order to compete with other lenders, even though interests are favorable to formal banks. And it is no secret that persons of the E and D classes are still wary of walking into a bank office and not feeling intimidated by the amount and complexity of all the mandatory requirements.

As a consequence, other mechanisms have been created to obtain funds from persons other than lenders, at better interest rates. But each one has found a way to reach this public. For example, Bancrecer, sends its account executives to the residences of potential clients.

That is how, once micro credits became known, their growth has been vertiginous. They arrived to cover an immediate need of funds that used to be in the hands of lenders and profiteers at very high interest rates.

According to statistics of Softline Consultores, in January 2004, BsF 270 thousand were granted in these kind of credits and at the close of January 2008, the figure closed at BsF. 4 million 91 thousand, an incredible growth for four years, representing 298%.

Since banks realized the potential of this area, they began their adaptation to this niche, which has, in turn, resulted in the creation of development banks.

They are proactive
Luisa Mariana Pulido, director of Bancrecer, affirms that classes D and E are proactive, require funds for their businesses, have no savings capabilities and their investment is on a daily basis.

“The efforts we have been making from the financial sector to include non banking classes into the system are beginning to show its effects, and people in these sectors already feel that they have an option other than the regular lenders”. Further, these persons have not yet been able to access formal banking.

Pulido stated that most credits are concentrated on the productive segment of D and E classes, particularly on the commerce, production and service sectors.

“The commercial sector includes bodegas, stores, kiosks, spots in municipal markets, all of which represents 49% of the credits”, she said.

The service sector includes loans to sewing businesses, mechanical services, plumbing services, electricity services, which represents 35% of credits to this segment of the population”.

According to Pulido, at least at Bancrecer, there are no discriminations with respect to the kind of activity and the average of requested credits is of BsF 6 thousand.

“The term of the credit depends on the dynamics and size of the business, among many other variables”, she added.

However, Pulido warns about the existence of a possible threat.

“Many institutions are doing the same: covering the need of immediate funds of this segment of the population. Classes D and E are good payers but they also demand funds and, if this situation is not handled carefully, it may well lead them into over-indebtedness”.

In the case of Bancrecer, they are looking not only to satisfy the credit needs of classes D and E, but also to establish a long term relationship with the client, so that they have their own accounts and the bank is able to provide them other services. “And we are doing just that”.

Seven banks

According to the Superintendence of Banks (“Sudeban”), there are seven development banks in the country in charge of granting micro credits to segments D and E of the population. There are 12 other banks of this kind in the process of receiving approval. Three of them are waiting for final approval while the other nine are in the first stages of investigation by Sudeban, in order to verify their compliance with all standards required by the system.

The seven currently operating banks offer services and products to small and micro corporations throughout the national territory.

Those banks are: Bancamiga, Banco Real, Banco de Desarrollo Económico y Social de Venezuela, Bandes, Banco del Sol, Bancrecer, Tangente and Banco Internacional de Desarrollo.

The majority of the customers of these banks are seamstresses, ice cream salesmen, shoemakers, tailors or entrepreneurs dedicated to the production of artisanal goods and services.

“The reality is that in Venezuela, there are more than two million micro entrepreneurs who don’t have access to bank credits and are forced to resort to other lenders who charge high interest rates. That is why these days, we support these initiatives in order to offer more opportunities to entrepreneurs and to the productive sectors of the E and D classes”, said Trino Alcídez Díaz, Superintendent of Banks.

Applications in bulk

Claudia Valladares, Vice President of Banesco’s Community Banking, said that the productive majority of classes E and D apply for credits to increase their working capital.

“Close to 81% of our population belongs to the D and E segment. From this group, approximately 58% performs economic activities within the informal sector. Therefore, the credit applications are destined to strengthen and contribute to the growth of their micro corporations. At Community Banking, applications made by micro entrepreneurs are destined to increase their working capital, that is, to purchase merchandise or raw materials and to purchase fixed assets. We have served businesses of all kinds such as transportation, bodegas, clothing sales and beauty and esthetic salons, among others.

Valladares also believes that the micro financial sector in Venezuela has shown significant growth in the past few years, “thanks to the increasing interest of financial institutions in satisfying the economical needs of the population located at the base of the pyramid”.

According to Valladares, from July 2006, Community Banking has offered the opportunity to access the financial system to the lower income sector of the population in a simple and quick manner, which has allowed these persons to solve their economic needs without being forced to resort to other lenders or profiteers.
“Microcredits constitute a valued product to our customers, because it offers access to the capital they need to strengthen and expand their business, at interest rates that, compared to those offered by other lenders, represent substantial savings”.

Valladares says that as of today, Banesco's Community Banking is able to affirm that “47% of our clients have received their first-time credits and 24% have opened their first bank account”.

Among the products and services that have been developed to serve this sector of the population are the following:

- Community Accounts

- Working Loans

- Personal Loans

- Step by Step Savings

- Integral Life Insurance Policy

“In this manner, we have been able to incorporate a significant number of persons into the financial sector, who had been excluded from the system, up to now.

One element that positively differentiates us in the market ifs the figure of the Consultant, an officer who offers personalized attention to the client and provides orientation regarding the development of his investments”.

Valladares believes that the bancarization index of our country is close to 40%. “Therefore, people are forced to resort to other lenders and profiteers. Also, by not having formal access to credit or bank accounts, their possibilities of having any access to capital for the development of their businesses and saving efficiently are significantly reduced”.

Lack of knowledge about the opportunities offered by the banking system is frequent in this sector of the population. “So this, in addition to the complexity of the requirements traditionally required, generates fear, rejection and insecurity. Consequently, these persons resort the inadequate mechanisms such as the so-called “san”, the “bolso” or even worse, keeping money at home.”

Valladares emphasizes that, upon knowing the opportunities offered by Community Banking and their possibilities of accessing these products through the compliance of few requirements, these persons are easily inserted into the banking sector.

“Recent studies show that persons who resort to Community Banking do so basically because of the need to obtain funds and end up tripling the savings intentions. Also, studies have shown that kind and personalized treatment, simplicity of requirements, quick response and proximity and access to our services are elements highly valued by our customers that promote bancarization and stimulate healthy financial practices among low income sectors”.