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Despite Making Strides In Financial Inclusion, Microlending In Peru Involves Higher Credit Risks

Microcredit has been a fundamental instrument for the development of individuals and small enterprises in Latin America, allowing many of them to have access to the financial system, which promotes entrepreneurship and competitiveness. Microloans are a gateway for informal businesses that, because of their small scale and lack of credit history, are unable to access funding from conventional banks. Peru's microfinance segment has developed rapidly during the past several years thanks to financial capacity of microlenders sufficient enough to support their growth, a favorable regulatory framework including fair capital requirements, low barriers to entry, and oversight by the Superintendencia de Banca y Seguros (SBS), the financial regulator. Microloan volumes in Peru have risen on average 12% per year since 2010, primarily boosted by growth of the Cajas Municipales de Ahorro y Credito (CMACs; microfinance lenders ) and MiBanco Banco de La Microempresa S.A. (BBB/Negative/A-2), which have grown nearly 20% on annual basis since that year.

There's a wide range of microfinancing institutions in Peru, all of which are regulated. The SBS oversees about 36 entities providing microcredit, SME loans, and other consumer loans to the low-income segment of the population. The CMACs grant about a half of microloans, followed by MiBanco (around one-fifth) and other financial companies (the remainder).

Chart 1


Microfinance Providers Face High Credit Risks

Asset quality of the microlenders' loan portfolios is weaker than those of commercial banks (30-day non-performing loan ratio average of 7.1% versus 4.1%) because of their business model. There are several reasons for such a gap. First, these lenders provide credit to people and small companies that are more vulnerable to distressed economic conditions and lack credit history necessary to run appropriate credit risk models to ensure accurate pricing. Second, contrary to recipients of loans from traditional banks, microloan borrowers don't have suitable guarantees to mitigate credit losses in the event of default. Third, competition and the microfinance supply glut led to excessive indebtedness among borrowers, undermining asset quality. Fourth, the rapid lending growth also can weaken credit quality if lenders don't have sufficient capacity to support new underwriting.

External factors are also hampering asset quality of microlenders, such as macroeconomic instability, weather risks, and social unrest. For example, Peru's economic deceleration in 2009, 2014, 2017, and 2020--triggered by several exogenous factors including the global financial crisis, "El Niño" phenomenon that caused flooding and business interruption, corruption scandals, and the pandemic that eroded borrowers' cash flows--took a toll on asset quality during the subsequent years. However, the government relief measures mitigated the adverse effects of the pandemic on asset quality.

Chart 2


Robust Growth Prospects

A substantial portion of the region's population is still locked outside the formal financial mainstream. Only about 15% of Peru's working-age population borrows from financial institutions. In addition, like in other countries in Latin America, Peru has a high level of informal economy, which was hit hard by pandemic-induced lockdowns. According to the International Labor Organization's report, the share of informal employment is at 70% in Peru compared with the 64% average of the Latin American countries. Nevertheless, we believe such a situation offers Peru's microfinance sector opportunities to grow and further develop. But it would require the government to expand the internet and mobile networks, along with financial and digital education to the population. The development of technology is important because it allows access to low-cost transactions and access to financial services, particularly for people located in hard-to-reach areas of the country.


A Ways To Go To Become Self Sufficient

Despite the sector's favorable growth opportunities, it needs to support its long-term operating sustainability through sufficient earnings and capitalization. Although microloan providers benefit from higher lending interest rates than those of universal banks, underwriting costs are also higher mainly due to more complex credit risks, given the focus on borrowers with limited credit history located in out-of-the-way areas and who are also vulnerable to economic woes. In addition, stiff competition among microlenders through interest rates further dent their margins. Some players are implementing measures to mitigate pressure on profitability by offering additional financial services or expanding operations to other countries, as is the case for MiBanco. However, we expect lending to low-income clients that are more vulnerable to distressed economic conditions than other types of borrowers, will continue generating earnings volatility for microlenders. However, these entities gain customer loyalty by providing credit to many previously unbanked people which help them improve living conditions and promoting business. This also supports business stability and growth.

Microlenders' Key Metrics
Average 2010-2022
Cajas Municipales MiBanco Empresas Financieras Universal banks
Lending interest rates* 36.1% 37.4% 53.8% 18.1%
Operating costs/financial margin 61.6% 54.4% 55.2% 44.2%
Return on equity 11.7% 14.8% 13.7% 18.8%
*For universal banks, data refers to the average interest rate of corporate lending, SME loans, microlending, consumer lending, and mortgages.

A Proper Business Platform Would Bolster Performance

We believe that sustainable and profitable growth of the microlending sector requires authorities and lenders to develop confident sources of credit information and strengthen underwriting standards, credit risk management, and collection models while capitalizing on the increasingly advanced technologies. The market leader, MiBanco, already adopted some initiatives in that regard including better estimate and segmentation of credit risks and adopting a more efficient collection process. The bank's larger competitors, CMACs, benefit from a non-profit status given that local governments own them, which allows these entities to reinvest earnings to maintain business infrastructure to expand underwriting, while maintaining satisfactory capitalization. Moreover, MiBanco derives benefits from its status as a subsidiary of Banco de Crédito del Perú S.A. (BBB/Negative/A-2), the largest bank in Peru, which helps support MiBanco's lending growth and absorb unexpected hits to credit quality.

This report does not constitute a rating action.

Primary Credit Analyst:Camilo Andres Perez, Mexico City + 52 55 5081 4446;
Secondary Contact:Sergio A Garibian, Sao Paulo + 55 11 3039 9749;

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