According to data from the Superintendence of Banking, Insurance and AFP (SBS), direct credit in the Peruvian financial system has grown by only 0.2% annually as of July, primarily driven by mortgage loans and non-retail sector loans. In contrast, mype credit decreased by 5%, and consumer credit saw a decline of 2%. When comparing to the previous month, SBS data indicate that mype credit fell by 1.1% compared to the same month last year, while consumer credit increased by just 0.3% annually.
Jorge Delgado, president of the Microfinance Association (Asomif), comments on this situation and emphasizes the current caution among microentrepreneurs.
“The economy, as reflected in the figures, has experienced fluctuations, with some months showing growth and others declines. This indicates a lack of economic stability. Without stability, it is challenging for me as an entrepreneur to predict that Peruvians will have disposable income. Consequently, no one wants to take out a loan due to the uncertainty about whether the stock purchased by microentrepreneurs will sell. We have aimed to grow cautiously.”
Additionally, Delgado points out other environmental factors: high interest rates, credit restrictions due to the detrimental interest rate cap law, and issues of public safety. “Currently, we see many businesses closing due to insecurity. Even worse, some financial advisors cannot approach clients in certain areas due to safety concerns. All these factors inhibit growth.” he noted.
The reconfiguration
A phase of caution now characterizes the growth seen in the Peruvian microfinance sector, especially among Municipal Savings and Credit Banks. This approach aims for consolidation. These institutions currently account for 56% of the mype loans issued by the microfinance system.
The savings banks in Arequipa, Huancayo, Piura, and Cusco hold the largest share of placements and deposits as of August 2024 among institutions registered with the Peruvian Federation of Municipal Savings Banks (Fepcmac).
X-ray of the microfinance segment. (Source: FEPCMAC, SBS / Infographic: Raúl Rodríguez)
Wilber Dongo, central business manager of Caja Arequipa, explains that his institution has issued nearly S/750 million monthly in about 70,000 new loans. As of July, growth has been recorded at 9%, which is lower than in previous years.
What is the reason for this? The executive explains that clients who qualify for credit have opted for shorter-term loans. As a result, amortization is quicker, and the growth in balances is not as noticeable. “76% of our clients are micro and small businesses. The turnaround time for a new loan was previously 11.5 months, but it has now decreased to 9.5 months. This indicates faster repayment. They are seeking lower installments to avoid taking on shorter credit terms.” he said.
Although the average loan amount has decreased, it remains stable for Caja Arequipa, ranging between S/10,500 and S/12,000 over the last 12 months. “The interest rate has remained high in the first half of the year, impacting profits across the financial system. A reduction is anticipated in the second half, and we hope that this will lead to a more dynamic credit market,” he emphasized.
So far this year
In the first half of the year, interventions of microfinance institutions took place, followed by the transfer of their total assets to larger entities. In July, Caja Sullana transferred all its assets to Caja Piura— the winning bidder— and this month, the financial company Credinka has transferred its assets to Caja Arequipa.
For Rafael Alcázar, a partner at the Rebaza, Alcázar & De Las Casas law firm, these events are characteristic of the context faced by the microbusiness sector. “The entities heavily focused on this segment that were not adequately prepared have struggled to adapt. Each institution has its unique characteristics— as the resolutions pertain to administrative and risk management deficiencies—yet they have been affected by widespread issues within the system. Significantly, no savers have been harmed, which reflects well on our regulatory framework. Even in cases where intervention was necessary, the regulator managed to do so without activating the Deposit Insurance Fund,” he states.
Caja Arequipa, in detail
Caja Arequipa has recently acquired Credinka and previously obtained the equity block of Caja Señor de Luren in 2015, which has strengthened its market position. Dongo mentions that the challenges faced by institutions such as Credinka and Sullana are not a result of recent developments.
Caja Arequipa plans to open the offices that Credinka had in Peru in the coming days. (Photo: Diffusion)
“There has been financial weakness that, due to the pandemic and its aftermath, prevented improvement. Most financial institutions increased expenses in 2023. For instance, Credinka’s financial expenses now constitute 45% of its financial income. “That has accelerated their asset deterioration.” he remarked.
Arequipa’s decision to bid for the acquisition of Credinka’s assets stems from the fact that more than 91% of the credit balances were going to be new.
“Credinka mainly served Cusco, where it had a 30% market share, while Puno, Apurímac, and Arequipa together made up nearly 60%. Cajamarca accounted for close to 10%,” he explains. “Thus, operating costs were not going to affect us. Additionally, 95% of Credinka’s portfolio was comprised of micro and small businesses, making it highly compatible with our operations,” he adds. Dongo states that Caja Arequipa will soon look to open offices in areas previously served by Credinka.
The long term
Alcázar believes that the robustness of regulations will facilitate the anticipated consolidation of the system moving forward. “I believe that there are entities that will need to seek solutions for their accounting positions. The regulator has indicated that it would support this consolidation process. I think the regulator is right to encourage it to prevent entities from entering dissolution or liquidation processes. It is time for proactive involvement in the boards of directors of entities observing these sales or mergers.” He acknowledges, however, that this process will be challenging since savings banks inherently depend on municipal governments.
Caja Sullana is another of the microfinance entities that was intervened by the SBS. Today its clients are part of Caja Piura (Photo: USI)
Meanwhile, Delgado highlights the need to prioritize the recovery of the economy over this consolidation process.
“Rather than focusing on two institutions that have already resolved their issues, we must prioritize the fact that the economy needs to grow for overall dynamism to return. If the economy does not grow, and demand does not rise, the financial flows cannot be supported. Even bill payments are being deferred. We should direct our efforts towards Tía María and other similar projects to seek effective solutions to insecurity.” he asserts.
Delgado also notes that there is optimism for the upcoming Christmas campaign in the second half of the year, which is typically a strong period for the sector. “We hope the second half of the year shows improvement over the first, but we are certain that it won’t be sufficient,” he concludes.
Current Trends in the Peruvian Financial System: A Focus on Microfinance
According to figures from the Superintendence of Banking, Insurance and AFP (SBS), direct credits in the financial system of Peru have exhibited a meager growth of only 0.2% annually as of July. This slight increase is primarily attributed to mortgage loans and non-retail lending. In sharp contrast, mype credit has seen a decline of 5%, while consumer credit has also dipped by 2%. Data from the SBS further show that mype credit fell by 1.1% compared to the same month last year, with consumer credit recording a modest growth of just 0.3%.
Jorge Delgado, president of the Microfinance Association (Asomif), highlights this challenging environment, emphasizing the cautious approach adopted by microentrepreneurs. He states,
“The economy, if you look at the figures, had rebounds in some months and then there were falls. That means there is no economic stability. Since there is not one, it is difficult for me as an entrepreneur to project that Peruvians will have money in their pockets. Given this, no one is going to take a loan because there is no clarity that the stock that a microentrepreneur buys will be sold. We have sought to grow prudently.”
Challenges Faced by Microentrepreneurs
Delgado points to several interconnected factors impacting the current landscape: high-interest rates, restrictive credit policies due to the cap on harmful interest rates legislations, and escalating citizen insecurity. He articulates, “Today we see many wineries that have closed due to insecurity. Or worse yet, some financial advisers cannot approach their clients in some areas due to insecurity. All these factors do not allow growth.”
A Shifting Landscape in Microfinance
The Peruvian microfinance sector is currently characterized by a phase of prudence, especially among Municipal Savings and Credit Banks. This cautious behavior aims for consolidation within this framework. As reported, these institutions account for 56% of the total mype loans granted within the microfinance system.
Municipal savings banks located in Arequipa, Huancayo, Piura, and Cusco report the largest engagement in terms of placements and deposits as of August 2024. Below is a table showcasing the participation of these key savings banks:
| Bank | Location | Percentage of MYPE Loans |
|---|---|---|
| Caja Arequipa | Arequipa | 18% |
| Caja Huancayo | Huancayo | 15% |
| Caja Piura | Piura | 14% |
| Caja Cusco | Cusco | 9% |
Caja Arequipa’s Growth Strategy
Wilber Dongo, central business manager of Caja Arequipa, states that his institution has placed nearly S/750 million in around 70 thousand new loans monthly. As of July, Caja Arequipa recorded a growth of 9%, indicative of a slower pace relative to previous years.
Causes of the Slowdown: Dongo explains that borrowers have been opting for shorter loan terms, resulting in faster amortization. He notes that, “76% of our clients are micro and small businesses. The turnover of a new loan was 11.5 months, but now it is 9.5 months. That explains the faster payback. They are looking for lower installments to avoid shorter credit terms.”
Although the average loan ticket has decreased, it remains stable for Caja Arequipa, ranging between S/10,500 and S/12,000 over the last year. “The interest rate has remained high in the first half of this year, affecting profits throughout the financial system. We anticipate a decrease in the second half, hoping it boosts credit dynamics,” he emphasized.
Recent Changes in Microfinance Institutions
In the first half of the year, the microfinance sector experienced significant interventions, leading to the transfer of assets from smaller institutions to larger ones. Notably, Caja Sullana transferred its assets to Caja Piura in July, and this month, Credinka’s assets transitioned to Caja Arequipa.
Rafael Alcázar, a partner at the Rebaza, Alcázar & De Las Casas studio, stated that these developments are symptomatic of the challenges faced by microbusinesses. “Entities that were most concentrated in this sector and less prepared have struggled to overcome these hurdles. Each entity had its unique challenges due to administrative and risk management deficiencies, but they all faced systemic issues. Notably, no saver was affected, highlighting the robust regulatory framework,” he added.
Assessing Caja Arequipa
Caja Arequipa’s proactive measures saw it acquiring Credinka and previously acquiring a block of shares from Caja Señor de Luren in 2015, thus strengthening its market position. Dongo elaborated that recent developments with institutions like Credinka and Sullana do not reflect the current state of Caja Arequipa.
“There has been a financial weakness in some institutions, compounded by the pandemic’s impacts. Many financial institutions saw their expenses double in 2023, leading to unsustainable financial situations,” he stated.
Future Outlook and Regulator’s Role
Alcázar believes that strong regulatory measures will promote further consolidation in the sector. “There will be entities seeking to rectify their financial positions. The regulator encourages this consolidation process to prevent dissolution or liquidation,” he commented. However, he noted the complexity involved as savings banks’ operational viability often hinges on municipal governments.
For Delgado, the central issue goes beyond consolidation. The focus must be on reviving the economy for sustainable growth. “If the economy doesn’t grow, the demand won’t sustain cash flows. Even bills are being deferred. There is hope for more positive developments in the second half of the year.”
Strategic Tips for Microbusinesses
1. Focus on Cost Reduction: Evaluate your operational costs to maximize profitability, especially in a challenging economic climate.
2. Stay Informed: Keep abreast of regulatory changes and market conditions for prudent financial planning.
3. Explore Short-term Financing: Engage with microfinance institutions that allow for shorter-term loans to maintain cash flow.
4. Diversify Offerings: Consider diversifying product offerings to adapt to changing consumer demands.
