Passport Series: Ecuador: Part 2: Microfinance

August 15, 2011

By: Jonathan Bloom

This month’s Passport Series focuses on Ecuador, thanks to your votes on Kiva’s Facebook page! Ecuador is a South American country with dynamic ecosystems, which are home to the Amazon Rainforest, Andean Mountain Range, Galápagos Islands, and Pacific Coastal region. Follow us throughout the month of August as we learn about Ecuador’s country profile, its microfinance sector, and the lives of its Kiva borrowers. Last week, we examined Ecuador’s background and this post covers its microfinance sector.

Microfinance in Ecuador

The microfinance sector in Ecuador has been stable and relatively well-regulated in recent years since the adoption of a new constitution in 2008. According to Microfinance Information Exchange (MIX), as of 2009 there were $1.3 billion USD in microcredit loans dispersed among 667,696 borrowers. Throughout the country, there are about 1.4 million depositors saving about US$844.1 million. Currently, there are 53 microfinance institutions (MFIs) reporting to MIX, five of which are currently partnering with Kiva. Later in this post, we will discuss why Kiva has chosen to work with each of these Field Partners.

Growth of the microfinance market in Ecuador measured about 7% in 2009. Depositors remain higher in comparison to borrowers, allowing for lower financing costs in general for MFIs. The following figures outline the make-up of the microfinance sector in Ecuador and its growth from 2007 to 2009.

Microfinance Regulatory Climate in Ecuador

The financial system in Ecuador, including part of the microfinance sector, is regulated by the Superintendence of Bank and Insurance (SBS). The SBS’s mission is to safeguard the security, stability, transparency and soundness of the private financial and insurance systems, as well as of the social security system. This is accomplished by means of an efficient process of regulation and supervision to protect the interests of the public and foster the development of the country. The following strategies outline the functions of the SBS:

• strengthen the legal and regulatory framework in accordance with the principles, best practices and international standards in force;
• achieve appropriate risk management by strengthening the supervision processes of the controlled systems;
• protect the rights of financial consumers;
• strengthen organizational management and human resource management;
• guarantee quality and safety of information as well as information technology service with state-of-the-art technology; and
• optimize the administration of financial resources.
Source: MixMaket

While the SBS regulates many banks and savings & loans organization, there is a large segment of cooperatives and non-governmental organizations (NGOs) in the microfinance industry of Ecuador that remains officially unregulated. Some microfinance networks, like the Red Financiera Rural (RFR - Rural Financial Network), have sponsored a voluntary auto-regulation program wherein participating members can elect to comply with a lighter version of the superintendent regulations. This includes following standard accounting practices, reporting financial information to the Management Support System on a monthly basis, and participating in light external evaluations. The RFR is also leading the effort to introduce social performance auditing and evaluation into MFIs by working with their members to complete the CERISE social audit tool as well as pilot Grameen’s Progress out of Poverty Index (PPI) evaluations.

Some of the regulatory changes made in the last three years have taken place in order to improve competition, safety, and provide clear regulations for Savings and Credit Cooperatives; in line with the new Constitution and the 2007-2010 National Development Plan.

The landscape of microfinance regulation in Ecuador is still evolving with new proposals currently in Congress evaluating how to bring NGOs into the regulatory structure. In general, the addition of new laws and decrees in recent years have helped to create a more stable environment in Ecuador.

In 2007 the law governing the Effective Maximum Cost of Credit was created to allow the Central Bank of Ecuador to establish a maximum rate for active, passive and legal interest rates. This, as well as other factors, have contributed to generally lower interest rates for Kiva borrowers in Ecuador than the average Kiva borrower worldwide!

The Law of Creation of the Network of Financial Security was passed in 2009 to create a safety net for the financial system similar to the Federal Deposit Insurance Corporation (FDIC). This has helped instill confidence in depositors, which in turn allows MFIs to lend at lower costs.

Kiva Partners in Ecuador

As stated earlier, Kiva works with five Field Partner MFIs in Ecuador. You can read more about how Kiva chooses field partners on our blog in our latest webinar from JD Bergeron, Senior Director of Social Performance. These five MFIs have met the rigorous criteria of becoming a Kiva partner, and each offers services to meet the needs of specific vulnerable populations.

The following maps show where our Kiva’s Field Partners are concentrated and how this directly overlaps with the most vulnerable regions of Ecuador.

Kiva Field Partner, Cooperativa San Jose has been in existence for 45 years, its work is primarily focused in rural areas and its regulated by the SBS. Kiva chooses to partner with Cooperativa San José because of its reach into under-served areas and the range of meaningful benefits it offers to members! Cooperativa San José encourages member participation in governance and pays generous interest rates on savings deposits, benefits that are virtually unheard of at non-cooperative microfinance institutions.

Banco D-MIRO S.A. Ecuador, which until recently was known as Fundación D-MIRO Misión Alianza, is headquartered in the port city of Guayaquil. D-MIRO recently transformed from an NGO to a regulated bank in order to be able to offer savings opportunities to their clients. They have a network of nine agencies in the Guayaquil area and fourteen agencies total, providing over 30,000 Ecuadorian borrowers with credit services.

D-MIRO’s target markets are families and microentrepreneurs who have been marginalized from the traditional financial system for different reasons (culture, sex, race, poverty, etc.). The Inter-American Development Bank named D-MIRO one of the best MFIs in Latin America and the Caribbean in 2009.

Kiva chose to partner with D-MIRO because of its strong social mission and its unusual model of offering small individual loans to the urban poor without requiring any physical collateral. This is seldom attempted in microfinance because of the associated risks and the high cost of providing small individual loans in place of larger group loans. D-MIRO’s recent transition to a formal regulated bank will allow it to offer savings accounts to its customers.

Fundación ESPOIR is an Ecuadorian non-governmental organization (NGO) that specializes in communal banking to hard-working women. Their key differentiator is their offering of health and financial education to their entrepreneurs. Such topics include setting personal and business goals to understanding reproductive health and nutrition benefits. Their Cuenca office houses a medical clinic where about 300 entrepreneurs per month receive health services for themselves and their families from two staff doctors.
The majority of ESPOIR's portfolio is group loans. However, their individual loan business is growing, as long-standing entrepreneurs with ESPOIR "graduate" from group loans and take on larger amounts to finance and sustain their businesses for the goal of asset accumulation. In addition, ESPOIR offers emergency, university and home improvement loan products.

One of two new Field Partners in 2011, FODEMI is an NGO that directs its efforts to working with groups of microentrepreneurs, who for lack of economic guarantees, are not subject to credit in the formal financial system. Kiva chose to partner with FODEMI because they target areas of extreme poverty and social exclusion. Ecuador's country context makes it difficult for FODEMI to continue serving these clients because pricing controls require FODEMI to maintain interest rates below a certain level, which means these clients are more costly to serve. By providing 0% loans through FODEMI, Kiva lenders are helping to ensure that FODEMI is able to continue to serve this vulnerable segment of the population.

Also new to Kiva in 2011, Fundación Alernativa is an Ecuadorian nonprofit organization, founded in 1991, with the purpose of propelling entrepreneurship and providing sustainable financial and non-financial services to clients. Kiva chose to partner with Fundación Alternativa because of its strong social focus. Fundación Alternativa conducts on-site surveys to measure their client’s living conditions and through their three other programs, they provide excellent and environmentally friendly non-financial services to low-income entrepreneurs and communities. One of their goals is to penetrate the Napo region located east of Quito and home to Ecuador’s Amazon forest. By supporting borrowers through Fundación Alternativa, Kiva lenders are helping them continue to provide valuable social services to their borrowers. In addition, in the future Kiva lenders can help the organization grow into the more challenging regions of Napo and Chimborazo and serve more marginalized borrowers.

Kiva is proud to be a part of helping you fund loans in Ecuador! Next time you loan to an entrepreneur, consider lending to a small business owner in Ecuador!

Stay tuned for our final post next week highlighting more about the lives of our borrowers in rural Ecuador.