MICROFINANCE FOR PEOPLE IN ECUADOR

Micro-finance has boomed in Ecuador over the past ten years. The many dozens of small savings and credit cooperations and other micro-finance institutions do, however, need support and continued professionalisation.

Micro-finance institutions (MFIs) bring financial services such as saving and borrowing within the reach of the poorer layers of the population, the people who are not attractive as customers to regular banks. At the same time these are exactly the very people who could achieve a higher standard of living by access to microcredit. 'Many small savings and credit cooperations are not subjected to the rules of the financial authorities,' says Javier Vaca, director of Red financiera Rural (RfR), a network of organisations involved in micro-finance.

'Furthermore, they are often too small to be able to properly develop themselves. RfR wants to support these organisations so that they can actually reach the bottom rung of the market ladder. This is why we organise training events for their staff about risk analyses, or about the problems specific to MFIs working outside the cities. We have also developed software to enable us to provide member organisations with better follow-up information. They supply us with their basic data and then we send them a quarterly overview which shows them how they are performing compared to other organisations, both in terms of finances and the social aspects of their work.'

Last year the left-wing correa government of Ecuador decided to tackle the interest rates which banks were charging for credit which in its view were far too high. 'The lower the interest, the better, of course, it is for the poor,' says Javier Vaca. 'However, the problem was that the government wanted to fix one maximum rate for all financial institutions. But an MFI lending out amounts of dozens or hundreds of euros in the countryside has higher costs than a commercial bank lending money to project developers to build in the capital. Not least because a MFI credit officer regularly has to visit all the villages in order to collect the repayments. One maximum rate wouldn’t do justice to those differences.'

This is why the RfR campaigned vigorously against these government plans; and successfully so. In the law which was eventually passed different maximum rates were set out depending on the different kinds of credit. Within the MFI category the rule applies: the larger the amount borrowed, the lower the maximum interest rate. With loans below 600 USd the rate is now around 40%. Javier Vaca: 'That is obviously a lot but in the country side
you can only cover your costs if you are charging an interest rate of between 30 and 40 percent. In the cities, where people can easily go to the offices themselves, the interest charged by the MFIs is lower.'

'Don’t forget, before the advent of the MFIs people in the countryside had no access to credit at all. Or they had to rely on informal loans which were often charged at an effective interest rate of 100-150% per annum. And also bear in mind that many MFIs do more than just provide credit. They also act as savings banks, give technical support to small businesses and sometimes even provide micro-insurance. In other words, if we had not succeeded in getting realistic maximum interest rates for MFIs, then micro-credit would no longer have been available in large areas of Ecuador. And that in a situation where only one third of all people outside the cities in Ecuador has access to micro-finance at this time.'