Finnfund

Small loans have become a popular form of development cooperation in the past few years but finance programmes intended for the poor of the developing countries are now beginning to interest commercial financiers, too.

Finnfund’s partner, the Latin American Challenge Investment Fund (LA-CIF) is a good example of how small loans can be a profitable area of investment. The fund, which operates in six Latin American countries, provides short-term loan capital for organisations and banks that offer microfinance. Established just over three years ago, LA-CIF started to show a profit in only its second year of operations.

“Our return on equity reached 18 percent in 2002,” calculates the fund’s manager, Fernando Lucano.

LA-CIF’s loan portfolio totalled $14 million at the end of last year. Lucano aims to increase it to $20 million in 2003. Most of the loans are made in Peru and Nicaragua.

Half a million dollars from Finnfund

Finnfund has invested half a million dollars in LA-CIF. The other main financiers include the Latin American Development Bank IADB as well as the Norwegian development financier Norfund and Canada’s Desjardins.

Lucano points to countless examples around Latin America showing that commercial financing can be provided even for the poor – and can still be profitable. The repayment rates on most microlending programmes are close to 100 percent, he says.

“Microfinance institutions are a mixed bunch, though. The investor needs to choose the ones that have the right administration and business philosophy. Management know-how and skills are especially important,” Lucano adds. “The managers need to know the local market, the customer base and the risks.”

There are an estimated 50 million microentrepreneurs in Latin America, of whom only a small fraction has access to a normal bank loan. Lucano says that in his home country of Peru alone, a billion dollars of small loans are granted each year to about a million entrepreneurs, most of whom operate in the grey economy.

Microfinance becoming more professional

Small loans are usually for less than a thousand euros. Their tenor is 4-6 months and interest is 25-28 %. Typical customers are traders, artisans and entrepreneurs with other small-scale operations.

Lucano is pleased to see that microfinance is moving in the direction of greater professionalism and more ambitious objectives. However, aid donors still do not set the yield targets on their small loan programmes high enough.

“Fortunately we are now moving away from soft loans to credit on market terms. Commercial financiers are also now seeking microfinance institutions that have a business philosophy based on providing funding for SMEs at market interest rates,” he says.

Valuable market information for Finnfund

Sari Nikka, an investment manager at Finnfund who monitors the field of microfinance, points out that LA-CIF is a valuable source of information about Latin American markets and corporate sector development.

For more information please contact Ms Sari Nikka tel. +358 9 3484 3304