Micro Finance Sector in Emerging Capital Markets Peruvian Financial Entity - CMAC Caja Municipal de Huancayo Edmundo R. Lizarzaburu [email protected]Esan Graduate School of Business - Universidad Esan – Perú Kurt Burneo [email protected]CENTRUM Católica Graduate Business School. Pontificia Universidad Catolica del Perú Abstract This paper used public information and represents an analysis about how the capital markets will be consider as alternative for the micro finance entities in order to obtain better interest rates and new financial alternatives (diversify their capital structure) and develop their corporate governance (Bolaños E., et al., 2014). Peru has been one of the fastest growing Latin American countries in recent years. In microfinance, Peru has achieved considerable growth in recent years. According to the Interamerican Development Bank (IDB) and Coporación Andina de Fomento (CAF), Peru is the country with the best conditions for microfinance in Latin America and the Caribbean. This is reflected in part by a larger portfolio of microfinance loans and better business environment in the region (IDB, 2010). At the beginning the case reviewed the history of this industry for the period 2009 - 2013. This overview will facilitate the understanding of this industry, its development and the main participants in this sector, then the case by exploring the market structure, its nature, its characteristics and the supply and demand forces, including the competitors and the size of the Peruvian financial sector. Finally, the case focus in the process followed by the entity Caja Municipal de Huancayo in order to listed bonds and commercial liabilities in the Lima Stock Exchange, considering the regulation process and then, the results of the operation; this case review, will give a better understanding about this microfinance entities development process in a volatile macroeconomic context. Keywords Micro finance, Peruvian Financial Sector, Capital markets. 1. Introduction
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Micro Finance Sector in Emerging Capital Markets
Peruvian Financial Entity - CMAC Caja Municipal de Huancayo
Edmundo R. Lizarzaburu
[email protected] Esan Graduate School of Business - Universidad Esan – Perú
Kurt Burneo
[email protected] CENTRUM Católica Graduate Business School. Pontificia Universidad Catolica del Perú
Abstract
This paper used public information and represents an analysis about how the capital markets will be
consider as alternative for the micro finance entities in order to obtain better interest rates and new
financial alternatives (diversify their capital structure) and develop their corporate governance
(Bolaños E., et al., 2014). Peru has been one of the fastest growing Latin American countries in
recent years. In microfinance, Peru has achieved considerable growth in recent years. According to
the Interamerican Development Bank (IDB) and Coporación Andina de Fomento (CAF), Peru is the
country with the best conditions for microfinance in Latin America and the Caribbean. This is
reflected in part by a larger portfolio of microfinance loans and better business environment in the
region (IDB, 2010). At the beginning the case reviewed the history of this industry for the period
2009 - 2013. This overview will facilitate the understanding of this industry, its development and the
main participants in this sector, then the case by exploring the market structure, its nature, its
characteristics and the supply and demand forces, including the competitors and the size of the
Peruvian financial sector. Finally, the case focus in the process followed by the entity Caja
Municipal de Huancayo in order to listed bonds and commercial liabilities in the Lima Stock
Exchange, considering the regulation process and then, the results of the operation; this case review,
will give a better understanding about this microfinance entities development process in a volatile
macroeconomic context.
Keywords
Micro finance, Peruvian Financial Sector, Capital markets.
1. Introduction
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Microfinance are those activities in which financial services and no financial resources are provided
to low-income population, which is excluded from the traditional financial system. The Advantages
of microfinance according to Alvarez-Moro (2013) are:
Allow the inclusion in the financial system of people with less income, traditionally marginalized
from that.
They allow people with limited financial means to undertake projects beyond their means,
allowing its development.
Aare specifically aimed at helping the most disadvantaged.
Involve business developments since the disbursement of the loans are for specific uses.
Borrowers entities that offer microcredits belong to the local community know their environment
and are close to support.
Microfinance provides a better alternative to more disadvantaged compared to the usurers and /
or informal lenders.
Besides, the same author indicates the following disadvantages:
High Leverage, people who get a microcredit and timely paid are recorded as customers with
good credit history. But then they use this information to obtain at the same time more
microloans in other entities.
Due to the competitive market, there are institutions that do not measure the borrowing capacity
of the client, in their eagerness to achieve goals placements.
The main proposed of the several products in microfinance (microcredit) does not meet the
purpose for which it is granted, for example investing in customer revenue source and, therefore,
have and generate more revenue.
No supplies the customer need, because the entrepreneur will pay only what their ability to pay
and not allow it requires growing.
Migration from traditional banking customers, due to lack of credit products and services.
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2. Economic Environment
Peru has registered a slight slowdown in the last months of 2013 due to a lower volume in their
exports, as response commodities prices declining ,strong supply contraction in the mining sector,
private investment contraction, among other factors. However, it remains as one of the fastest
growing countries with relative lower inflation in the region, because exchange rate appreciation, its
strong fiscal position and because its improved risk rating reflects high expectations to GDP
recovery, high level of international reserves, etc. (Banco Central de Reserva del Peru, 2013).
Within its main macroeconomic indicators, it can be mentioned:
Gross Domestic Product
According to the Instituto Nacional de Estadística e Informatica (INEI), the national production
registered a growth of 5.02% for the year 2013, explained by these sectors: Fishing (12.66%),
Financial and Insurance (9.07%) and Construction (8.56%). As you can see, the GDP has been
reduced, due to the cooling of the Peruvian economy. The principal factors behind this result are
external (superprime raw materials price) and internal related to private sector expectations, as a
consequence related to commodities price fell.
Figure 1: Gross Domestic Product 2009 - 2013
Source: Annual Memorial - 2013 and INEI
Own Elaboration
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Inflation
According to the consumer price index in Metropolitan Lima, the monthly inflation was of 0.17% in
December 2013, while the accumulated throughout the year was 2.86%. In addition, this percentage
is located within the target range established by the Banco Central de Reserva del Peru, which
oscillates between 1% and 3%.
Figure 2: Inflation and inflation target: December 2009 - December 2013
Source: INEI
According to the Asociacion de Bancos (Asbanc), bancarization in Peru has increased from 20% to
28% in the past six years, thanks to the dynamism of the economic activity and government
iniciatives as the develop of Banco de la Nacion credit products (Multired Loans), introducing
competition in the financial market Burneo (2009). These, has enabled to strengthen the confidence
that people have in financial institutions. With regard to the stock market, a society that has been
affected as a result of the volatility in the price of commodities and in the exchange rate, was the
Bolsa de Valores de Lima which felt 23.63% in 2013.
However, it is expected that for the next year, it will come progresively around. Also, the growth and
development of mutual funds has been hampered by the negative environment that was experienced
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in the international markets and the local uncertainty, which affects the valuation of the investment
instruments at international level.
In terms of social development, despite the slow process in the economy, this has improved over the
years, thanks to various programs and strategies developed by the state.
Nevertheless, these measures have not yet been able to achieve the expected results, as you can see a
high rate of extreme poverty at national level. This has led to migration from the countryside to big
cities or urban areas as well as the transformation of commercial and labor relations, resulting in the
growth of the informal sector. At the end of 2013, according to the Instituto Nacional de Estadistica
e Informatica,(INEI), 19% of the Gross Domestic Product, valued in S/. 545 billion comes from the
informal sector and it is this same sector that generates 61% of employment throughout the country.
As a result of this informal demand and the difficulty in accessing credit, specialized institutions
were established in microfinance (Municipal and Rural Savings Banks and Credit) able to provide
credit to both small and micro enterprises (SMEs) as to individuals with low purchasing power. This
has led to increasing and improving the indexes of social and economic development in Peru.
SMALL AND MEDIUM ENTITIES (SMEs)
According to the International Labor Organization (ILO), the small and medium enterprises (SMEs)
represent an important source for the economic growth in developing countries, as it can generate up
to two-thirds of total jobs. In addition, through it they can access to markets, networks and financing;
additionally, another skills were developed by the SMEs in order to improve the resilience factor.
Other sectors, such as banking are aware of its importance and even consider it strategic for their
business. However, upon granting the funding to the SMEs, the informality is the main factor that
makes it more difficult. Unfortunately the entrepreneurs face high costs of registration, inefficient
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procedures as well as tedious regulations, which lead to continue operating in the informal sector.
(FOMIN, 2013).Also there are anothers factors that explain entrepreneurs difficults credit access, as
low scale operations and absence financial historial.
In the case of Peru, according to the Instituto Nacional de Estadistica e Informatica (INEI), SMEs
gathers near 98% of the business activity in the country, to 70% of the economically active
population and it represents about 50% of the GDP, further considering that informality is still an
unsolved problem. However with the promulgated Law Nº 30056, is where important changes were
made regarding the labor regime of micro and small companies, it is hoped that the informal sector
will be reduced (Official Journal El Peruano, 2013).
On the other hand, given the characteristics of SMEs, these always had problems with lack of
capital, due to the absence of direct or very expensive loans. In this context emerged the
microfinance credit specifically oriented to support SMEs, which involved the development of new
skillful credit techniques to evaluate the small entrepreneurs (The Economist Unit 2013).
3. Peruvian Financial System
According to the Superintendencia de Banca, Seguros y AFPs (SBS), the Peruvian financial system
at 2013, is composed of 64 financial institutions, which are regulated by the Superintendencia de
Banca y Seguros (SBS) and are divided as follows: 16 Multiple Banking, 12 Financial Companies,
13 Municipal Savings and Credit Banks, 9 Rural Savings Bank and Credit System, 9 Entities of
Microenterprise and Small Business Development, 2 Financial Leasing Companies or Leasing
Companies, 1 Factoring Company and 2 Administering Mortgage Companies.
There are also non-regulated entities by the SBS, as is the case of NGO, which offer credit financing;
and the Cooperative Savings and Credit that are supervised by the Federacion Nacional de
Cooperativas de Ahorro y Credito del Peru.
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Table 1: Financial indicators of financial institutions to December 2013
Source: Class & Partners (December, 2013)
Regarding the financial institutions supervised by the SBS, these same are also regulated in their
respective areas of expertise, by the Superintendencia de Mercado de Valores - SMV and the Banco
Central de Reserva - BCR.
4. Peruvian Microfinance System
According to Microfinance Information Exchange - MIX, Peru is considered as the leader of
microfinance in Latin America and the Caribbean. Nowadays, the supply of financing for
microfinance is done by regulated and unregulated entities, with a range of approximately of 4.1
million customers (Equilibrium, 2014).
The microfinance system is composed of 51 financial institutions, which provide loans to sectors
such as the micro and small enterprises. These entities belong to different institutional segments of
the financial system such as Commercial Banks (Banking Companies), Financial Enterprises,
Municipal Savings Banks, Rural Savings Banks and Entities on Development of Small and
Microenterprise; the last four belonging to the Non-Banking business sector.
Currently, this system is characterized by a high level of competence, basically in the microfinance
sector, since it has large numbers of entities operating in the same market. This results in a credit
With respect to the funds available in the Huancayo Rural Savings Account, these totaled S/. 326
Million in the first half of 2014, that is to say, there was an increase of 2.38 % compared to the
previous fiscal year 2013. This increase is due to the increase in the cash account, banks, and
correspondents; and also to the requirements established by the BCRP as to the legal reserve, the
deposits in other banks and the financial institutions.
CMAC Huancayo
Another factor worth mentioning is the source of Anchoring that the Huancayo Municipal Savings
Bank counts on, which focuses on:
The acquisition of deposits from the public. What is sought is to diversify with measures, as the
forthcoming placement of Negotiable Certificates of Deposit. Also, these acquisitions have as
main feature the need for high interest rates.
Lines of credit granted by the public sector, and that allow institutions to access to more reduced
terms and interest rates. However the risk of change is accentuated given that most of the credit
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lines are denominated in foreign currency (ME), while the placements are made predominantly in
national currency (MN), the risk will increase when there is exchange rate volatility and high
probability to sudden pass to revaluation or devaluation (as occurred at the 2014 end, against
BCRP´s efforts to reduce it)i, at the same time, the interest rate risk is accentuated, given that the
majority of the lines are hired at variable rates and the placements are at a fixed rate.
The issuance of Certificates of deposit. Its entry into the capital market has the possibility to
attract investors and large corporations; however it has a very high cost of operation.
As a result of the growth of their placements, the leverage of the CMAC Huancayo has
increased and their profitability has been declining as a consequence of i) The incursion of the
commercial banking, which has led to the decline in active interest rates, (ii) The structure of less
flexible liabilities dependent upon fixed term savings whose cost pressure the margins
downward, iii) The higher expenditure in provisions product of the deterioration generated in the
portfolio by the client over-indebtedness and, (iv) The increase in operating expenses due to the
aggressive growth and penetration strategy implemented by the municipal savings banks as a
response to the growing competition. Equilibrium, Ranking Report - CMAC Huancayo, 2013).
Table 11: CMAC Huancayo - Structure
Structure
% On the Total Assets In millions S/. In %
Jun-13 Dec-13 Jun-13 Dec-13
Obligations to deadlines 497 536 35.18 % 33.36 %
Savings Obligations 209 243 14.83 % 15.17 %
Total obligations to the
public 1008 1.169 71.33 % 72.74 %
Dep Financial System 247 72 0.17 0.04
Arrears 99 104 7.03 % 6.48 %
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Net Worth 200 227 14.20 % 14.13 %
Total Assets 1.413 1.608 100% 100%
Source: SBS & Equilibrium - organiser of Risks (2014)
Own Elaboration
Certificates of Deposit
In 2012 CMAC Huancayo took the decision to issue certificates of deposits1, setting a maximum
amount in circulation of S/. 45 000 000. This would serve as a positioning strategy towards investors
and the market in general and as a means that would allow diversifying its supply resources, all the
companies who wants to list a fixed income must receive an evaluation from a rating agency
(Cisneros D, et al., 2012). Besides, they can evaluate their potential risk following Basel II and III
(Lizarzaburu E. et al 2012).
The table 12 showed summarized the whole information of the program:
Table 12: CMAC Huancayo - Characteristics of First and Third Issuance of Certificates of Deposits (2012)
Caja Municipal de Huancayo - Issuance of Certificates of Deposit Issuer Municipal Savings and Credit Bank of Huancayo S.A.
Program First Program of corporate bonds and Negotiable certificates of deposit of Municipal Savings and Credit Bank of Huancayo S.A.
Amount of the Program Up to a maximum amount in circulation of S/.45,000,000
Instrument to place Negotiable Certificates of Deposits of CMAC Huancayo S.A. - first issuance. Negotiable Certificates of Deposit - Third issue - Serie A.
Classification of risk EQL2.pe/CLA-2 Amount released S/.10,000,000 (First and Third Issue) Respondent Amount S/.20,000,000 (First and Third Issue) Currency Nuevos Soles (First and Third Issue)
Placement Price The Negotiable Certificates of Deposit will be placed below the same.
Interest Rate Fixed, zero coupon (discount) Term 360 Calendar days
Redemption The principal of the Negotiable Certificates of Deposit will be amortized over a single payment on the Expiration Date of the Negotiable Certificates of Deposit.
Date of issuance April 30, 2013
1 Resolución de Intendencia General SMVNo034‐2012‐SMV/11.1, de fecha 13 de abril de 2012
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Expiration Date April 25, 2014 Guarantees Generic Warranty on the patrimony of the Issuer Structurer Banco Internacional del Peru - Interbank Investment Banking Inteligo Sociedad Agente de Bolsa S.A.
Source: BVL (2013)
The auctions results and comparison
The commitment to issue certificates by the CMAC Huancayo, occurred in a context where as
another entity in the same sector had issued debt in terms of less than 360 days (CMAC Arequipa)
and where the SBS had already generated its vector price2 and allowed investor to comparing the
performance of various fixed income instruments, but mostly made the “mark to market”.
Using the information provided by the SBS in its vector Price, the following table 13 shows the rates
of the certificates and other instruments from not only by CMAC Arequipa, but also by some of its
competitors:
Table 14: Information of Instruments in Capital Market – April 30 2013.
The main aspect here, is how relevant the capital market is in order to provide not only cheaper
funds, but also if helps to diversify them. CMAC Huancayo issued certificates in 2103, first in
February and then in April of the same year, these certificates were overbooked, the market demand
was three times compared to supply Caja huancayo (2014).
Obviously, several factors explain these successful results, for the macroeconomic side, a lot of
liquidity was functional to certificates placement in a context with few issuers, in addition there was
an opportunity window in the offer moment, in adition the real interest rate was negative in the
money market. Respect the microeconomic side, the solid financial indicators and adequates
economic perspectives were key factors.
Conclusions
At a general level, at the end of year 2013, the main financial indicators of the banking system
maintained a positive trend, in spite of the slowdown in the economy; this remained in line with the
performance of the economic and productive activity of the country. This trend could also be seen in
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the Municipal Credit and Savings Bank of Huancayo. Obviously, solid financial indicators,
interesting economic firm perspective, oversupply liquidity in the capital market with a few issuers,
were the principal factors that explain, the successfully certificate placement compared to other
issuers. As consequence of generated new demands credits agents, and an improvement in financial
conditions, could to define a better economic context, which has benefited the private sector
(companies) and thousands of families mainly to entrepreneurs.
In addition, as result to the adequate regulation by the Superintendencia de Banca y Seguros AFP -
SBS; and to the efficient and responsible management of the intermediation skills of banking
companies, is that today we have a solid, robust, and capable of facing international crises and
turbulence banking industry, which in turn is properly capitalized, highly competitive and attractive
both for foreign entities such as foreign investors. The acces to capital markets, was functional to
develop potential synergies inside the CMAC Huancayo, several improved financial indicators show
the effect, that in quantitative terms i.e. arising liquidity is possible to measure until one year and half
after; but more durable effects as reputation or improved empowerment are related with the medium
and long term. Besides in future the entity could explore the MILA market (Bolaños E.L., et al.,
2015)
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i The balance sheet effect, occure when in an exchange rate arising context, a majority liabilities borrowers are
nominated in foreign currency but their incomes are nominated in local currency.