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Microfinance faces debt test in Brazil

BRASILIA (Reuters) - In the shantytowns that surround Brazil’s cities, plenty of peddlers and vendors say they could use a small loan.

The trouble for microfinance lenders -- who believe loans as small as $50 can help poor entrepreneurs grow business and climb out of poverty -- is that many would-be borrowers in South America’s largest economy are already loaded with debt.

With some of the world’s highest interest rates, Brazil is fertile ground for aggressive commercial lending. And after decades of hyperinflation, rich and poor have learned that it’s smarter to spend than invest.

“Brazil is different. We don’t have a culture of saving,” said Stelio Gama Lyra, who heads CrediAmigo, one of the few microfinance success stories in the country. “My son doesn’t know what it means to save 10 reais ($5).”

Brazil seems like the perfect place for microfinance, a development strategy that emerged in the 1970s.

Some 44 million people -- one in four -- live in poverty and city streets bustle with makeshift businesses. Coconut sellers, seamstresses and craftsmen all hawk goods to survive.

But microfinance efforts have struggled.

“Everybody is looking at Brazil with frustration. It has no providers of scale but a huge potential population,” said Andre Laude, microfinance coordinator for Latin America at the World Bank’s private development arm, the IFC.

As microfinance rides a new wave of global attention and more private capital flows into the segment, lenders may want to consider what went wrong in Brazil.

EASY CREDIT

Globally, cross-border investment in microfinance tripled in the last two years to $1.4 billion. Microlenders sold shares, private funds invested and even profit-driven giants like ABN Amro and Citibank started taking an interest.

Muhammad Yunus won the Nobel Peace Prize in 2006, capping the wave of enthusiasm. Yunus founded the nonprofit Grameen Bank in Bangladesh, microfinance’s great success story with 7 million clients today.

But critics have slammed private capital’s arrival, saying loans can hurt poor people by encouraging them to consume beyond their means and charging them interest to pile on debt.

One critique said most people, rich or poor, are simply not entrepreneurs and the poor use easy credit to consume, not invest.

In many ways, Brazil is a case in point. A mix of urban and rural, rich and poor, it is two worlds in one.

The informal economy, where one in four city dwellers makes a living, is a world with no regular paychecks and little cash. The formal economy offers fashions, electronics and fast cars and a sophisticated consumer credit market to help buy them.

Stores hand out credit cards, banks cash post-dated checks, and retailers sell everything from TVs to T-shirts on payment plans with high interest rates built into the price.

At the other extreme, the government sets limits on lending rates charged by nonprofits and offers discounted loans -- which often go unpaid, causing federal debt and market rates to rise.

In an effort to expand microfinance services to the poor, President Luiz Inacio Lula da Silva’s government decided in 2003 that banks must invest 2 percent of sight deposits in microfinance at capped interest rates.

The move has created a pool of domestic capital, but critics say the measure simply encourages banks to make loans to slightly poorer clients without doing the hard work required to reach the neediest and to make sure loans are used productively.

“They’re only going to take the really low-hanging fruit and leave out the rest,” said Alex Counts, the head of Grameen Foundation.

The web of regulations and credit options has made it difficult for micro-lenders to experiment with models that might blend best practices with sustainability and profit.

SMALL SUCCESSES

A sustainable microfinance business depends on keeping default rates down, which in turn depends on having the right methodology, said Francisco Alexandro da Silva, a loan agent for CrediAmigo in the dusty outskirts of Brasilia.

CrediAmigo’s methodology has helped da Silva weed out the debtors and keep tabs on clients, some of whom cannot read.

“Microfinance is very much the revenge of the poor,” the IFC’s Laude said. “You need to give clients the same attention and follow up that you would give your larger clients.”

Recently, another microfinance lender seems to have mastered Brazil’s tricky market.

Real Microcredito, founded by Dutch bank ABN Amro a few years ago, serves a growing number of hairdressers and shop owners in the outskirts of Sao Paulo, one of the world’s five biggest cities.

General manager Giovani Anversa estimates Brazil has some 10 million potential micro borrowers and he expects competition for their business to grow.

Grameen Foundation’s Counts, who aims to bring the Bangladesh model to the world, welcomes the private investment but with a word of caution.

“The only way you can scale is private capital but it has to be done in a way that the goals aren’t lost,” he said.

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