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Microfinance Research Paper

June 2009

Why Has Argentina Been

Unsuccessful in the

Development of Microfinance?

Roberto H. Crouzel

Argentine lawyer, Senior Partner of Estudio Beccar Varela, and President of the Comisin Pro Bono del Colegio de Abogados de la

Ciudad de Buenos Aires rcrouzel@ebv.com.ar. As participants of an exchange program between University of Denver Sturm College

of Law and Estudio Beccar Varela, Conor Filter and Gracie Chisholm collaborated with the translation of this paper.

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INDEX

Introduction ............................................................................................... 3

First Challenge. The Lack of Funding ......................................................... 5

Second Challenge. Lack of Vision and the Difficulties of Formulating

Successful Development Plans: Educating the Authorities .......................... 7

Third Challenge. The High Cost of Taxes .................................................. 11

Fourth Challenge. Legal Obstacles ........................................................... 12

Fifth Challenge. Training, Educating, and Increasing Professionalism in the

Agents of Change ..................................................................................... 15

Sixth Challenge. The Stock Market ........................................................... 17

Seventh Challenge. Acquiring and Holding Client Savings ....................... 19

Conclusion: How Can We Help? ................................................................ 21

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Introduction

Although there are examples of micro-credit operations in Argentina from the

1970s and 80s, microfinance, as it is currently understood, received its first

important boost in the 1990s, when various micro-credit lending institutions

emerged. These institutions implemented methodological systems borrowed from

international organizations with extensive experience in Latin America. Among

others, we might mention the work carried out by the Fundacin Emprender1, by

the Fundacin Banco Mundial de la Mujer en Crdoba, and by the Fundacin Pro

Vivienda Social.

Furthermore, it was at this time that FONCAP was created, a fund to give credit,

technical assistance, and training to the entities that grant micro-credit. The fund

was originally established by the Federal Government (49%), Accin Internacional

(45.5%) and the Fundacin Emprender (5.5%).

The enterprises of this decade were generally small undertakings with limited

financial and human resources, mainly focused on resolving the problem of poverty

in specific locations, rather than constructing an ambitious project that would

concentrate financial and human resources on a larger scale.

The persistent recession and growth of unemployment rates that affected Argentina

in the late 90s, in addition to the significant social and economic crisis that the

country suffered in 2001 and 2002, aggravated the problems associated with

poverty. It was at this time new institutions dedicated to microcredit emerged, and

an acute awareness of the importance of combining resources, articulating common

policies and articulating microfinance criteria arose, with the purpose of

strengthening and increasing professionalism within the sector.

To this end, in 2004 the principal institutions of the micro-credit sector established

the Red Argentina de Instituciones de Microcrdito (RADIM), which currently

encompasses as much as 80% of the market and has come to be considered the

driving force behind Argentine micro-credit activities.2

1 A project of a group of successful Argentinean businessmen in collaboration with Accin Internacional. 2 RADIM was constituted as a second-tier non-profit organization whose principal end is the unification of strategies, the creation of programs, and the internal strengthening of organizations dedicated to micro-credit.

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According to the quarterly indicators published by RADIM, in the last three years

the member organizations of the Network increased the number of clients by

181%, the total amount of employees by 197%, the number of agencies by 115%,

and the total portfolio by 372%.3

However, the Network only represents a total of 30,200 active clients, while

research conducted by Andares4 in April, 2007, indicates that in the Buenos Aires

metro area alone there are half a million potential clients who have not yet received

assistance.

One might ask why micro-credit lending has not caught on in Argentina, and while

different reasons for this have been discussed, none of them seems completely

satisfactory to those actually working within the sector.

In the Pro Bono Commission of the Bar Association of Buenos Aires City, we have

had the opportunity to collaborate with several of the institutions dedicated to

micro-credit, including RADIM and several other entities, and we often discuss the

day-to-day challenges confronted by the various institutions interested in

developing this sector. My intention is to categorize and identify these obstacles

and to contribute a comprehensive work aiding the search for solutions.

The institutions that participated in the formation of the Network (and who presently constitute the core group of founding members) are: Fundacin Banco Mundial de la Mujer, Entre Todos Asociacin Civil, FIE Gran Poder S.A., FIS Fondo de Inversin Social S.A., Fundacin Alternativa 3, Fundacin Grameen Mendoza, Fundacin Progresar and Fundacin Pro Vivienda Social. See Mission and Values at www.reddemicrocredito.org 3 See Estado de las Microfinanzas en Argentina: la Mirada de los operadores nucleados en RADIM. March 4, 2009. 4 See Demanda Potencial de Microcrdito en el Conurbano Bonaerense at www.fundacionandares.org.

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First Challenge. The Lack of Funding

As a result of the recurrent crises that the country faces5, the Argentine financial

system has neither long-term financing nor a stock market where the banks can

obtain funding.6 The lack of confidence and the absence of attractive alternatives to

savings explain why Argentines only retain 20% of their total savings in the

national banking system.7

Nearly 50% of all deposits are located in the public banking system. The peso is a

weak currency (it is used for transactions but not to preserve value) and bank

funds are basically used as transactional money, deposited into sight accounts.8

Argentina is one of the countries with the highest country risk, and it continues to

rise.9

Against this adverse background, microfinance and micro-credit institutions have

disadvantages in competing with other businesses, individuals, and with their own

Government in their effort to obtain any of the countrys scarse credit. I write

disadvantages to point out that existing regulations were designed to allow credit

distribution to companies and individuals in relation to their work, but they do not

recognize the distinguishing characteristics of microfinance. Microfinances are more

difficult and expensive than other financial industries and therefore compete at a

disadvantage with others who seek credit.

A habitual complaint of Microfinance Institutions (MFIs) relates, quite simply, to

the lack of sufficient funding sources. Presently, the sector is primarily financed by

funds provided by the State,10 international entities,11 and some private donors.12

There are few lines of credit provided by private Banks and those that have decided

to explore the field have preferred to do so in a direct form (or through

subsidiaries) and with a still uncertain result.13

5 On average there is a significant crisis every 7 years. 6 In fact, the decision of the Argentine government to nationalize the pension system in 2008 destroyed the emerging stock market, which was the source of the most highly-desired financing after the crisis of 2002. 7 See the report, Desarrollo del Financiamiento de largo plazo: El aporte clave del Sistema Financiero al Credimiento de la Economa Argentina, developed by McKinsey&Company for IDEA between March and September 2008. 8 Or public funds. See CML&A. Sistema Financiero: Situacin Actual y su Impacto en las Microfinanzas. Pablo Curat, Presentation at RADIM, March 10, 2009. 9 See El Cronista Comercial from April 19, 2009, page 4. 10 Through FONCAP, the Ministry of Social Development or the lines created by Bank officials. 11 Such as Oiko Credit and Etimos 12 See El Microcrdito en Argentina of the Universidad Catlica Argentina from March 2004. 13 Banco Columbia and Banco Supervielle.

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Some believe that a necessary condition for faster development of microfinance in

Argentina is the addition of products to micro-credit lines, as seen in other

countries and see the present international financial crisis as an opportunity to

occupy the market spaces left behind by other organizations. However, how will it

be possible to create new credit products when there are no funds available to

lend?

Against this background, eliminating the obstacles that make it difficult to fund

MFIs is a necessary condition to the development of microfinance in Argentina. This

condition is necessary to add further competitiveness to the sector, but perhaps

that is not sufficient. In order to guarantee the flourishing of micro-credit in

Argentina, it will be necessary to strengthen the financial market and the stock

market14 as a whole.

In this context, therefore, we can work toward the removal of various obstacles in

order to facilitate development in the field, but larger and faster growth of the

sector will only be obtained when we achieve a more profound development of the

Argentine financial market and stock markets as a whole.

14 Lamentably, the concentration of the banking market in the public bank, the reduction of the stock market as a consequence of the lack of normalization of Argentinas foreign debt, and the nationalization of pension funds indicates that the country is headed in the opposite direction.

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Second Challenge. Lack of Vision and the Difficulties of Formulating

Successful Development Plans: Educating the Authorities

If we analyze the problem by looking at the objectives we most need to achieve, it

is clear that it is most important to lower the barriers that limit access to credit so

that more people may access more benefits.

For that reason, I believe that if we wish to make progress and strengthen the

sector, we must focus on promoting an increase in the availability of credit to those

who are currently excluded from the system, rather than focusing on the nature of

the organizations granting credit or their reasons for doing so.

I say this because a negative viewpoint exists in Argentina towards those interested

in the development of microfinance. This prejudice is harming the sectors

development, and is based on the belief that one cannot and should not make

money at the expense of the poor.

This perspective is aggravated when typical microfinance interest rates are

revealed, because they are always higher that what companies pay. In this sense,

certain existing regulations designed to encourage microfinance reveal an

inaccurate vision of the sector.

An example of such a negative perspective can be found in law 26,117 of 2006,

which created a system of micro-credit promotion that benefits not-for-profit MFIs

(foundations, cooperatives and similar entities) by means of the creation of an AR$

100 million fund of initial capital for the development of micro-credit, and the

establishment of a series of tax exemptions with respect to the dispersal of these

funds by the micro-credit institutions. It should be noted that the law excludes

commercial companies as profit-driven enterprises, implying that what matters

most is the purpose for which credit is given, not increasing the number of people

accessing credit. It is also remarkable that the law provides tax benefits for the

micro-entrepreneurs only if the credit comes from this fund. The loans of

impoverished micro-entrepreneurs should be tax-exempt in any case, and not only

when the credit comes from a state fund.

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The agreements formed under the framework of this law also demand that

borrowed money have an annual maximum interest rate of 6%, which is far too low

to cover the transaction costs of the granting entity, especially for non-profit

organizations. This reveals an understanding that the subsidy will be exhausted

quickly, thereby hindering growth in the number of placed loans. Further, the size

of the portfolio does not permit the MFIs to be realistically self-sustainable. The

organizations must also confront the problem of explaining why the interest rate

may vary between 6% and 60% depending on which outside source of financing it

has obtained a fact which has forced several organizations to withdraw from the

program.15

The funds distributed by the Federal Government also include a non-reimbursable

subsidy of 30% of the total, but this subsidy cannot be used to pay of the largest

fixed cost of the MFIs: personnel costs.

All these problems have both limited the ability to disperse the funds and

diminished the speed and anticipated impact on the individuals who use them. The

Federal Government cant see the forest for the trees, underestimating the

importance of credit access for all people in its concern over the identity of the

lender and the source of their profit.

Another recent example of microfinance regulation has a more satisfactory end. On

October 17, 2005, the Banco Central de la Repblica Argentina (BCRA) enacted

Circular A 4427 that released international loans from the encaje16 (legal bank

reserve) requirement if they were destined for non-profit-organizations dedicated to

microfinance. The fact that this benefit only applied to non-profit organizations

demonstrates a lack of knowledge in this sector of the social economy, where the

defining characteristic is the different technology necessary to service the sector,

not the profitability or business structure of the company.17 Just three years later,

after discussing the topic in numerous meetings and conferences organized by

15 It should be noted that the Argentinean legislators did not read the principles formulated and approved by CGAP and its 33 cooperative members, and by the Group of Eight (G8) during the G8 Summit on June 10, 2004. 16 Since 2005, there has been an obligation, termed encaje, to provide a deposit, in dollars, that is not remunerated and which lasts for a term of 365 days. It is equal to 30% of the currency revenue in dollars within the exchange market, based on the concept that whatever produces revenue should not be excluded from BCRA regulations. Basically, it is a cash reserve requirement to ensure a certain degree of liquidity. 17 This was repeatedly emphasized by Professor Claudio Gonzlez Vega in the South American Regional Course, Microfinances: towards an inclusive financial system, in Quito, Ecuador, in February 2007 and in Mexico City, Mexico, in November of the same year.

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BCRA, the regulator issued Circular A 4843, which granted equal benefits to all

organizations, for-profit or non-profit alike, in relation to their microfinance

activities.

During those years BCRA was also lobbied to increase flexibility in some of the

technical qualification requirements, precautions, and computable financial liability

in order to facilitate the granting of micro-credit by the Commercial Banks. This

was also important so that the loans granted to the MFIs could be considered

lower-risk by the Commercial Bankseven in the event that credit was granted to

nonaccredited (according to BCRA standards) individuals. By the end of 2008,

these goals were achieved through the enactment of Circular A 4891.

These accomplishments were the result of an important educational effort carried

out at all levels, from institutions and interested banks, from the concerns

expressed by Princess Maxima of Holland,18 by the United Nations Development

Program (UNDP),19 and by the good will of countless officials and employees of

BCRA. Nevertheless, the time taken to achieve these successes prevented anyone

from taking advantage of the existing market opportunities between 2002 and

2007; in fact, these opportunities did not become available until the credit market

was suffering from the profound international crises.

These accomplishments are a good indicator of where our efforts can be most

effective. A consistent and well-planned lobbying campaign is needed one

designed to give the problem visibility within the different public administration

agencies. A good campaign must propagate a broad understanding of the sectors

unique characteristics, and address the regulatory changes that would facilitate its

development. This work should highlight the importance of extending credit to

those sectors generally excluded from such lending, and downplay considerations

about whether the lender is a for-profit or non-profit entity.

In other words, the regulator must emphasize expanding the credit supply to a

greater number of people rather than whether the moneylender hopes to profit or

achieve altruistic ends. After all, the final objective is to ensure that more people

18 Princess Maxima was involved in at least two events dedicated to micro-finances and lobbied through the mass media, with significant impact, for the repeal of the encaje. 19 UNDP co-financed a series of conferences and meetings for the purpose of furthering the debate on the sectors weaknesses and on the rapid promotion of microfinance in Argentina.

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have access to credit and to encourage a healthy competition between

moneylenders, thereby forcing each to improve their product and reduce overall

transaction costs.

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Third Challenge. The High Cost of Taxes

The high cost of taxes in Argentina is a constant complaint of MFIs. Consider, for

example, what happens in the case of the Value Added Tax (VAT): a middle-class

individual receives a tax exemption when he purchases material to renovate his

house, while a lower-class individual pays additional surtaxes when she acquires

micro-credit loans to develop her trade.20

Under the Argentine tax system, the taxation rate on the VAT is 21%. In the case

of a micro-credit loan, however, the loan is treated as an informal transaction and

the rate is increased by 10.5%, raising the total tax rate to 31.5%.21 Additionally,

funds transferred through the banking system are taxed on debits and credits

(0.6% for each debit or credit), and are often subject to Gross Income Tax or

Stamp Taxes. On the other side of the transaction, the moneylender must pay a

35% income tax on the interest payments.

All of these expenses are added to the total cost of credit and directly affect the

final amount that the micro-entrepreneur must pay. For this reason, projects with

social development aims often choose to organize themselves as either Foundations

or Civil Associations, which by definition are non-profit and exempt from taxation

on their earnings. Nevertheless, in the case of Fundacin Emprender (August 1996)

as well as the more recent case of Entre Todos Asociacin Civil (May 2006), the tax

authority denied exemptions to these organizations. These were denied based on

the understanding that whoever lends money and receives interest payments must

pay taxes on the earnings. Although these decisions were soon overturned,22 they

illustrate a prejudice and a basic lack of understanding of the sector within

government ranks. This is further revealed in the text of the law promoting micro-

credit. There is a purely political tendency within the Government to view charging

interest on loans to low-income individuals as reprehensible. However, these

politicians lack an understanding of what is most important: lowering the barriers

that block accessible credit to those who have no access whatsoever. In the cases

above, it is notable that when the MFIs and their advisors explained the nature of

the loans and the situation in which they would be made, they were able to

overturn the original decisions. I will later return to this subject in greater depth.

20 See RG 680/99 of the AFIP. 21 See RG 2126/06 of the AFIP. 22 In the case of the Fundacin Emprender, the decision was overturned by a judicial decision passed four years later when it was already too late, and in the case of Entre Todos by the tax authority in the following year.

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Fourth Challenge. Legal Obstacles

Another reason there has not been greater development of the Argentinean

microfinance sector is the lack of a friendly regulatory framework.

In our country, there are no regulations that recognize the distinctive

characteristics of micro-entrepreneurs or microfinance organizations.23 Simply put,

microfinance is beholden to the same rules as any other commercial activity. These

general regulations are often extremely complex and prohibitively expensive for

enterprises that have limited capital and professional resources. Micro-

entrepreneurs comply with the regulations only when they become an

insurmountable obstacle and only when they have the adequate economic and

professional resources to do so. The finance of micro-business requires awareness

of this reality. It also requires the agencies to be conscious of which regulations

facilitate the acquisition of loans, especially for undocumented people with no

portfolio, tax identification or assets.

In El Misterio del Capital, Hernando de Soto drew attention to this problem. De

Sotos example below is as applicable to Argentina as it is to Peru:

To give us an idea as to how difficult the life of the migrant really is, my

research team and I opened a small textile workshop in the outskirts of

Lima. Our goal was to create a perfectly legal new business. The team

began to fill out forms like everybody else; they waited in lines, took buses

to the center of the city where the government issues the certification

required to operate a legally registered small business in Peru. Working six

hours a day, the team was finally able to register the business 289 days

later. While the textile workshop was designed to operate with a single

worker, the cost of the registration was US$ 1,231.00, or 31 times the

monthly Peruvian minimum wage. In another case, getting legal

authorization to build a house on state land took 6 years, 11 months, and

required 207 administrative passes from 52 different government offices

(). Obtaining legal title to this lot required 728 passes (). We also

discovered that the individual operator of a bus, van, or taxi who desires

official recognition of their route generally must set aside 26 months for

bureaucratic red tape.24

23 With a few poorly executed exceptions, such as those mentioned previously in the BCRA citations. 24 Hernando de Soto, El Misterio del Capital, Editorial Sudamericana, p. 36, 2000.

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A recent work commissioned by the World Bank25 evaluates the difficulty of doing

business in countries around the world. It reveals a disheartening result for

Argentina: it is ranked as 113 out of 181 countries. A second study, sponsored by

The Economist Intelligence Unit, ranked Argentina 20 out of 20 Latin American

countries for its microfinance regulatory framework.26

We have already discussed the difficulties related to the regulation of banking

activity by BCRA, and the struggles resulting from the laws designed to promote

micro-credit. However, as seen above, the major obstacles facing the development

of microfinance in Argentina arise from the general legislation. Consider, for

example, what happens when a foreign investor interested in funding a non-profit

commercial microfinance company attempts to register in Argentina: under articles

436 and 437 of General Resolution 7/2005 of the Inspeccin General de Justicia

(Corporation Control Authority), the foreign investor will likely discover that the

funding of such an entity is forbidden.

In light of such regulation, it is no wonder that international Non-Government

Organizations (NGOs) fail to invest in micro-credit enterprises formed as

Commercial Entities in Argentina. These rules have deprived the country of an

important source of resources in a time of financial crisis.

What is amazing is that the desired goal is to see some MFIs transformed into

microfinance banking entities, and for such purpose they must necessarily be

constructed as a corporation or cooperative corporation.27 Ironically, the difficulties

that international NGOs have in funding local MFIs and the corresponding lack of

resources is precisely what hinders many of the MFIs from making this leap into the

financial sector.

One example is the BBVA Foundation, whose registration with the city of Crdoba

was rejected by the Direccin de Inspeccin de las Personas Jurdicas (Commission

of the Inspector General of Corporations).28 The Commission inferred that if the

business purpose was making loans and the collection of interest, it could not be

classified as a Foundation. The BBVA Foundation was also prohibited from

25 Doing Business 2009. Country Profile for Argentina. Comparing Regulation in 191 Economies. World Bank. 26 Microscopio 2008 concerning the Business Environment for Microfinances in Latin America and the Caribbean, conducted by the Economist Intelligence Unit, with the help of the Banco Interamericano de Desarrollo (BID) and the Corporacin Andina de Fomento (CAF), October 2008. http://www.iadb.org/mif/microscope.cfm?language=Spanish 27 Art. 9 of the Financial Entitites Law (Ley Entidades Financieras). 28 Resolucin 052 A/09.

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acquiring stock in an MFI formed as a Corporation, despite the fact that the annual

profits were limited so that dividends would not be distributed, but would instead

be reinvested for further microfinance activity.

We could continue naming other legal obstacles ad infinitum. Other frequently

addressed questions include the high cost of labor; the impossibility of a public

offering to participate in trusts which provide micro-credit grants without first

obtaining permission to make such offering; and those challenges related to BCRAs

exchange rate manipulation (which in fact multiplies the cost of remitting money

and impedes the functioning of systems like KIVA), among others.

In summary, this is a curious case29 of simplification and deregulation of a

government framework to benefit the poor, as the current regulatory environment

condemns them to a regime of informality and illegality. The extreme

complexity of the general banking regime in our country is more than a regulatory

framework there exists a true regulatory barrier that leaves the most

impoverished stuck in a world of illegitality. The examples above reveal the

necessity of educating public administration officials. BCRA is finally beginning to

understand that microfinance organizations are legitimate market participants, but

as of today they remain unrecognized by the rest of the Administration. Simply put,

the government should adopt legislation to facilitate the development of a truly

inclusive system.

29 I describe it as a curious case because in order to integrate the poor into the formal economy, the best thing we can do is to prevent the application of certain regulations that, ironically, were designed to protect citizens against possible abuses or illicit practices.

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Fifth Challenge. Training, Educating, and Increasing Professionalism in the

Agents of Change

There are those who blame the lack of development in the microfinance sector on a

lack of business vision, market analysis, development of products, poor

management,30 and on other issues revealing a lack of sufficient human resources,

including poor training and low salaries. In fact, many companies in the field have

complained of the theft of human resources between MFIs, to the point that most

now subscribe to a code of ethics to avoid the type of conflicts that make it difficult

to develop a strategic industry-wide plan for development.

Nevertheless, it is important to note that in the last several years there have been

various steps towards professionalizing the sector, including those mentioned

below:

The creation of RADIM in 2004 and its clear role as a reference point for

the sector within Argentina.

The creation of Andares,31 a foundation dedicated to the development of

microfinance, which, with the support of the Inter-American Development

Bank (IDB), began a Management Program to train existing human

resources within the sector.

Market entry by new MFIs with extensive experience in other countries in

the region, such as FIE and Pro Mujer, and the capitalization of several

organizations through foreign organizations, as with FIS.32

The financing of the training of diverse companies in the interior of the

country by the International Development Bank, and supportive training

programs by RADIM as well as various other MFIs.

The organization of self-training programs by various entities, including

FIE, FIS and Pro Mujer.

The standardization and incorporation of information from the MFIs in the

web pages most frequented by donors, investors, and financiers, such as

MixMarket, thus improving the transparency of the sector.

The programs of the United Nations Development Program (UNDP)33,

which provide greater visibility to the sector and aid in a successful

debate, for example, in the sphere of BCRA.

30 See Los microcrditos en la Argentina por que no tienen xito? By Ana Laura Fontana and Mara Isabel Negre. Observatorio de la Economa Latinoamericana. www.eumed.net/cursecon/ecolat/ar/2006/fone.html. 31 www.fundacionandares.org. 32 ACPs incarnation in Argentina (see www.grupoacp.com.pe). 33 See http://www.undp.org.ar/programa/microcreditos/index.html.

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The participation of Argentine professionals in international training

programs, such as those organized by IDLO, the Boulder Institute of

Microfinance and others.

The support of development organizations, such as Etimos and Oiko

Credit, which have not only provided financial assistance and technical

training, but have collaborated with the MFIs in selecting the best

indicators of progress in the field.

The offering of other financial services by some MFIs in addition to micro-

credit (such as micro-insurance).

The initiation of business management practices and processes to verify

that MFIs carry out their vision, mission, and values within their governing

parameters, and to measure the impact of microfinance loans within target

populations.

As CGAP explains, the role of the government should be that of facilitator, not a

direct provider of financial services.34 Instead of competing in the microfinance

field, the government ought to utilize its funds to finance MFI employee

participation in some of the many available local and international training

programs. Such expenditures would result in greater quality and quantity of

service from available human resources, better information, better indicators of

progress, and, ultimately, a stronger sector overall.

34 See Los Principios Clave de la Microfianzas. CGAP, Principle No 5. http://www.cgap.org/gm/document-1.9.2752/KeyPrincMicrofinance_spa.pdf.

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Sixth Challenge. The Stock Market

As in other countries, the stock market is, along with the channeling of client

savings, one of the principal drivers of funding for microfinance activity.35

Typically, micro-credit first enters the debt market (they are sold as a bundle of

micro-credit debt in the capital markets, generally to institutional investors such as

pension funds) and are then issued, over time, as securities to fortify the capital of

the institution.

The principal problem that Argentine MFIs face in entering the market is the lack of

volume to justify the fixed costs of market placement. In fact, none of the

countrys MFIs have reached a volume that would justify entrance into the capital

markets. RADIMs network of MFIs have studied the possibility of a combined

market placement, but it is a complex transaction that would require a portfolio of

available credit (not granted on the guarantees of other loans) that exceeds their

financial capacity.

The Comisin Nacional de Valores (the CNV) has announced regulations to enhance

capital market access for Small and Mid-Sized Businesses; therefore, it is clear that

the CNV is eager to simplify the regulations for MFI market access as well.

Unfortunately, as indicated above, the Argentinas failure to normalize public debt

payments and the governments decision to nationalize the pension system in

200836 has reduced trade volume in the stock markets, making this source of

financing even less accessible.

Furthermore, in Argentina all invitations to invest through impersonalized channels

and addressed to the general public are considered public offers. Both the

nature of this type of marketing and the scale of these public offers must fit

within specific parameters according to law 17,811 (the LOP), and must be

supervised by the CNV.37 The LOP inhibits MFIs in their ability to search for

35 See note 39, infra. 36 From 2002-2008, pension funds were the principal investors in the capital markets of Argentina. 37 The LOP defines a public offer as the invitation which is made to people in general or predetermined sectors or groups to perform any legal act involving securities, made by emissaries, individually-owned organizations, or corporations in an exclusive form or partially to the businesses of these, through the medium of personal offers, periodical publications, radio transmissions or television, cinematic projections, posters, signs or other postings, programs, circulations, and printed communications or any other process of diffusion. (Unofficial translation from Spanish)

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financing or investors through invitations or public solicitation, limiting

advertisement in practically all mass media formats.38

It is true that one can lobby the CNV to set certain criteria that would allow MFIs to

look for new sources of funding through the mass media. However, this serves as

another example of how much must be done to secure the advantages of already

existing sources of funding.

38 Including post, email, periodicals, weekly newsmagazines and conferences, Internet advertisement, etc.

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Seventh Challenge. Acquiring and Holding Client Savings

At some point during the development of the microfinance sector, the most

important source of financing will become the acquisition and holding of deposits;39

it is there we should focus our efforts.40 In Argentina, various MFIs have

demonstrated their viability for more than 10 years and, despite the frequent crises

that have troubled our country, deserve a vote of confidence. All the same, it is

preferable that a countrys savings be used for its own growth and, in particular,

the growth of the neediest segments of society.41

While some countries, generally those with well-developed microfinance sectors,

have a well-defined legal system for collaboration between MFIs and Commercial

Banks, Argentina lacks any legal framework designed for this type of activity.

An early and relatively simple (at least compared to the regulation of other financial

entities) form of regulation and supervision over the acquisition and holding of

public savings that could be implemented and utilized in the microfinance sector is

the Cajas de Crdito.

Cajas de Crdito constitute one type of organization accepted by the Law of

Financial Entities (Ley de Entidades Financieras) as being authorized to collect

public savings and carry out intermediary financial duties. In this sense, the law

establishes general criteria which, under a certain organizational framework, in

association with micro-credit entities, could easily be achieved. It would be

possible to create a Caja de Crdito that centralizes the savings of its clients, or, at

least in its first phase, the savings of the MFIs themselves. Moreover, these

savings could later be used as loans to the same depositors and/or, if it is deemed

appropriate, to the micro-credit entities, thereby serving as a regulated mechanism

for their funding. Essentially, the Caja de Crdito would serve as a type of

intermediary development bank for micro-credit entities, as well as a commercial

bank in which the MFI clients may deposit their savings.

39 See Cmo deberan financiarse las instituciones de microfinanzas?. By Felipe Portocarrero Maisch, Alvaro Tarazona Soria, & Glenn D. Westley. Lima, Instituto de Estudios Peruanos, Inter-American Development Bank; 2006. 40 The law of financial entities 21.526 stipulates in article 1 that the following are subject to this Law and its proscribed regulations, including individuals and private, public or mixed entities of the Nation, its provinces or municipalities who habitually intermediate between supply and demand of financial resources. (Unofficial translation from Spanish) 41 See Los Principios Clave de las Microfinanzas. CAAP, Principle No. 5. http://www.cgap.org/gm/document-1.9.2752/KeyPrincMicrofinance_spa.pdf.

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For the initial stage, which can be considered an exploratory phase, the entities (at

least those in a financial position to do so) would establish a cooperative that

complies with the general parameters defined in the Financial Entities Law, of which

they would become members. If this step was completed satisfactorily, and the

volume of savings added and loans granted exceed the pre-established guidelines,

the Caja de Crdito would then be transformed into a commercial bank, adopting

the more complex guidelines which govern banks within the system. It is precisely

at this point where BCRA regulation should join the process, assisting in the

development and success of this framework and supervising the evolutionary

process.

Currently, BCRA regulates Cajas de Crdito through different regulations,

particularly under Communication A 4712. This regulation is quite restrictive in

terms of the goals explained above. The Communication makes it extremely

difficult for MFIs to join together and establish a Caja de Crdito designed to

receive savings deposits from its clients, and still harder to establish a Caja de

Crdito that can serve as a full or partial funding mechanism for their activities.

As it is currently constructed, to be in agreement with Communication A 4712, a

Caja de Crdito must comply with a plethora of regulations: allowing associated

members participation in social capital; a level of minimum participation from

individuals and associates of the area; restrictions on the acquisition and holding of

savings for non-associated clients; limits on financial grants for non-associated

clients; prohibitions on loan grants to MFIs; and limits on financial grants to

individuals. In practice, these limitations would make the stated goal of regulated

microfinance practically impossible.

By limiting their rate of growth, fixing mandatory supervisory guidelines, and,

especially, by ordering the mandatory transformation of these Cajas de Crdito into

commercial banks with clearly defined expectations (volume of deposits, assets,

quantity of clients, etc.), it would be possible for BCRA to both validate and

efficiently protect public savings and at the same time protect and assist the growth

of microfinance.

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Conclusion: How Can We Help?

As discussed in the beginning, it is difficult to hope for accelerated growth in the

Argentine microfinance sector before achieving higher growth and better

development of the financial and capital markets as a whole. However, it is clear

that we can, and must, work to remove the obstacles that hinder the enjoyment of

existing opportunities.

Examples given throughout this work provide evidence that what is lacking is an

educational project to convince the government of the importance of the changes

discussed. The goal is to ensure that each of the different agencies that make up

the State comprehend the principles behind microfinance.

Moreover, the contributions of the UNDP, of Princess Mxima of Holland, and

various aid groups42 over the last several years are proof that this is the most

suitable path to generate a political environment favorable to the development of a

more inclusive system.

I have also attempted to demonstrate how a few simple modifications to various

regulations in the general regime, originally devised for different situations without

consideration for the unique characteristics of microfinance, would permit the MFIs

access to better sources of funding. Additionally, these changes would not result in

any further expense to the Argentine State.

Government authorities look at the petitions of Argentine MFI representatives as

complaints that compete with the demands and complaints of any other sector of

the economy, adding them to the long list of general banking complaints. However,

programs such as those organized by International Development Law Organization

(IDLO), directed at State officials and financed by prestigious international donors,

can approach the government with credibility on the subject of microfinance. As

such, they are in a position to facilitate an open dialogue on the general wellbeing

of microfinance and the lowering of the barriers to credit.

This work may take a long time and it will be difficult to obtain immediate results,

but I am nevertheless convinced that a project designed to educate the public

administration is the best way to reach our goals. Any educational project must

highlight unique characteristics of microfinance and its social impact, give visibility

42 Including the Comisin Pro Bono del Colegio de Abogados de la Ciudad de Buenos Aires.

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to the sector, and should be realized in collaboration with international

organizations who have clear goals of social and economic development

Creating inclusive financial markets; lowering the barriers to credit for those

excluded; ensuring that credit reaches those who need it most; ensuring that

millions of people find a window to escape poverty: these are concepts that affect

all people of goodwill. Our work is educational. We must appeal to the conscience

of the civil servants of the members of the public sector with the goal of aligning

the rules to the development and progress of microfinance.

According to CGAP, international organizations should center their aid on the

construction of institutional training.43 In my opinion, the best method to do this in

Argentina today is to finance forums for dialogue and discussion with the various

public agencies44 to help identify and understand the changes that would create an

inclusive financial system.

International groups can also be of assistance working with local MFIs in the

creation of a roadmap, with deadlines and concrete objectives to be reached, in

order to clarify ideas and create synergy with the different organizations that

support the development of microfinance in the country. Perhaps Argentina will

never have a strong, consolidated financial market with long-term growth.

However, there are many reasons to be optimistic and I believe that, nevertheless,

microfinance has an opportunity to flourish in our country. Although the sector is

small, it is experiencing steady growth in volume and professionalism.45 The MFIs

have learned the benefits of collaboration between themselves and with other

organizations competing with them in the market something rare in Argentina.

Further, they have achieved several demonstrable benchmarks, and some areas of

the public administration have come to value their social contributions and

recognize their unique characteristics. Betting on the growth of the microfinance

sector is worthwhile.

There are many important topics that I have not addressed. I have not, for

example, mentioned anything about Commercial Banks as providers of microfinance

services or the situation of rural credit in Argentina. This work does not pretend to

be an exhaustive study of the situation surrounding microfinance in Argentina, nor

43 See Los Principios Clave de la Mircofinanzas. CAAP, Principle No 10. 44 Not only BCRA, but the Ministerio de Economa, Minsterio de Trabajo, Ministerio de Desarrollo Social, IGJ, CNV, and others. 45 Just as we have seen in challenges 2 and 5 of this report.

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does it provide a magic solution as to why microfinance markets are not developing

with more success. Instead, the intention of this paper is to present an overview of

the most commonly cited problems, as noted by the MFIs, and to propose a course

of action.