VZCZCXRO4840
RR RUEHLMC
DE RUEHSN #1909/01 2642106
ZNR UUUUU ZZH
R 212106Z SEP 07
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 7925
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 03 SAN SALVADOR 001909 
 
SIPDIS 
 
DEPT PLEASE PASS OPIC JWOZNIAK 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ES
SUBJECT: EL SALVADOR MICROFINANCE SECTOR 2007: MOVING TOWARDS 
REGULATION 
 
¶1.  SUMMARY.  A recent visit to three leading micro-finance 
institutions shows a booming market serving a broad client base 
ranging from street vendors to medium enterprises.   Microfinance 
organizations are also seeking to become regulated financial 
institutions, which will allow them to take deposits and finance 
their operations at lower rates.  Despite some regulatory hurdles, 
the outlook for the sector looks positive, though increased 
competition may lead to future consolidation.  END SUMMARY. 
 
¶2. During a September 6-7 visit, Overseas Private Investment 
Corporation (OPIC) Senior International Economist Joseph Wozniak and 
Econoff visited ABANSA, El Salvador's private bank association, and 
three leading local microfinance institutions: Accovi, AMC, and 
Apoyo Integral.  All three institutions have received support from 
OPIC through its relationship with Seattle-based Global 
Partnerships. 
 
SECTOR OVERVIEW 
---------------------------- 
 
¶3. El Salvador's regulated financial sector is divided into two 
categories of institutions: Banks and Non-Banking Financial 
Institutions (NBFI).   While the laws governing both categories are 
largely the same, they differ in two key areas.  First, NBFIs must 
meet a 15 percent reserve requirement, while banks must only 
maintain a 12 percent reserve.  Second, while they may offer deposit 
(savings) accounts, NBFIs are not allowed to issue current 
(checking) accounts.  Unregulated institutions, including most 
microfinance operations, may not hold deposits. 
 
¶4. Unregulated institutions may become regulated through a formal 
process, which includes meeting the reserve requirement, upgrading 
information technology infrastructure, and meeting the 
Superintendent of the Financial System's reporting requirements. 
The process is both expensive and time-consuming, and few 
unregulated institutions have completed it.  Accovi, AMC, and Apoyo 
have all received support from USAID's financial sector program to 
help become regulated institutions. 
 
¶5. According to Carlos Caceres, Executive Director of ABANSA, the 
microfinance sector is dominated by two groups.  Cajas de Creditos, 
which he described as private worker banks, are limited 
responsibility cooperatives which have been operating in the country 
for more than 70 years.  They typically offer $500-1000 loans to 
their members.  Non-governmental organizations (NGOs) offer a wider 
variety of loan services, but are not as established.  NGOs also 
tend to support the very poorest segment of the market.    In 
Caceres's view, the sector is so large that even with the large 
number of Cajas de Creditos and NGOs not everyone can get a 
microfinance loan. 
 
¶6. ABANSA supports institutions becoming regulated in order to 
formalize what had previously been a largely informal sector. 
Caceres stressed that formalized lending is far better than "the 
street," where loan sharks can charge exorbitant interest rates. 
 
ACCOVI 
------------ 
 
¶7. Accovi, a San Vicente-based cooperative, has successfully become 
a regulated NBFI.  General Director Nelson Alvarado stated that 
Accovi's financial indicators are actually better than most 
commercial banks, and they currently have a 22 percent reserve. 
Accovi's ten branches are concentrated primarily in the eastern and 
central regions.  Accovi currently has 18,000 associates, who pay a 
$5 fee per month to the cooperative, and 33,000 non-member savings 
account holders.  In addition to banking services, the associates 
also receive free doctor visits, discount pharmaceuticals, and 
educational opportunities (e.g., computer classes).  Five percent of 
earnings is dedicated to these non-banking social services. 
 
¶8. Accovi's minimum loan size is $50, and their average loan is 
$4,500.  Their largest loan - a special client - is $250,000. 
Microfinance loans make up 7 percent of Accovi's portfolio, with a 
loan size of up to $600 and an average interest rate of 30 percent. 
Ninety percent of their loans are in the "small and medium 
category," with loans ranging from $600-20,000 and a typical 
interest rate of 12%. 
 
¶9. Accovi offers three types of loans: consumer, enterprise, and 
housing.  Thirty-seven percent of Accovi's total portfolio is 
housing loans, including both mortgages and home improvement. 
Mortgages require a 15% down payment with a 12% interest rate. 
 
¶10. While still receiving some outside financing, Accovi now funds 
many of its loans through deposits.  Alvarado complained that, as an 
NBFI, the Superintendent considers Accovi "more risky" than a bank, 
 
SAN SALVAD 00001909  002 OF 003 
 
 
even though Accovi is "more liquid than most commercial banks. "  He 
would also like to see the laws changed to allow NBFIs to offer 
current accounts, so that Accovi could better compete with 
commercial banks while remaining a cooperative.  Accovi's growth 
strategy is focused on small and medium enterprise loans, where they 
must compete directly with commercial banks. 
 
AMC 
------- 
 
¶11.  San Miguel-based AMC (Adel Morazan Credito) is 90 percent owned 
by the Adel Morazan Foundation, a private development organization. 
According to Executive Director Wilson Salmeron, AMC has a special 
request pending to approve this single large shareholder before it 
can become regulated, but it hopes to complete the process by the 
end of 2007.  AMC's current capitalization is $4 million and it 
offers points of service in 17 locations across the country. 
 
¶12. AMC has over 13,000 outstanding loans, 11,900 of which are 
considered "micro," with an average loan size of $600.  Micro loans 
go to individuals, families, or businesses with ten employees or 
less.  Most micro loans are to individuals or businesses in the 
agriculture or services sectors or for housing.  Housing loans may 
be as large as $10,000.  Accovi's average interest rate is 28.5%, 
with a 34% rate on micro loans and a 16% rate on housing loans.  The 
term varies with the type of loan.  AMC has been averaging 40 
percent growth per year and sees its greatest potential continuing 
to be the micro sector, even after regulation. 
 
¶13.  Thirty percent of AMC's clients receive remittances.  Since it 
cannot capture deposits, AMC offers a "pass through" service on 
remittances, charging a $2 commission on up to $1,500.  Remittances 
may be used as collateral for loans. 
 
¶14. Salmeron sees two major benefits from regulation.  First, AMC 
will be able to receive financing at a 5% interest rate, versus its 
current 9.5%.  Second, AMC will be able to diversify its funding; 
Salmeron projects that 10 percent of future funding will come from 
deposits, and an additional 30 percent will come from other sources 
(Adel Morazan will retain a 60 percent stake). 
 
APOYO INTEGRAL 
------------------------- 
 
¶15.   Apoyo Integral was formed as part of the Fundacion Salvadorena 
de Apoyo Integral, a private development foundation.  According to 
President Luis Castillo and General Director Carlos Viteri, Integral 
currently has a total capitalization of $7 million and 22 branches 
across the country.  Sixty percent of its financing comes from 
international sources, while 40 percent is domestic.  Both Integral 
and the foundation receive substantial support from the Duenas 
family, one of the wealthiest families in El Salvador.  Integral 
hopes to become regulated by the end of 2007.  The Superintendent is 
currently reviewing its systems and reports. 
 
¶16.  Integral's micro sector includes loans from $25-10,000 at 
interest rates from 15-45%.  Integral divides the sector into three 
sub-sectors: survivor, simple accommodation, and expanding 
accommodation.  Survivor loans (e.g., street vendors) are $25-100 
loans with a 1-3 month tenor.  Simple accommodation loans target 
businesses with less than 10 employees and sales of $20,000-$50,000 
per year.  Expanding accommodation loans target businesses with 
sales of $50,000-$70,000 per year.  The average micro loan is 
$600-700. 
 
¶17.  Integral also lends to small enterprises (sales up to 
$700,000/year), but does not offer loans to medium enterprises.  An 
average small enterprise loan is $18,000 at a 15% interest rate. 
Integral also offers loans up to $50,000 for housing, with a 15% 
down payment on mortgage loans. 
 
¶18.  Integral estimates that 30% of its clients receive remittances, 
which may be used as collateral.  Castillo noted, however, that 
Integral is only processing about 3,000 remittance payments per 
month, and the trend is heading down.  He attributed this in part to 
immigration issues in the U.S. and in part to current problems in 
the U.S. housing market. 
 
¶19.  According to Viteri, Integral has enjoyed 60% growth over the 
last year.  Viteri views the urban market as oversaturated, and 
Integral's current strategy is focused on the rural and semi-rural 
markets, especially in the northern territories and the border 
regions.  They also plan to offer insurance products and credit 
cards after regulation.  They will continue to offer technical 
assistance to clients (especially those receiving housing loans) 
through the Foundation.  Castillo sees two principal benefits from 
regulation.  First, the institution gains credibility.  Second, they 
 
SAN SALVAD 00001909  003 OF 003 
 
 
will be able to receive financing at lower interest rates. 
 
COMMENT 
--------------- 
 
¶20.  All three institutions complained of regulatory headaches, 
seemingly arbitrary reporting requirements from the Superintendent, 
and high costs to become regulated institutions.  All three, 
however, view the long-term benefits of regulation - deposits, 
credibility, and cheaper finance - as outweighing the short-term 
pain.   While their growth projections look positive, increased 
competition, especially as international commercial banks enter the 
sector, and the challenge of maintaining efficient operations during 
expansion will likely lead to future consolidation within in the 
sector. 
 
¶21.  OPIC Joseph Wozniak has cleared this cable. 
 
BUTLER