VZCZCXRO2350
RR RUEHLMC
DE RUEHMU #2393/01 3022108
ZNR UUUUU ZZH
R 292108Z OCT 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 1581
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RHEHNSC/NSC WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 MANAGUA 002393 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, AND EEB/IFD 
TREASURY FOR SARA GRAY 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR 
 
E.O. 12958: N/A 
TAGS: EFIN EAID ECON PGOV NU
SUBJECT: Nicaragua: Government Back in the Microfinance Business? 
 
REF: Managua 1783 
 
¶1. (SBU) Summary: The National Assembly has approved two bills 
creating a National Development Bank (NDB).  A state-owned 
institution, the NDB will operate as a first story financial 
institution providing small loans to both urban and rural Nicaraguan 
producers.  The GON will provide USD 8 million to capitalize the 
NDB.  While the Assembly did not set an interest rate ceiling on the 
bank's lending portfolio, it did place restrictions on its use for 
government projects and by government employees.  The NDB's 
activities will be dominated by the GON's new USD 5.1 million "Usura 
Cero" (Zero Usury) program designed to provide credit to urban women 
wanting to start businesses.  Both NDB and Usura Cero will compete 
with Nicaragua's existing private microfinance institutions (MFI), 
numbering as many as 300.  National Assembly deputies believe that 
the restrictions on who can access NDB loans and what they can be 
used for will ensure that the NDB can operate effectively and not 
become a source of petty cash for political patronage.  In our view, 
given the nature of Nicaraguan politics, and the upcoming 2008 
legislative elections, the NDB and Usura Cero may well quickly 
become little more than political (and campaign) slush funds.  End 
Summary. 
 
A New Development Bank for Nicaragua 
------------------------------------ 

¶2. (U) On October 2, the National Assembly approved two versions of 
the bill creating a National Development Bank (NDB) and establishing 
its operating structure.  Both versions establish the NDB as a 
state-owned bank that will make small loans to Nicaraguan urban and 
rural producers, but will take no deposits.  Starting in 2008 and 
spread over four years, the GON will transfer USD 8 million to 
capitalize the institution.  The legislation sets no interest 
ceilings.  The bank cannot finance government projects, make loans 
to GON employees or relatives, or lend more than 10% of its capital 
to any single borrower.  The NDB will be able to work through 
financial intermediaries, such as microfinance institutions, in 
areas of the country where it does not have offices.  The names of 
all the candidates for the Board of Directors will be submitted to 
the President and the National Assembly for approval.  The bill 
provides for future private sector and/or NGO capitalization of the 
NDB, granting any non-state stakeholder representation on the 
board. 
 
¶3. (U) The two versions of the bill differ primarily in the make-up 
of the Board of Directors, and must be reconciled during a full 
session of the Assembly before a final law can be sent to President 
Ortega for signature.  The FSLN version of the bill states that the 
NDB board should include a president and vice president, who are not 
active in any political party and will serve five-year renewable 
terms.  Other members of the board include three representatives 
from the major productive and agricultural chambers; one 
representative from the Atlantic Coast; as well as the Ministers of 
Finance, Trade, and Agriculture.  The National Assembly will approve 
all board members by a simple majority.  (Note: A simple majority is 
50% +1 of a quorum.  A quorum requires that at least 47 of 92 
members of the Assembly be present. End Note.) 
 
¶4. (U) The ALN version of the bill would have the NDB operate more 
like a private bank.  In this version, the NDB would be supervised 
by the Superintendent of Banks, and would be audited by a non-state 
entity if it begins to experience losses.  To limit the influence of 
the Executive Branch over the NDB, the three ministers would serve 
only as advisors to the Board.  The president and vice-president 
would be approved by at least 47 votes in the National Assembly 
(known as a qualified majority).  In an attempt to reduce possible 
Venezuelan influence on the bank, the ALN bill also places 
restrictions on donations to the NDB, including the use of donations 
as capital. 
 
Zero Usury 
---------- 

¶5. (U) The NDB will also administer the GON's new "Usura Cero" (Zero 
Usury) program.  Touted as an urban version of "Hambre Zero" 
(Reftel), the program provides credits to urban women wanting to 
start a business.  Loans will average USD 300 and carry an interest 
rate of 9% (4% ceiling, plus 5% for to cover inflation).  (Note: 
Currently, the cheapest microfinance loans are 20%, while private 
sector dollar-denominated consumer loans average 11%. End note.) 
 
¶6. (U) Usura Cero has already begun operations under the supervision 
of the Ministry of Trade and Industry.  So far, 500 women from 
Managua have received loans from the USD 2.25 million 2007 allotment 
to the program.  With a 2008 budget of USD 5.1 million, Usura Cero 
is expected to reach 7,600 beneficiaries, representing the largest 
single component of NDB activities.  The Usura Cero program requires 
that its administrative staff be composed of 70% women and 30% men, 
with preference given to business administration graduates under the 
age of 24.  It is unclear how the Usura Cero program requirements 
will affect the staffing and operations of the NDB. 
 
¶7. (U) While the GON has stated that Hambre Cero, and now Usura 
Cero, will take the place of pre-existing agricultural and business 
development programs in the Rural Development Institute (IDR) and 
the Institute for Small and Medium Enterprise (INPYME), both 
institutions retain most of their funding and their programs in the 
2008 budget. 
 
Competition to Private Sector Microfinance? 
------------------------------------------- 

¶8. (U) The combination of the budgets for the NDB and Usura Cero 
(USD 7 million in 2008) will create an institution that competes 
with the majority of existing microfinance institutions (MFI), most 
of which are operated by non-governmental organizations (NGOs). 
Nicaragua's entire MFI market is comprised of more than 300 
registered institutions, reaching 300,000 clients and handling over 
USD 400 million a year.  The Usura Cero loan program will likely 
compete with the smaller, NGO backed MFIs, which make small loans 
(USD 200-500) and carry higher operational cost and risk levels. 
Loans from these institutions average interest rates of up to 40%, 
well above the 9% Usura Cero will charge. 
 
¶9. (U) The NDB's non-Usura Cero loans will compete more closely with 
Nicaragua's five largest MFIs.  These institutions recently became 
full-fledged banks under the supervision of the Superintendent of 
Banks, offering a full range of banking services, including credit 
cards and deposits.  They represent almost two-thirds of the MFI 
market.  Two of the largest, Findesa and Banco ProCredit, each 
manage about USD 100 million in loans.  The average loan from these 
institutions is USD 5,000, but loans can be for as much as USD 
200,000.  Until the first NDB board decides on interest rate and 
loan size policy, it is difficult to say how much of a threat the 
NDB's regular operations will be for these MFIs.  The Minister of 
Agriculture stated that he believes unmet demand for microcredit to 
be USD 300 million, leaving "plenty of room in the market." 
 
Historical Context 
------------------ 

¶10. (U) The NDB will be the first state-owned bank in Nicaragua 
since 2001 and the first development bank since the 1990s.  In the 
1980s, the Sandinista government nationalized all banks, including 
the National Development Bank of Nicaragua.  The bank continued to 
operate as a state-run institution into the 1990s, when it failed as 
a result of poor management and too many non-performing loans. 
 
¶11. (U) The idea of creating another state-owned development bank 
has been floating around for several years.  Two FSLN deputies 
revived the idea in September of 2005, but the bill was sidelined by 
other political priorities.  As part of their campaign platforms 
during the 2006 presidential election, the two left-leaning parties 
(MRS and FSLN) proposed national development banks to provide 
credits to small and medium-sized producers (mostly agricultural). 
In contrast, the two liberal parties (ALN and PLC) proposed the 
creation of a Development Institute that would manage the funds made 
available by IDR and INPYME. 
 
Comment 
------- 

¶12. (SBU) During the National Assembly debate, members of all 
parties emphasized their determination to create a bank that 
responds to market forces and does not succumb to the pitfalls which 
have plagued state-owned development banks throughout Latin America. 
 They believe that the restrictions on who can access the loans and 
what they can be used for will go a long way to ensuring that the 
NDB can operate effectively and not become a source of petty cash 
for political patronage.  Given that everything in Nicaragua quickly 
becomes politicized, National Assembly delegates claims that the 
bank will remain "untainted" come across as disingenuous.  In our 
view, with the 2008 legislative elections just around the corner the 
NDB and the Usura Cero program may well quickly become little more 
than political (and campaign) slush funds. 
 
TRIVELLI