Micamericas

Apr 16, 2008

Giant Steps

By Peter Bate

BBVA, one of the largest finance groups in the world, caused a commotion in the microfinance industry by creating a foundation endowed with 200 million Euros (some US$280 million) to build a network of microfinance institutions in Latin America. The Fundación BBVA para las Microfinanzas (“BBVA Foundation for Microfinance”) has lost no time: the same year it was established it acquired two institutions in Colombia and another two in Peru. In an interview with MicroEnterprise Americas, the foundation’s president, Manuel Méndez del Río, talks about how the new network will expand in the coming years and surpass 1 million clients.

How did BBVA come to enter microfinance? What experiences did it have before creating the foundation?

The emergence of the BBVA Foundation for Microfinance needs to be understood in the framework of Grupo BBVA’s strategy for Corporate Social Responsibility, and in particular its policy on social action, which includes four strong and increasingly tangible directives: clear social usefulness, greater attention to the extremely disadvantaged sectors, search for cohesion and diversification, and growing priority for Latin America. Along these lines, several initiatives have begun in the microfinance sector, among them, for example, the creation of the first Spanish microfinance investment fund for Latin America in late 2006, “BBVA Codespa Microfinanzas,” which promotes participation in responsible investment that combines social benefit with economic profitability.

From this commitment by Grupo BBVA to social action in the region, the BBVA Foundation for Microfinance was the culmination of a process and a search, an initiative of unquestionable social value, reflecting Grupo BBVA’s nature and long-term strategy, clearly discriminating and focused on what we believe makes up one of the basic tenets of social responsibility of all financial institutions: the battle to overcome financial exclusion.

What was your first personal contact with microfinance?

In my previous position as general director of Risks in Grupo BBVA, I had the opportunity to experience the situation of Latin America’s finance market first-hand, and in particular, its microfinance industry, and I have to say that I was really fascinated both by its success as well as its potential to overcome financial exclusion, poverty, and underdevelopment. Microfinance goes beyond a loan for poor people; we are talking about microcredit, savings accounts, the possibility of receiving direct deposit of a salary, etc.—opportunities that can lead to big changes in the lives of poor people and their families, who are the true protagonists, and this is really exciting. So, for me, to have the opportunity to participate so directly in this area, besides offering a big professional challenge, gave me great personal satisfaction to know that we are contributing to the well-being of the disadvantaged -communities.

BBVA chose to create a foundation instead of adding microfinance as an additional line of business in its finance group. What led you to choose that route to enter microfinance?

BBVA established a foundation because our objective is the nonprofit promotion of microfinance activity, with a perspective of empowering, developing and collaborating by contributing new ideas and tools to microfinance institutions, which are the ones that best know their clients and the reality of the markets.

A foundation came to appear essential for various reasons. First, it ensures that there is no intent to benefit and offers the guarantee that we share objectives with those microfinance institutions most committed to the economic and social development of the extremely disadvantaged; second, it guarantees that it has a mission reinforced by statutes in which all profits generated must be reinvested in microfinance, whatever the future is of the bank itself or the people representing the foundation; and, third, it represents a permanent commitment on the part of the bank, and thus has an irrevocable nature.

This does not mean there is no collaboration between Grupo BBVA and the foundation. The bank shares its know-how on banking, technology, tools, infrastructure, and other resources, and the foundation will share its knowledge, image, and reputation to contribute to Grupo BBVA’s policy on social action in Latin America.

What does BBVA bring to the microfinance industry?

BBVA considers access to financing as the basic tenet of its social responsibility and thus contributes to improving access for the most disadvantaged populations, through the creation of products and services adjusted to their needs, as a significant channel of social integration and of better quality of life. Along this line of action, the bank has undertaken initiatives such as making banking available to the lowest-income sectors in Latin America and to immigrants in Spain, the creation of the investment fund “BBVA Codespa Microfinanzas,” and, last year, the BBVA Foundation for Microfinance, which is without a doubt a unique and innovative instrument.

Some people in the industry fear that the phenomenon of downscaling is temporary, and commercial banks may soon abandon their projects because microfinance does not fit with their business model. What is your opinion of that risk?

Some banks, including Grupo BBVA, are developing this activity because of the evidently strong emerging and growing demand in this sector. I believe that the interest is not a passing one because the demand is not passing. The risks do effectively exist in terms of delinquency and over-indebtedness, especially if the downscaling is done from a perspective of traditional banking, without adapting products and services to this type of clientele.

However, in the case of the foundation, our institution has adopted a radically different approach: it is participating fully in the authentic area of microfinance, working in the “base of the pyramid” with a pure microfinance institution, nothing to do with this phenomenon. And, above all, we are concentrating on serving the poorest people, those who do not have other options to access financial products and services and, consequently, to start up any microentrepreneurial activity.’

How are the institutions operating that you bought in Colombia and Peru? What conclusions can be drawn from this initial period?

We are very satisfied with their activity, since they are undergoing extremely strong growth. Before we acquired them, the Colombian institutions had approximately 96,800 clients, and those in Peru had 39,779 clients. By the end of 2007, the four institutions had a total of more than 200,000 clients.

Also, these institutions are currently in full process of transformation. In Peru we are completing the [initial public offering] for the shareholders of the microfinance institution Caja Sur and when that is finalized we will begin the process of merging with Caja Nor, in which we already hold 98.14%, to create a single unified institution, which we expect will be completed in early 2008.

In addition, in Colombia we are getting ready to establish a new regulated microfinance institution with two NGOs, the Corporación Mundial de la Mujer-Colombia and the Corporación Mundial de la Mujer-Medellín. We are presenting the project right now to the Superintendency.

Do you have plans to expand in those countries? Will you use the same institutions, or grow through the purchase of other MFIs?

Yes, effectively, the process of expansion in both Peru and Colombia is much broader. Currently we have several open negotiation processes with other microfinance institutions that we hope will come to fruition soon, and that will help expand our presence in both markets, giving us more mobility. The expansion plans are both organic and inorganic.

Have you made more acquisitions in other countries?

We are currently in contact with various microfinance institutions in practically all Latin America countries and shortly we will seal agreements in two or three more countries.

Do you plan to grow through the purchase of microfinance institutions or do you also propose to create new institutions?

First of all, the foundation seeks to promote economic and social development of the most disadvantaged through a strong network of institutions specialized in microfinance, whether acquired or created from scratch, depending on the objective conditions in each country or specific market.

We do not want to be a simple owner of holdings—our goal goes way beyond that. We want to promote efficient accessible financing—an objective that we will reach through the creation of a microfinance network, totally independent of BBVA, able to be self-sustaining and to grow through its own profitability and to which, in addition to capital, the foundation contributes a corporate culture and some systems of governance, achievement, and shared responsibility, as well as ongoing management support. Definitely, there are advantages to an integrated network with a global strategy and an objective of promoting radical improvement in the institutions’ efficiency and their capacity to grow, contributing to lowering costs and the expansion of microfinance and its social impact.

What do you look for when you study whether or not to incorporate a new institution into your network—a well-functioning business or an institution with problems but also potential?

The foundation is building a network through the acquisition of pre-existing incorporated companies or the creation of new bodies in collaboration with preexisting non-incorporated bodies. And it does so in full agreement with the institutions that were acquired or with which the foundation collaborates, maintaining reference shares and majority interests, thus enabling control of the foundation.

With respect to the process of incorporating institutions into the network, we focus our attention on quality institutions, and above all, those with strong growth potential. We are not necessarily interested in the largest or the best, but instead in those that have the appropriate elements so that we can develop with them the strategy of intense expansion and the social mission that we seek. In any case, as I have said, we focus on quality institutions, paying attention to factors such as equity structure and solid financing, good reputation, firm standards of ethics and corporate governance, strong management, social focus (extremely low-income sectors), etc.

A notable phenomenon in Latin American microfinance is that the industry is much more developed in small countries such as Bolivia and El Salvador than in large countries such as Brazil and Mexico. Has your foundation contemplated this challenge?

Yes. Currently we are in the final stages of signing agreements with institutions in small countries, where the microfinance industry is effectively more developed. But our activity is also taking place in countries with less microfinance development, and, consequently, where greater needs exist. In those countries we will collaborate with public institutions, which have information on markets and clients, and they can help us in our commitment to help get microfinance within the reach of more poor people.

At the moment of deciding whether to invest in a new country, what factors do you contemplate? Have you decided against investing in any country because you do not find satisfactory political and economic conditions or adequate laws and regulations?

The objective is to create a large microfinance network with investments in Latin America, giving priority to the countries in which Grupo BBVA has banking presence, although we do not rule out expanding our activities to other emerging markets. Next, we look at those countries in which microfinance activity is developed, where specialized institutions exist and where there is a more or less adequate regulatory framework, but without ever ruling out others that do not meet these conditions. And last, we also keep in mind whether the financial and economic authorities have a favorable attitude, although we have not ruled out investing in any country if they do not.

In your plans for expansion, how many institutions do you propose to integrate into your microfinance network? How many individual clients does the foundation have now? How many clients does the network aspire to have?

In 2008 we are planning to sign new acquisition agreements or create institutions, with the goal of incorporating at least four or five more into our network (with an investment of between 50 to 80 million Euros). Our medium-term objective is to have a network of at least 20 institutions within three to five years.

With respect to the current clients the foundation has through the microfinance institutions belonging to or participating in the network, at the end of 2007 the four institutions served more than 200,000 clients, which if family members are included, reaches a figure of nearly 1 million beneficiaries. In the medium term, we hope to measure people served in the millions and not in the hundreds of thousands.

Our final objective is to help the greatest number of people possible, especially those with the lowest income level, which can be achieved through a comprehensive coherent microfinance network with a common strategic goal that can facilitate popular access to financial services. And that is where we are going to put our efforts, so that the impact is as great as possible and can contribute to the well-being and development of the most disadvantaged groups. This is our desire, our ambition.

 

In the last Microenterprise Forum held in El Salvador, the Inter-American Development Bank, through the MIF and the BBVA Foundation for Microfinance, signed a Memorandum of Understanding to promote the microfinance industry in the region. Based on the Memorandum, both organizations are beginning to identify joint initiatives, such as coordinated investments of capital and technical assistance for microfinance institutions, as well as projects to improve information systems, risk management, training, and corporate governance in microfinance.

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