Citigroup Has Arrived

Large international banks are integrating microfinance institutions and transfers. "We are cautiously entering the business," says the global director of microfinance of Citigroup, "because we still have a lot to learn."

Over 40 billon USD flowed to Latin America and the Caribbean in 2004 in small transfers sent by emigrants to their families who stayed behind. And since the majority of those who fled in search of work are poor, they do not have bank accounts or access to financial services. "This is 40 billion dollars," emphasized Donald Terry, manager of the Multilateral Investment Fund (FOMIN), before a hundred executives from microfinance institutions, "and the majority of this money is sent to your customers or people who should be your customers."

Terry spoke at a conference on integrating transfers and microfinance institutions organized by FOMIN in Cartagena, on the eve of the IDB's VII InterAmerican Forum on Microenterprise in Cartagena. "And I strongly urge microfinance institutions to get into the transfer business," he exhorted upon ending his presentation, "because if you do not, Citibank or Bancolombia will."

Citibank has already done so, and has become active in the microfinance market. And it is not the only international banking giant doing this. In the last two years, banks as large as the Bank of America and Wells Fargo Bank as well as the British HSBC and Spanish BBVA and Santander Central Hispano have entered the microfinance industry and started to handle transfers.

The irruption of these giants in the Latin American microfinance arena may frighten smaller players, but it also strengthens and grants acceptance to a market that is still in its early stages of development. "We see that the big banks are entering this sector," stressed IDB president, Enrique V. Iglesias, upon opening the microenterprise forum in Cartagena, "and this shows that there is good business opportunity."

Drums and Cymbals

In mid-2004, Citigroup created the position of global microfinance director, and offered it to Robert Annibale, a Citibanker with vast experience in emerging markets.

Annibale has worked for the financial group in Eastern Europe, the Middle East, Africa and Southern Asia; with the exception of Latin America, he has experience in all emerging markets. His has focused on the areas of price/liquidity risk and issuing debt in local currency, but he was also the director of Citigroup Foundation, the philanthropic branch of the financial group.

Annibale's appointment did not go unnoticed. Within a few days of assuming the role in August 2004, Citibank made an announcement: Banamex, the second-largest private bank in Mexico, which is a 100% subsidiary of Citi, issued bonds in Mexican pesos for some 17 million USD to finance the microcredit operations of Compartamos, the largest microfinance institution in Mexico and the third-largest in Latin America in terms of number of customers.

It was the first time in history that a microfinance institution had issued debt in local currency and invested it with the country's investors. "This is a milestone for Compartamos because it helps establish a broader and deeper base of investors for the future growth of the company," declared Carlos Danel, co-chairman of the microfinance institution. "We are excited that Mexican institutional investors are willing to invest in microfinance institutions, thereby continuing to build in the country a stronger financial sector with greater inclusion."

The other co-chairman of Compartamos, Carlos Labarthe, explained that the issue was not only a milestone for the company and for Mexico, but also for the global microfinance industry. "This showed that investing in microcredit is good business, but not only that," he said. "It is also a way to create social wealth in our communities."

Compartamos' million-dollar issue by Banamex won the financial operation of the year award for 2004 bestowed by the Latin American financial magazine Latin Finance and Citigroups's irruption on the microfinance market could not be more talked about. However, Annibale does not want to frighten anyone. "We are entering cautiously because we still have a lot to learn," he notes. "However, we believe that we have expertise in [certain] products that will enable us to make a contribution."

The Mexican Magnet

The Citigroup global microfinance director was one of the stars at the Cartagena forum, but that is not the only place he was noticed. He is seen

at all international microfinance and transfer sites, and confirms in every tone that he wants to do business. Annibale reports directly to Marjorie "Marge" Magner, chairperson and manager of Citigroup's Global Consumer Business, the bank's global retail business, "so there really is a corporate commitment to this," he says.

The interest of banks such as Citigroup, Bank of America, the British HSBC and the Spanish banks BBVA and Santander Central Hispano in the microfinance and transfer markets is due to a large extent to their increasing participation in Latin American financial markets where they have acquired banks or networks of local banks in different countries, principally in Mexico. Citigroup owns Banamex, for which it paid 12 billion USD in 2001, and Banamex has formed an alliance with Compartamos to give microentrepreneurs and low-income individuals access to banking services. Bank of America made a similar move by buying, for 1.6 billion USD, 25% of Banca Serfin, which was already an affiliate of the Spanish Grupo Santander Central Hispano. Meanwhile the British HSBC (formerly Hong Kong and Shanghai Banking Corporation), which had purchased 27% of the Mexican Grupo Financiero Bital in 2002, increased its participation somewhat to 52%, and expressed its intention to acquire 100% of the Mexican financial institution. Another U.S. bank, Wells Fargo Bank formed an alliance with the largest Mexican bank, BBVA Bancomer, in which the Spanish Banco Bilbao Vizcaya Agentaria is already a partner with nearly 50%, in order to make a strong entrance into the transfer business.

Mexico is the number one country in transfer receipts in the world, with a flow of 16.6 billion USD in 2004, or 15% of all banking deposits in the country. What does this mean in terms of commissions for those who transfer funds or physically transport money? Seven hundred million USD, according to estimates of the McCombs School of Business of the University of Texas at Austin. Does anyone still doubt that there is an interest for large international banks?

Transfers and microfinance institutions are not synonymous and share little in common. However, 700 million USD in commissions for transfers are only the beginning. "Banks see this business as their first point of interaction with the Hispanic market in the United States," says Regina Sánchez-Mejorada, Banamex transfer coordinator. The business begins with the commission for sending these transfers, but becomes much more lucrative when the 24 million Mexicans living in the United States, a figure that increases every year, become customers with an average annual income of 33,000 USD, according to Banamex calculations. And 55% of them do not have a bank account or any formal ties with the financial system. Without going far, Wells Fargo is the U.S. bank that serves the most small companies in its own country, which include many Hispanic customers. Its credit portfolio in the Hispanic market is 1.6 billion USD.

Large banks initially entered the market to get a cut in the transfers, but Citigroup is the first that has come in with its feet firmly planted—issuing Compartamos bonds—in the microfinance arena.

Union Makes Strength

"We are looking at the microfinance sector with the idea of expanding our scope and bring financial services to those not in the banking system," confirms Annibale. However Citigroup, a bank with a long tradition in Latin America, but which has always been oriented toward the population's higher income groups, is not going to enter directly to attract low-income customers or make incursions alone into microcredit. "We want to work with microfinance institutions and help them gain financing in the capital markets, as we did with Compartamos," emphasizes Annibale.

Citigroup wants to offer financial services integrated in microfinance institutions and thereby expand in this market, which has yet to be captured, adds Annibale. "We cannot do it alone and I believe that we will succeed by working with microfinance institutions." MFIs already reach microentrepreneurs, have them as customers, and explains Annibale, will help Citigroup expand beyond its own networks.

The U.S. financial group does not want to lose its customers to microfinance institutions, rather transform the institutions themselves into customers by developing special products for microfinance institutions according to each one's needs.

Annibale talks about offering them insurance, collateralization of transfers, even including the possibility of helping them venture into the savings market.

"We can also help with risk rating," he mentions, recalling the relationship the Mexican Compartamos has had for some time with the World Bank's International Finance Corporation. This relationship was crucial when obtaining a prestigious rating firm to perform a financial evaluation of Compartamos and give it an investment grade. The international agency Fitch performed this evaluation, giving the Compartamos debt the seal of legitimacy.

Annibale knows about risk rating not only through his previous work with other emerging markets in Citigroup. In addition to being the group's global director of microfinance, he is also a member of the board of directors of The Microfinance Information Exchange (MIX), an organization that specializes in the financial analysis of microfinance institutions. (The MIX provides the figures of the ranking of microfinance institutions that MicroEnterprise Americas publishes in this issue). "This is where we are trying to achieve transparency," he says, "and things are improving because we have many more sources of information than before."

It was high time. The microfinance industry in Latin America has been around for 30 years already and there are more regulated and rated microfinance institutions in the region than in the Middle East or Asia. In Bolivia, in some countries of Central America, in Ecuador and in Mexico itself, the market already has strong and stable microfinance institutions, already clear winners. Does this mean that there will be more issues in local currency such as Compartamos?

"If this is what the institutions and the markets want, and they are prepared to do it," smiles Annibale, "yes, of course."