The state of microfinance in Panama

Luis Germán Linares, General Manager of Microserfin

On 30 June 2017 the Panamanian government published its first report measuring poverty with a multidimensional indicator. This provides us with a good starting point for talking about the situation of microfinance in Panama, given that the report will be used as the baseline for the decisions and approach taken by governmental bodies, as well as the guidelines we in the private sector must follow when designing tools to trigger useful social-development opportunities that enable us to reduce poverty in the country effectively.

From our perspective, we re-affirm out commitment to continue driving Responsible Productive Finance efficiently, to reduce poverty in Panama

The multi-dimensional measurement of poverty is built on two key indicators: incidence and intensity. Incidence relates to the number of people, and intensity indicates the degree of poverty suffered by people by the deprivations in the different variables collated for the indicator. In Panama, incidence is 19.1%, representing 777,752 people, while intensity is 43.5%. When combined, these indicators give us a multidimensional poverty index of 8.3%. This means that approximately one in every five people lives below the poverty line in Panama and that of these, around half suffer shortfalls simultaneously by most of the 17 measurements taken.

Nevertheless, when the indicator is compared with other countries in the region, it is one of the lowest, although this in no way means that the task is completed, nor that we should stop looking after the low-income population. In fact, there are more than 700,00 Panamanians who need opportunities for social development and who should be looked after on a long-term and sustained basis. This number will always be too high when we turn to people in vulnerable situations. That is why we feel that it is a good time to review the microfinance framework in Panama, to confirm what we need to do to achieve the goal of providing access to credit.

Panama is a country of service provision, particularly in financial services, and this is one of its strengths, which might lead one to think that access to these resources should be relatively easy. However, for those at the bottom of the economic pyramid, banking penetration and access to banking is not so straightforward; only 32% of the 40% poorest people in the country holds an account in a financial institution.

This situation has led legislators to establish standards to strengthen microfinance in Panama, with the aim of making it easier for all those who do not have access to traditional banking to have exposure to financial resources. Currently, microfinance in Panama is handled through several types of companies, including microfinance banks, financial companies, savings & loan cooperatives and NGOs. As is evident, the activity is therefore subject to different regulatory bodies, with the outcome that the regulatory framework for microfinance in Panama is asymmetrical.

Acting on this analysis, the government passed four laws to strengthen and formalize certain aspects of the entrepreneurial environment. Their main purpose is to encourage access to credit and modernize the system of secured transactions (eg, through mortgages on moveable assets), set up a new prudential regulatory framework for microfinance institutions, create a legal structure for limited-liability enterprises (to make it easier for micro-enterprises to operate within Panama) and incorporate incentives to include microfinance in the formal economy, all underpinned by ensuring that information about microfinance entities’ credit history is thorough, accurate and standardized.

Under this scenario, banks supervised by Panama’s Banking Authority have been using licenses that allow them to provide financial services for microfinance, although it has been difficult for this type of institution to conduct transactions, mainly because of the costs associated with microfinance activity. As a result, no banks are currently operating under these licenses, but are rather trying to become general license banks, which puts a spotlight on the priority the private sector should place on making microfinance regulations more robust, given that the current situation drains the momentum from sector development.

All the above means that microfinance services are generally provided by financial institutions, NGOs, cooperatives and, in the worst cases, by the informal lending market controlled by foreigners, with charging mechanisms and interest rates that stunt micro-entrepreneurs’ growth, in the economic and the social sphere.

Other important players in Panama are multilateral entities such as CAF-Development Bank of Latin America and the IDB, which provide support with funding and take part in special programs. One of our star products was created in collaboration with the IDB, CASAFIN, targeted at serving people with substandard housing, which in many cases are their workplaces too. There are also specialized microfinance investment funds, which agglutinate investors who want to put their money into social purpose institutions, as in the case of Microserfin. Our funders include GAWA Capital, Microvest, Symbiotics, LocFund, ResponsAbility, BIB and Alterfin. There are development agencies too, managing resources for governments for exclusively social purposes, such as Fidemicro, Findec and ICO, which has given us resources from the Spanish cooperation agency.

Finally, and no less importantly, are the funds from local banks with which we have commercial relationships, not only in funding, but who provide us with day to day operating services, issuing checks and providing liability products where we can place such occasional liquidity surpluses.

Some of the institutions holding microloan portfolios on their balance sheet have organized an association called REDPAMIF (Panamanian Microfinance Network), to drive progress in the sector by issuing public policies, legal and regulatory frameworks, organizing training events, recruiting loan officers. The aim of these and their other activities is to give the sector a higher profile, and recognition in the small business segment of the market.

The most important microloan players are members of REDPAMIF, clearly differentiated by the market niches they target. Of the 9 institutional members, two use the microloan methodology, and grant loans with an average value of around USD5,000. Only Microserfin reaches the very base of the economic pyramid, with loans averaging USD1,500. The total loan portfolio of these institutions is worth USD 270 million, of which 13% is in the rural sector and 40% is lent to women.

The most significant governmental institution in this field, the leading provider of programs focusing on low-income entrepreneurs, is the AMPYME Ministry, that supervises micro, small and medium companies. It is responsible for promoting the creation of companies, consolidating those that already exist and for helping to generate decent employment and creating added value to the country’s production.

As we have seen, there is a widespread impression that an ecosystem for microfinance already exists. Indeed, the ecosystem was specifically targeted at fostering entrepreneurship. However, the outcomes are manifestly improvable, given the use of subsidies, tools which do not necessarily ensure long-term sustainability.

We should not forget the environment in which the microfinance sector is embedded. Panama is used to significant rates of GDP growth; in the last ten years it has grown at an average rate of 7.2%, the highest in the world, with the forecast for the end of this year at around 5%, supported by public-sector investment, and particularly the construction of a second metro line plus additional traffic generated by the canal enlargement.

The solid performance of Panama’s economy suffers from some social shortcomings in the areas of poverty and inequality. The economic slowdown is visible in sluggish sales, increased production costs and even the closure of businesses of all sizes, which has a knock-on effect, one way or another, on micro-entrepreneurs. This situation is a breeding ground for an increase in financing offered by different players, thus increasing the risk of over-indebtedness.

The deteriorating quality of assets can also be seen in the overall figures for the financial sector.  Proof of this is the impairment of the non-performing portfolio over the course of 2016 and to date. The over-30-day default indicator has risen from 2.2% in December 2015 to 3.44% in July 2017, representing a 124-base point (bp) impairment in the last 18 months. In contrast with the 31bp increase between June 2014 and December 2015, this demonstrates a significant overall impairment in Panama’s loanbook.

In conclusion, the country must make a firmer commitment to financial inclusion if it is to bring the poverty indexes down over time to a meaningful extent. From our perspective, we re-affirm out commitment to continue driving Responsible Productive Finance efficiently, to reduce poverty in Panama.