In rural Guatemala, a microlender grows by knowing its customers.
BY DANIEL DROSDOFF
Fabián Lucas, 48, has always made his living in the rope business, selling ropes for ranchers, fishermen, household use—ropes for just about any purpose. He sold ropes as a young street vendor and then worked in a factory. Later he founded his own factory, which has brought him modest prosperity.
But that isn’t enough for this entrepreneur. Lucas dreams of quadrupling his monthly sales from $3,300 a month to $13,000 a month, expanding both inside Guatemala and in neighboring Central American countries. He also has his eye on opportunities resulting from the Central America-Dominican Republic-United States Free Trade Agreement. Already anticipating that possibility, his trademark lassos are already sold in plastic bags with an image of a cowboy on a bucking bronco in the American West.
A few years ago, Lucas decided to buy some used, electric rope-making machines made in Germany to boost production. Until then he had relied entirely on home-made machiney cobbled together from old bicycles and powered by pedaling workers. Then, in 2005, Lucas faced a money crunch. Because of a temporary lack of access to three-phase electricity, he could not make monthly payments on the loan that had enabled him to purchase the new machines, which were still not operational. He needed to obtain a bridge loan, or he would risk losing his investment.
Lucas turned to a local microcredit provider that in recent years has undergone its own rapid expansion: the Asociación para el Desarrollo Integral de San Antonio Ilotenango, known as ADISA. Credit examiners from ADISA knew about Lucas’s operations personally and were impressed by his successful track record in business. The association granted him a two-year bridge loan of $20,000, which he has repaid on schedule.
WEIGHING CREDIT RISK
How did ADISA know Lucas was a good credit risk?
“We knew from his monthly income receipts that he had the resources to pay us back,” says Francisco Yat, a 33-year-old former schoolteacher who is ADISA’s general director.
A nonprofit organization, ADISA was founded in 1992 with a handful of subscribers paying 25 quetzals (approx. $3) a month. Its purpose was to devise ways to help meet local development needs in one of the poorest municipalities in the country in three areas: agriculture, health and education. An early idea to found a community pharmacy never got off the ground. But providing poor farmers with small loans to buy seed and fertilizer—loans repaid within a year when crops were harvested—filled an immediate local need and launched ADISA on the road to establishing a viable microfinance operation.
Today ADISA has 1,600 borrowers, offices in three cities, a loan portfolio of $1.6 million and $400,000 in capital. Its 59 full-time employees not only run a sustainable microcredit system, but they also carry out health and education programs on government contracts.
Yat describes ADISA’s evolution as a process of trial and error. In the beginning loan officers did not know how to conduct rigorous risk analyses of potential borrowers, and as a result the default rate was about 30 percent. Interest rates were about 34 percent annually, but even so the organization struggled to survive. After many years of experience and capacity-building, the default rate has been reduced to 4.5 percent, and interest rates charged are now around 24 percent.
International assistance, first from Canada and later from the Netherlands, helped ADISA adopt better credit management techniques and expand its loan portfolio in the late 1990s.
A $250,000 Inter-American Development Bank (IDB) grant for technical assistance and $500,000 IDB loan disbursed in 2002 enabled ADISA to carry out a major expansion in recent years, Yat says. The resources helped ADISA establish a consistent credit management system, install the necessary computer software, train personnel and draft a long-term business plan. Now ADISA is seeking additional resources to expand even further.
Over the years the share of agriculture loans in ADISA’s portfolio had declined, while commerce loans have grown. A typical borrower now is Encarnación Simaj, whose three grown children help her operate a bakery. She got two loans from ADISA, one for $6,600 in 2004 and another for $10,000 in 2005 to enable her to purchase new oven equipment and to raise production by 50 percent.
ADISA has not abandoned its roots, however. It continues to lend to small farmers like Manuel Vicente, a 37-year-old father of six. He received a $3,300 loan from ADISA in 2006 for a six-month term that enables him to buy seeds and fertilizer to grow asparagus and other vegetables on his small farm and bring them to market. Next year he will repeat the borrowing process, which is necessary for the economic survival of him and his family.
Republished with permission from IDBAmerica, the magazine of the Inter-American Development Bank.