NICARAGUA: Strengthening the Microfinance Sector
The explosive growth in Nicaragua’s microfinance lending activities in the overall credit boom during 2006–2008 led to widespread over-indebtedness, which led to the “No-Payment Movement” (Movimiento No Pago) in 2009–2010. As a consequence, 19 microfinance institutions lost over $60 million in foreign financing and their credit portfolio in arrears skyrocketed to 17 percent from 3 percent before the crisis. Several microlenders went out of business or had to be heavily recapitalized. As the “No Pago” movement had brought abusive practices to light, the Nicaraguan authorities urgently needed to improve their financial consumer protection framework, and strengthen oversight of microfinance institutions.
In late 2010, Nicaragua’s Superintendency of Banks and Other Financial Institutions (SIBOIF) had approached FIRST for TA to strengthen the legal, regulatory, and institutional frameworks for consumer protection with the focus on the banking, microfinance, and insurance sectors. With support from the World Bank and IMF, the Central Bank of Nicaragua enacted a new microfinance law (Law 769) and created the National Commission of Microfinance (CONAMI) as the regulator for non-deposit-taking institutions. In 2014, CONAMI approached FIRST for assistance in strengthening the supervision framework and its supervisory capacity. These two projects, delivered at different times to different supervisory agencies, both aimed to strengthen the country’s microfinance sector.
The first project, Financial Consumer Protection, worth $217,000, was undertaken from 2011 to 2013. It assessed the legal, regulatory, and institutional frameworks for consumer protection. It gathered demand-side information about consumers’ experiences with and concerns about financial consumer protection. Drawing on this context, a workshop was held to build consensus and develop an action plan for revisions to laws and regulations related to consumer protection.
The second project, Strengthening Supervision of Microfinance, worth $210,000, took place in 2014 and 2015. It entailed development of a manual for risk-based supervision, pilot tests, and training of supervisors in the use of the manual.
The first TA, Financial Consumer Protection, resulted in the enactment of a new consumer protection law in June 2013, Law 842—“Law for the Protection of Consumers’ and Users’ Rights.” Subsequently, an office in charge of the implementation, application, and enforcement of Law 842 and its regulations was established under SIBOIF.
The second TA effort, Strengthening Supervision of Microfinance, was completed in August 2015 with CONAMI’s adoption of the risk-based supervision framework. The president of CONAMI, Jim Madriz, in his feedback to FIRST, stated
Technical assistance in each of its stages and processes was extremely useful for the institution. With the Manual, from 2015, CONAMI will initiate the supervision based on risks…. Prior to the completion of the project, supervisions were carried out in strict compliance (rules-based). This method did not allow us to focus resources on the most pressing problems faced by the entities and led us to perform tasks for each regulated institution by diluting the attention we must have on the most important…. We would like to clarify that although we indicated that the final deliverables are the most important, we do not subtract importance of the process of how it was made, workshops and training, since they are the foundation of the reason for applying the manual and risk-based supervision.
FIRST’s experience in Nicaragua exemplifies how small, targeted TA projects can synergize to reduce systemic risks and contribute to the development and stability of national financial sectors. In the long term, hundreds of thousands of borrowers and depositors (at present 150,000 borrowers and 70,000 depositors*) will have access to sustainable and responsible financial services provided by well-regulated microfinance institutions.