MicroCapital: Can you tell us a bit about your talk planned for European Microfinance Week on “balancing financial inclusion with market stability”?
Narda Sotomayor: A key element to achieve this balance is the principle of proportionality, under which regulations vary based on the risks associated with the product or service in question. For instance, for microloans for businesses with overall debt below PEN 20,000 (USD 7,000), the required documentation is minimal, and loan provision requirements are based only on the number of days any loans are overdue. The lender has the freedom to establish prices to cover its costs, such that institutional sustainability is guaranteed. It was determined that anti-money-laundering rules were making it too costly to open deposit accounts for the poor, mainly because of the heavy burden of “know-your-customer” documentation.
Thus Peru introduced a tiered system, based on the risk levels of products and customers. The three regimens are reinforced, normal and simplified. Within the simplified regimen, the “basic deposit account” allows a balance of PEN 2,000 (700 USD) and PEN 4,000 (1,400 USD) in accumulated deposits and withdrawals per month. The only document required for opening a basic account is the National Identification Card, and it can be done through a bank’s agent.
MC: What are your thoughts on financial education?
NS: Peru began a financial education program back in 2007, at first in urban areas. The approach is to train teachers in state high schools to transmit the information to their students. Teachers are provided with a wide range of advice, videos, comics and other audiovisual tools. This is done in partnership with the Ministry of Education, which incorporated financial literacy into the National Curriculum of Schools in 2009. In addition, we have prepared education materials and performed training workshops oriented to groups such as youth, women working in community kitchens, microentrepreneurs and retirees.
MC: How does this relate to consumer protection?
NS: Financial education is an important instrument for consumer protection. Consumers who have the skills to understand what the system can offer them are in a better position to to demand respectful treatment from service providers. To support this, another key element of consumer protection is disclosure of information, aimed at protecting people before, during and after contracting. The transparency regulations contain detailed information that needs to be disclosed to consumers by all financial institutions, including the costs of their products and services – not only nominal interest rates, but also other fees and charges. This allows consumers to compare offers from different providers. Also, we have coordinated with financial institutions to design contract templates to prevent unfair contracts. Contracts have to be written in plain Spanish and observe a minimum font size. In addition, any changes in the contract have to be communicated to the customer with 30 days’ notice, allowing him or her the opportunity to cancel.
MC: Several traditional banks in Peru have downscaled into microfinance.
NS: Yes, for many years, several traditional banks have been attempting to downscale into microfinance, attracted by the very high returns observed in specialized microfinance institutions. They used different approaches, and it did not go well for some of them, basically because of lack of knowledge of the technologies needed to serve low-income households and micro-entre-preneurs. However, since microfinance was just a small part of their operations, those institutions did not suffer greatly. Most recently, the approach that is working for banks is to purchase specialized institutions, maintaining their independence of operations.
MC: Please tell us about your country’s recent push to promote mobile money.
NS: Peruvian regulators identified payments services as the most basic financial service, one that should be available for all segments of the population. Often, deposit accounts have been used for transactional and payment purposes; however, access to these accounts is very limited. In contrast, there is a high penetration of mobile phones nationwide; there are as many mobiles as Peruvians. This fact was identified as an opportunity to use electronic devices to deliver financial services at a low cost and more conveniently, especially for the unserved and underserved population.
This is why Peru issued an electronic money law in 2012, restricting the issuance of e-money to supervised institutions and defining e-money as monetary value stored on an electronic device, distinct from deposits. The law allowed a diversity of e-money issuers into the market – not only the existent intermediaries, but also specialized operators acting under a new category of licensure. In this way, low-cost and simple financial products such as prepaid cards and electronic wallets have been encouraged. The regulatory framework supporting the law, similar to that for basic deposit accounts, defines e-money accounts so that the simplified know-your-customer regimen can be applied. An important motivation of this effort is that we believe that e-money schemes have the potential to bring financial services to people leaving in remote rural areas, which are the most difficult segments of the population to reach.
Narda Sotomayor leads the Department of Microfinance Analysis at Peru’s Superintendencia de Banca, Seguros y Administradoras Privadas de Fondos de Pensiones.
Additional Sources and Resources:
European Microfinance Platform (e-MFP) to Host European Microfinance Week, November 12-14, 2014, With On-site Reporting by MicroCapital
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