Cablegate: Nicaraguan Microfinance: A Sector in Crisis

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RR RUEHLMC
DE RUEHMU #0941/01 2712144
ZNY CCCCC ZZH
R 282144Z SEP 09
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 4598
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1372
RHEFDIA/DIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RHEHNSC/NSC WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAIIA/CIA WASHDC
RUMIAAA/CDR USSOUTHCOM MIAMI FL

C O N F I D E N T I A L SECTION 01 OF 04 MANAGUA 000941

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC AND EEB
STATE PASS OPIC
TREASURY FOR SARA SENICH
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN

E.O. 12958: DECL: 09/27/2019
TAGS: EAID ECON EFIN PGOV NU
SUBJECT: NICARAGUAN MICROFINANCE: A SECTOR IN CRISIS

REF: A. MANAGUA 625
B. MANAGUA 116
C. 08 MANAGUA 1096
D. 08 MANAGUA 1032
E. 08 MANAGUA 0932

Classified By: Ambassador Robert J. Callahan for reasons 1.4 (b) and (d ).

1. (C) Summary. Nicaragua's microfinance (MFI) sector, a
vital source of finance for economic development, is under
siege. A decline in credit availability as a result of the
global financial crisis, the continuing and very serious "No
Pago" (No Payment) movement, and a drought that is causing
some crop failures have combined to present formidable
sectoral challenges to MFIs. An embezzlement scandal and
high-level political assault on ACODEP, one of Nicaragua,s
largest MFIs, cast a light on the institutional weaknesses
that affect MFIs. While the ruling Sandinista National
Liberation Front's (FSLN) interests in the sector remain
opaque, we believe they will exploit every opportunity to
profit from the current chaos. End Summary.

Nicaraguan Microfinance: An Overview
-------------------------------------

2. (C) There are over 300 microfinance institutions (MFIs)
operating in Nicaragua which serve approximately 490,000
clients with a lending portfolio of $500 million. Over 65%
of these clients work in the agricultural sector, the
lifeblood of the Nicaraguan economy. MFIs extend credit to
the poorest segments of Nicaraguan society, with some loans
as low $100, though a typical loan ranges from $1,000 to
$5,000. The vast majority of Nicaragua,s MFIs are financed
by an array of governmental and non-governmental
international lenders and donors, including the Overseas
Private Investment Corporation (OPIC). While some charitable
organizations provide funding to Nicaraguan MFIs on a purely
philanthropic basis, the majority are investors who seek
financial returns in addition to promoting economic
development. The World Bank and the Inter-American
Development Bank have both cited the success of MFIs in
providing access to financing for Nicaragua's rural poor.
Full service Nicaraguan banks have historically concentrated
their operations in Managua, making MFIs especially important
in the countryside.

Macroeconomic Challenges
------------------------

3. (C) MFIs in Nicaragua, however, currently face a
challenging macroeconomic environment. Gabriel Solorzano,
President of BANEX (one of Nicaragua's most successful MFIs,
now a bank), told econoff on September 1 that Nicaraguan MFIs
grew at an astounding rate of 74% from 2005-2008, both in
terms of capital and lending portfolios. New MFIs also
proliferated during this same period. Solorzano explained
that much of this growth was fueled by cheap funds available
from overseas as a result of the housing bubble in the United
States. MFIs expanded their lending rapidly, stressing their
administrative capacities and in some cases leading them to
make questionable loans. They were ill-prepared for the
effects of the global financial crisis. Remittances from
Nicaraguans working abroad (equivalent to 13% of GDP) have
dropped by 8% so far in 2009. Underemployment has risen
substantially. Further, the Ortega regime, which took power
in 2007, decided to directly compete with MFIs through the
creation of ALBA-CARUNA (its unofficial rural development
bank), with offers of unrealistically low interest rates
financed by Venezuelan funds (Ref E).

4. (C) Adding to MFI woes is the recent lack of rainfall,
vital for the health of the agricultural sector during the
most productive harvest season, from September until the end
of the rainy season in late October. Since July,
inconsistent and below-average precipitation across
Nicaragua's agricultural regions threatens to lower yields.
Given that the bulk of MFI clients are farmers, crop failures
pose a direct risk to their ability to repay loans.

No Pago Movement Closes Operations Across Nicaragua
--------------------------------------------- -------

5. (C) Another serious predicament for MFIs here remains the
"Movement of Northern Agricultural Producers, Merchants and
Wage Earners," better known as the "No Pago" (No Payment)
movement. The No Pago movement originated in 2008 under the
leadership of Omar Vilchez, a former Sandinista mayor of
Jalapa (a town in the northern Department of Nueva Segovia
near the Honduran border). Several sources allege that
Vilchez fraudulently obtained loans from four different MFIs
totaling $500,000--and he is not eager to repay them.
Inspired by President Ortega's verbal assault on MFIs in July
2008, when he labeled them "usurious lenders" and "banking
terrorists" supported by "imperialist Yankees," Vilchez began
organizing protests, many of them violent, on the premises of
MFIs throughout northern Nicaragua (ref E). A representative
of FAMA, a major Nicaraguan MFI, told econoff on September 9
in Jinotega that Vilchez created, in effect, his own
political movement; for example, he charges No Pago members
monthly dues of $15 in order to fund transportation and
provide meals to protesters.

6. (C) The northern regional manager for Banco ProCredit told
econoff that many No Pago members are former Contra fighters
and Sandinista guerillas from the 1980s who are well-armed,
dangerous and experienced in sabotage operations. Of course,
others are simply debtors who do not wish to pay their bills.
These same MFI representatives in Jinotega reported that the
Nicaraguan National Police (NNP) fear the members of the No
Pago movement. Local press reports estimate that the size of
the No Pago membership is now well over 10,000.

7. (C) Since July 2008, the No Pago movement has set fire to
MFI offices in Ocotal and Jalapa, has kidnapped branch
managers and MFI employees in several towns in northern
Nicaragua, and has prevented customers from doing business
with MFIs by physically barricading premises. On September
11, 2009, No Pago members in Matagalpa held 200 employees and
customers captive in a local branch of the Fund for Local
Development, a prominent MFI, and threatened to set the
branch on fire with gasoline. On September 2, the No Pago
movement physically prevented employees of BANPRO,
Nicaragua's largest bank, from entering or exiting their
respective branches in Rio Blanco and Sebaco. BANEX's
Solorzano told econoff that death threats have been made
against Julio Flores, the General Manager of the Nicaraguan
Association of Microfinance Institutions (ASOMIF). None of
these actions has resulted in arrests or prosecution by the
NNP. Consequently, since September 5, almost all major MFIs
(and even some major bank branches) have been closed for
business in Ocotal, Jalapa, Rio Blanco, Sebaco, Esteli, El
Rama, Nueva Guinea, and Juigalpa.

8. (C) On September 22, twenty five major international
providers of credit to Nicaraguan MFIs published full-page
announcements in both daily newspapers calling on the GON to
curb the No Pago,s violent actions. They threatened to
withdraw funds should this unacceptable situation continue.
Rene Gonzales, General Manager of the Nicaraguan Development
Finance Agency (a local MFI), told econcouns recently that
members of the No Pago movement are coercing good clients not
to pay their debts. According to data from ASOMIF, default
rates among Nicaragauan MFIs have risen from 3.7% in June
2008 to 8.7% in June 2009.

Debt Moratorium
---------------

9. (C) No Pago's Vilchez is demanding that the Nicaraguan National Assembly pass a so-called Moratorium Law, which would grant a 180 day interest-free grace period for No Pago debtors. In addition, Vilchez seeks a 10-year debt "restructuring" plan for No Pago members at an interest rate of 8%, well below current MFI interest rates which average 26%. This figure, while high in absolute terms, is well within the average for microfinance lending in Latin America, according to industry representatives. The No Pago movement has protested in front of the National Assembly on a regular basis to push for approval of the legislation. On September 23 ASOMIF representatives met with the National Assembly's Economic Commission to discuss more reasonable loan restructuring options for debtors, but Vilchez has thus far taken a hard line against any compromise. (Comment: Even die-hard FSLN deputies in the National Assembly--normally devoid of any common sense concerning market economics--have stated their opposition to passage of the law. Representatives of the banking sector, including Victor Urcuyo, the Superintendent of Banks and Financial Entities, have stated categorically that passage of the Moratorium Law would bring about a collapse of the financial system here. End comment.)

The ACODEP Affair
-----------------

10. (C) As if the No Pago movement, the global financial
crisis, and a drought do not pose sufficient challenges, the
Nicaraguan microfinance sector is also grappling with a major
embezzlement scandal and political assault on the Association
for the Development of Small, Medium and Micro Businesses
(ACODEP), one of the country,s largest MFIs (Ref A). Since
early 2008, ACODEP has been caught up in a nasty dispute over
control of its Board of Directors. In 2008, ACODEP,s Board
removed Armando Garcia from his position as president for
embezzlement and poor lending decisions. In retribution, Mr.
Garcia exploited his senior-level GON contacts to have
himself "legally" reinstated as president for a two-month
period in 2009. During these two months, according to the
current Board and its international creditors, he swindled $3
to $5 million from ACODEP. ACODEP subsequently filed a
criminal complaint against Garcia with Police's Economic
Crimes Division. ACODEP finally succeeded in removing Garcia
in late May 2009 by obtaining official recognition from the
Ministry of Interior of their newly-constituted Board, but
the financial damage done to ACODEP as a result of this
alleged embezzlement has been catastrophic; one U.S. creditor
recently described ACODEP as a "zombie company."

11. (C) Most disturbingly, on September 4, Garcia attempted
an armed takeover of ACODEP's Managua headquarters, holding
its employees and customers hostage for more than two hours,
an event broadcast live on one of Nicaragua's major
television news channels.

Enter Rosario
-------------

12. (C) Amidst the current chaos, several sources have told
econoff that First Lady Rosario Murillo is making a play to
take over ACODEP. Marta Elena Espinoza, the wife of Leonardo
Torrez, a close advisor to the First Lady, has been appointed
to the board. The local press has reported similar accounts.
BANEX's Solorzano speculated that Murillo's chief motivation
is the desire to acquire ACODEP,s 57,000 client base, along
with ACODEP's 40 nationwide branches. Such a move, according
to Solorzano, would allow the FSLN to win over ACODEP
borrowers in arrears by offering them low interest loans
funded by ALBA-CARUNA.

Comment
-------

13. (C) Solorzano's view concerning the First Lady's role in
ACODEP is plausible. Since his inauguration in 2007,
President Ortega and the FSLN have eagerly sought to enter
the MFI business, primarily via ALBA-CARUNA. This effort has
largely been a failure, attracting few clients. Gaining
control of one of the already existing largest MFIs would
provide a perfect platform for the FSLN to seize a
significant portion of the market.

14. (C) On the No Pago movement, the FSLN's position has been difficult to decipher, though it appears that these violent protests occur with at least the tacit approval of the FSLN. Back in 2008, Ortega incited MFI debtors to protest and not honor their payment terms. In January 2009, however, Ortega publicly stated that "the No Pago culture has disappeared from this country, we all have to pay," (Ref B). Finance Minister Guevara and Central Bank President Rosales made similar comments condemning No Pago. We suspect that the ultimate objective is to create a climate of fear and intimidation among local MFIs, using the No Pago movement as a proxy militia to force these institutions to do business with the FSLN on their terms. As the regional manager for Banco ProCredit in Jinotega recently told econoff, the members of the No Pago movement are "their people" and Ortega has to give them "something."

CALLAHAN

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