Small Loans Spark Big Change in Brazil's Northeast

Stuart Grudgings
Thursday, June 24, 2010

* Microcredit program booms in Brazil's poor northeast

* Poor families have long been cut off from cheap credit

* Program is profitable, with low default rates

RECIFE, Brazil, June 24 (Reuters) - The peeling yellow cart seems like just another nondescript piece of junk in the tumble of shacks, but it is one that fills Maria Jacinta da Silva with pride and gratitude every day. Bought with a 300 reais ($170) loan, which left change to buy a few bottles of beer and liquor to sell to other slum residents, the box on wheels provided income that stabilized the chaotic life of the 53-year-old mother who lives on the outskirts of the northeastern Brazilian city of Recife.

A year later, the beloved cart has been "retired" to make way for a permanent roadside stall where Da Silva sells barbecued meat and liquor and which was funded by more "microcredit" loans from the state-owned Banco do Nordeste, or Bank of the Northeast. "My home was a mess; my children were a mess," she said, recalling her life before that first loan. "Now I'm a happy person. I can sleep at night knowing what I'm going to do the next day." Her cart is part of financial revolution that has given hundreds of thousands of poor families access to credit for the first time and played a role in turning the long impoverished and handout-dependent northeast into Brazil's fastest-growing region.

The program started 12 years ago with a simple idea but one that was radical in Brazil, whose huge informal economy has long been cut off from access to credit. The bank assesses prospective clients' funding needs and provides a loan of anywhere between 100 reais ($57) and 15,000 reais ($8,475) at low interest rates. In a country infamous for its stifling bureaucracy, all clients need is a national ID card, a tax number, an address, a proven economic activity and to be part of a small group of fellow borrowers.

The business is often a hole-in-the-wall store, a small beauty salon, or simply a cart for selling beer to neighbors. Despite the humble status of the clients, the program has a default rate of just 1 percent. Having gained a foothold among poor communities, the bank's "Crediamigo" (Credit-friend) program is now expanding at a pace of about 40 percent a year in the northeast. From its current client base of 560,000, the bank expects to top 1 million clients with a total portfolio of 1 billion reais ($565 million) by the end of next year.

In a reversal of the usual flow of funds in Brazil, the bank is expanding its program to the wealthier south -- it recently started operations in Rocinha, a huge slum in Rio de Janeiro. "It is growing so strongly because we've been able to reach the most needy part of the population, which historically had no access to credit," said Manuel Gusmao, the bank's head of microfinances for Pernambuco state, of which coastal Recife is the capital. "It is a program that is totally self-sustaining, without using government resources."

Such growth rates are attracting private lenders such as Spanish bank Santander (SAN.MC), whose Brazilian unit (SANB11.SA)(BSBR.N) saw a 28 percent rise in its microcredit lending in 2009 to 220 million reais ($124.3 million).

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The northeast has been the biggest beneficiary of President Luiz Inacio Lula da Silva's Bolsa Familia program of benefits tied to school attendance, which is credited with lifting millions out of poverty but which critics say has also fostered dependency. The microcredit program reaches the same economic classes -- some 51 percent of its clients also receive Bolsa Familia -- but puts the emphasis entirely on self-sufficiency. Lula, who himself was born into poverty in the region, this month singled out for praise the Banco do Nordeste's microcredit programs, which include Crediamigo and a separate program that has lent 1.2 billion reais ($678 million) to nearly 900,000 farmers and rural families. "Sometimes you lend 1 billion reais to a businessman and he only generates 200 or 300 jobs. This shows that lending more money to smaller business is great for the country," he said.

A study of the Crediamigo program by the Getulio Vargas Foundation in Rio de Janeiro found that 55 percent of members in the lowest economic class succeeded in rising to the next income level. On a busy street on Recife's south side, where horses and carts still vie for space with cars, 49-year-old Maria Nancy de Santana has built up the Beautiful View convenience store over the past 12 years with the help of Crediamigo loans.

In May, the store was about to get a paint job and a new awning thanks to a new loan she can pay back over 36 months. "My old store was tiny and there was no way I could have grown without the loans," she said, adding that no-one in her group has defaulted. Two-thirds of Crediamigo clients are women, who are often the best stewards of family finances. Despite the lowly and often precarious status of the clients, the program is profitable partly thanks to its tiny default rate, something banker Gusmao attributes partly to social pressure and mutual help within groups to keep up payments. For stall-owner Da Silva, an almost religious faith in the bank's program suggests she is unlikely to join that small percentage of defaulters. "My life changed and will keep on changing. The bank wasn't just anyone's friend, it was mine, it was my light," she said. ($1=1.77 reais) (Editing by Todd Benson and Kieran Murray)