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Central American University - UCA  
  Number 200 | Marzo 1998



On the Death of BANADES (r.i.p.)

With BANADES dead and buried, a new state institution is born: the Small Farmer Credit Fund. Is it reincarnation, resurrection or a new creature? What agents will it use to fulfill its appointed role of financing small producers – the NGOs dedicated to providing credit or the private banking system? As we observe the passing of BANADES it behooves us to begin to respond to this question.

José Luis Rocha

The poor person is despicable because of his poverty.

If a poor person is seen sitting around
they say he's lazy.

If he takes a drink, he is a drunk
and if he doesn't, he's coarse.

If he has a little something it is stolen
but if he asks to borrow something
they say he is shameless!

The peasants just go their way

Pablo Antonio Cuadra

After a prolonged hari-kiri, the National Development Bank (BANADES), at 85 the oldest bank in Nicaragua's National Financial System, will close in May. Before it died, BANADES transferred all of its deposits, estimated at 950 million córdobas, to their 50,000 owners or, with their consent, to private banks. Its 327 clients in arrears will continue to be dealt with by the collection agency Cobanicsa and, once its current credit portfolio has been sold off to private banks, its moment for resting in peace will have come.

"It was said in 1992 that BANADES should be closed," commented economist Francisco Lainez recently. "If it had been, that whole piñata would have been avoided."
BANADES had been "dying by its own hand" for a long time. Like the colonizer Pedrarias Dávila, it climbed into its coffin and had its requiem sung every year. Researchers, public officials, businesspeople, politicians and journalists have all crowed the reasons for its internment:
*Its losses, estimated at $ 50 million annually from 1991 to 1996, were a drag on state finances.

*Its reinforcement of the culture of not repaying debts, thanks to the impunity enjoyed by its largest debtors, had adverse effects on the whole financial system. Those favored were friends and political clientele of the successive BANADES administrations, but for financial mediation, any tolerance of overdue loans is a fragmentation bomb. Clients seemed to go to BANADES under the slogan, Only a jerk lends and only an even bigger jerk repays!
*The ostentatious failure of BANADES to carry out its assigned historical mission—financing small and medium rural producers—delegitimized it in the eyes of the public. The BANADES portfolio, even at the moment of its death rattles, was more concentrated in few hands than seven of the ten private banks functioning in Nicaragua.

*The reiterated announcement of its closure ended up causing its collapse. Announcements of the pending downfall of financial institutions provoke what they predict and are the most efficient way to speed up the big crunch: the percentage of BANADES' overdue debt went from 6.1% of the total portfolio in July 1996 to 21.2% in April 1997.

A Triumph of Neoliberalism?

There has been a desire to see in the BANADES collapse the confirmation of one of the most ancient neoliberal theses: the state is a lousy administrator. But not even private management guarantees probity and efficiency, and inefficiency and corruption are not necessarily linked or limited to state administrators. We demonstrate with two recent financial scandals in private institutions: the forced cleaning up of US S&L associations after a period of bland regulation, which cost the federal government over $100 billion in 1989; and the recent fraud in FINSEPRO, a private Salvadoran financial institute, which cost its depositors millions and El Salvador's banking superintendent his job, and was on the point of causing a chain reaction of general financial panic in the country.

Those who scrutinize economic events in search of confirmation that state functionaries are inevitably bad administrators will not find solid support in the BANADES collapse. Even though Dionisio Chamorro participated in the vices of clientelism as much as he could—and he could a lot—as BANADES manager, his unsatisfactory term as a public functionary did not keep him from being named to the board of directors of BANEXPO, one of the most accessible and efficient private banks in Nicaragua and, with low arrears rates and 92% of its portfolio invested in clients with absolute assurance of payment, the second most profitable bank in 1996.

A Slow Death and Many Promises

The downsizing of BANADES since 1990 has left many rural producers in the lurch. From 1990 to 1996 the financing of the agricultural sector by the national financial system dropped from $92.4 million to $64.52 million and its share of total financing fell from 17.36% to 11.7%.

Whether state management failed because it was state-run or because of the opportunism of oligarchic sectors who did from state positions what private administration does not tolerate, the fact is that the progressive shrinkage of BANADES—from more than 80,000 producers attended in 1990 to less than 7,000 in 1997—had an impact on the rural sector that the growing number of private banks could not have corrected with their entire portfolio, even if all credits had gone to the agricultural sector. BANADES leaves a very small will. Since it has been dying for a long time, we are now burying very little.

The liberal government gambled on a "reincarnation." Last year was prodigious in promises to offer resources to agriculture. Among many others, there were the government offers to finance over 34,000 families to plant corn and beans; the BANCENTRO Agricultural Certificates Program (Certiagro); and the private banks' promises to offer 900 million córdobas in credits to the agricultural sector. And this without including the biggest promise, the basis of Arnoldo Alemán's electoral campaign: to make Nicaragua once again "Central America's granary."
But so many promises to finance agriculture seemed to be operating under the premise in Aldous Huxley's novel Brave New World: if you repeat a lie often enough, it will create the reality it is trying to describe. So it went with the bombardment of financing promises, which was a lot more talk than action.

The Protagonists of the Granary

It is worth repeating the importance of financing Nicaragua's agricultural sector. Agricultural producers contribute 26% of the country's GDP, generate 40% of total employment and represent 25% of the economically active population at the national level. Export production from the agricultural sector makes up over 60% of Nicaragua's total exports. Despite these overwhelming statistics, those who live in urban areas get seven times more public investment per capita than those in rural areas.

Basic grains production is still the country's most important and dynamic agricultural activity, and presents an overall growth tendency. In 1996-97 it represented 73.7% of the total area harvested and grew in the last four years at an annual rate of 4.33%. One has to look through this lens if one wants to learn about the behavior of small and medium rural production.

Over 30,000 acres of beans and 88,300 acres of corn were financed with state bank credit in 1990. To begin to turn ourselves back into the "granary of Central America," the new government announced a credit plan in 1997 of 100 million córdobas for 70,000 producers of 76,000 acres of basic grains, in which BANADES would put in 42 million. Yet in the end the state financed less than 800 acres of beans and 5,800 of corn. What happened?
The new Enhanced Structural Adjustment Facility (ESAF) agreement with the IMF brings the bad tidings: "The credit policies recently earmarked for agriculture were eliminated and will not be reintroduced." Behind this decision lurks the negative concept of the state development bank, which is willfully blind to the fact that bad management is not the exclusive patrimony of a state bank nor are its functionaries always inept.

Peasant Credit Fund: the Relief

With BANADES' death a new state institution is being born, the Peasant Credit Fund. Created by the Ministry of Agriculture, this Fund is expected to supply the credit demands of small and medium rural enterprises. According to the new ESAF: "To satisfy small farmers' credit needs, the government will establish a fund that will operate like a second-tier institution—which doesn't loan directly to the producer—counting on the help of branch banks, cooperatives and specialized NGOs with the best practices in rural financing, so that credit gets directly to poor farmers."
In order that this child be born, the government put out this general appraisal: the bulk of the BANADES portfolio was with 500 clients; those favored few brought the institution down and now the just are paying for the crimes of the sinners because rural credit must be limited. Private banks have money to lend, but need solid guarantees—mortgage guarantees—so they can recover their money in case the loans aren't repaid. Small producers, however, generally lack those guarantees. In reality, private banks have made an effort in recent years: between 1996 and 1997, agricultural loans increased by 168%, moving into new market niches: nontraditional producers in small enterprises that produce higher added value. Conclusion of the appraisal: there is hope in the private banks, but many poor farmers are not credit subjects and still require state support.

Following that, the government produced its proposal: retire the state from banking in general and rural banking in particular. How? Close BANADES and privatize BANIC, promote the entrance of private financial services in the rural sector, change the regulatory framework so that other non-mortgageable goods can be admitted as collateral, promote deeding programs and—a stellar decision—promote unsubsidized credit through the new Peasant Credit Fund, which as a second-tier entity will lend not to commercial banks but to financial NGOs that act like rural banks or to cooperatives, as long as they modify their statutes and receive the training needed to meet certain requirements. As an aside, this will reduce the excess of NGOs working in the same area because of lack of coordination between them.

The Peasant Credit Fund resources will come from international cooperation and will be earmarked by regions and by priorities. The Fund will be part of a broader rural development project that includes technical assistance and infrastructure works.

I Doub Therefore I Exist

Although the initiative to create the Peasant Credit Fund is plausible and it would be premature to judge this new state institution, it is not unhealthy to introduce some reasonable doubts.

First, it is not clear why this new state institution will inevitably be more efficient than previous ones. If BANADES failed because it was a state body and was oriented to promote development—which for many is synonymous with debt forgiveness and subsidies—what will now guarantee honest, efficient management adapted to the sector? What will make the supervision effective in this case?

Apparently, the novelty of this institution consists in being a "second-tier" institution that will not mediate directly. The risks and costs will be assumed by the NGOs and cooperatives, chosen for their qualifications, that will do the direct loaning. But what will be the criteria to determine if an NGO has the required pedigree? Political stripe? It is public knowledge that in Nicaragua the NGOs are predominantly red and black [FSLN colors] and left wing, or at any rate not loyal to the Liberal red. The same can be said for cooperatives. Will they be considered financially or ideologically eligible?

It is obvious that being a credit intermediary for rural producers constitutes a privileged political platform. Will it be possible not to exploit credit as an electoral investment? Will there be a seemingly spontaneous generation of lots of pro-government NGOs? If during the first year of Liberal government the Sandinista origins of the National Union of Farmers and Ranchers (UNAG) prevented it from getting new resources from the National Rural Development Program created by the Chamorro government, and made it hard to obtain the credits UNAG contracted before the change in government, will CARUNA, a credit NGO affiliated to UNAG, qualify for the Peasant Credit Fund?

So Many Stones in the Path

We must be alert to clientelism and to the urge to get in the photo. But we also need to be careful about the transformations that the government will demand of entities that serve as credit intermediaries. The intent to coordinate NGOs may be well-meaning, but it could also be hiding a proposal to control them based on political loyalties.

Very few institutions carrying out financial operations in rural areas are solvent enough to pass the qualifying test. Adequate financial technology—the famous "know-how"—cannot be improvised. Is the government thinking of giving a few NGOs all the resources to the point of over-indebting them?
Between those who don't want to be controlled and those who will be disqualified—for whatever reason—not very many intermediaries will be left on the horizon. And since there is talk of millions of dollars, the alternative is that those who pass the new Credit Fund's test will have to expand their base of operations. But a rapid expansion of their services would be disastrous; it would mean rapid and indiscriminate disbursements, which leads to an inability to recover money that has been loaned.

The other possibility is that a multitude of cooperatives be approved, which would mean minute follow-up of their financial professionalism and their portfolio concentration. Monitoring the cooperatives would naturally increase the costs.

In this panorama the Peasant Credit Fund will clearly face various dilemmas. Will it have supervision capability or not? Will it overcome the tendency to judge NGOs by their political stripe? Will there be a slow period of preparation while the rural areas languish without money, or will it opt for rapid expansion with the danger of not recovering credits because it gave them out randomly? The Ministry of Agriculture's laudable intentions will have to steer around many potholes before becoming reality.

Without trying to defend BANADES, its closure and substitution make clear, yet again, the problem of every new government replacing institutions. The Nicaraguan economy pays a high cost for inadequate management of state institutions, the cost of their destruction, of dismantling them—fulfilling the obligations they contracted—and of installing their replacement. Among other things, underdevelopment is the inability to accumulate experience, a continuous starting over without learning the lessons of the past.

All of the difficulties point to the question of whether the funds that the government is going to direct to rural production are really respectable, or will remain idle or be distributed largely by private banks. The plan to finance "the small and poor farmers" includes smoothing the road so that private banks can deal with them. In that case, there will be no dilemmas; issues will be resolved by increasing the role of private banks.

A Portrait of Private Banking

Nicaraguan private banking has grown so much since 1990 that today it has 76% of all assets, 75% of all deposits and 74% of all Nicaraguan financial system credits. With the change in the paradigm, which now stigmatizes all traditional state development banks as inept and corrupt, private banks have been enthroned worldwide, including in Nicaragua, as the financing model, the invisible powerful hand behind the market, working through its mediation to assign resources to those capable of using them most efficiently.

One of the arguments wielded to demonstrate the potential of private banks to finance small agricultural producers is their tendency to focus on the less capitalized clients: between December 1993 and June 1997, private banks as a whole reduced their average portfolio amounts from 17,730 to 3,380 córdobas (roughly $1,770 to under $340) for the portfolio in córdobas and from $3,430 to $1,580 for the portfolio in dollars.

Except for BAMER, all private banks reduced their average loans, some significantly. Among those BANPRO stands out. The report of the Superintendent of Banks includes data on credit given by strata according to amounts. In its lowest stratum, for example, BANPRO attends 9,956 clients with average loans of only 8,460 córdobas, and 9,889 clients with average credits of only $450, amounts that are perfectly accessible to small businesspeople and insignificant for medium producers. In its lowest stratum, BANEXPO has an average loan amount of 2,700 córdobas.

Private banks now have more clients. The drop in clients of the state banks—from 61,935 to 26,606 in the córdoba portfolio—was saved by the increase in clients at private banks from 3,787 to 37,530. All private banks have had a significant increase in clients between December 1993 and June 1997.

BANPRO, for example, went from 836 clients to 10,097 for its credits in córdobas and from only 18 clients to 10,101 for its credits in dollars. BANEXPO jumped from 476 to 12,564 clients in its national currency portfolio.

Private Banks Don't Finance Agriculture

Small agricultural producers have benefited little from the private banks' growth and expansion. Excessively optimistic government versions of the private banks' responsibility to the country's agricultural producers should be questioned for the following reasons:
*Agricultural credit represents a minimum percentage in the majority of the private banks' portfolios. In eight of the private banks it does not reach 17% of their dollar portfolio and in four does not exceed 10% of their córdoba portfolio.

*Only BANPRO has both average amounts accessible to small businesses and a dollar portfolio with 30% dedicated to agricultural financing. In addition, interviews with bankers reveal that credits are placed in the least risky sectors: coffee, peanuts and cattle, and with a mortgage as collateral. From this it can be concluded e that the small credits do not go to agriculture.

In the context of 300,000 producers without financing, the concentration of the private banks' portfolios and their small number of clients makes their support of agriculture in general, and of small and medium rural producers in particular, little more than symbolic. To think that land titles and a change in banking regulations will resolve this situation is illusory. The cost of lawyers' fees and registration, transport and time, all make credit more expensive. All of these costs become a significant percentage of small credit amounts—which is what small producers ask for—especially for people living in very remote zones. The solution also does not lie in facilitating the small producers' ability to provide a mortgage guarantee. In practice, that is not what has kept private banks from lending to small rural producers.

To justify having neglected those producers, private banks frequently invoke three fallacies: "the poor don't repay loans," "there is willingness but no money," and "interest rates are too high but are forced up by the market."

The Poor Don't Repay?

The Superintendent of Banks (SIB) must watchdog the solvency of financial institutions to guarantee the public's deposits. In keeping with this goal, it has designed prudential norms so that financial institutions can continually evaluate the quality of their loans, classifying them in five risk categories: overdue on payments, overall ability to pay, credit history and legal status of guarantees in terms of covering debtor obligations. A comedian condensed the situation created by these criteria into one phrase: "To get a loan, you have to demonstrate that you don't need it!" And that's the way it is. In fact, the best guarantee is the mortgage, which must fulfill innumerable requirements: positive SIB evaluation, a value greater than the debt, legal registration, etc. It is more important for the bank to know that the mortgaged goods can be sold for a good price than that the possible debtor is honest.

According to the Superintendent of Banks: "In terms of credit capacity, the submarginal sectors are easily identifiable as a group by the size of their business, their low physical productivity, and the disorganization of markets, which prevent appropriate control over the source of payment." And it adds: "In general, bank supervision is made difficult, if not impossible, by the lack of analytical elements to determine the recoverability of individual loans."

They Don't Pay or Aren't Allowed to Owe?

These prudential norms fulfill the proverb that says: "Laws are like snakes: they bite anyone without shoes." All the foresight and provision did not prevent BECA's bankruptcy and the total dispossession of BANADES. Why? Norms are insufficient. Solid guarantees can hide a den of thieves, including a Vice Minister of Agriculture—as was Roberto Rondón, one of BANADES' major arrears debtors. By the same token, asking for those guarantees is what prevents small rural producers' access to credit. It isn't that the poor don't pay, but that they don't get the opportunity to owe.

In an Inter-american Development Bank (IDB) seminar, it was recognized that bank regulations have generally been set up taking into account the size of the loans given by large commercial banks. But now there are countries with more progressive practices. In Bolivia since 1994, if the loans are under $5,000, the only condition that counts is if the client got behind in payments.

It is a question of getting up to date. Or as Gary Becker, winner of the 1992 Nobel Prize in Economics says, "Financial markets move at the speed of light while governmental organizations charged with controlling them are still in the era of the manual typewriter."

The SIB's prudential norms are an indicator of how slowly credit will advance toward those sectors labeled risky. Although the norms don't automatically exclude small and medium businesses, they do push them toward the sidelines.

The SIB should also impede the concentration of credit in a few clients. But on this point its norms are less severe. Since the goal is to distribute the risk and not the service, it is enough that loans not exceed a certain percentage of the bank's patrimony. This leads to a no-risk concentration, but an excluding one. Together, the national financial system shows a notable concentration overall: 94.54% of the clients in the córdoba portfolio receive 24.08% of credit, while only 5.45% receive a full 75.92% of the credit.

In the BAC, for example, only 10 clients—1.68% of the total—absorb 71,757,880 córdobas, 39.63% of the portfolio. The situation is even worse in the dollar portfolio: 9 clients (5.14% of the total), absorb 68.14% of the portfolio, equivalent to $13,351,200. For this portfolio, the average loan is no less than $111,970. Who said something about democracy?
The former president of Nicaragua's Central Bank in the 1960s, Francisco Lainez, said it well: "The public banks are manipulated by politicians; the private banks by business. Both are manipulated, some for political goals, others for economic goals. The difference is that journalists denounce what happens in public banks, while the private ones are ruled by banking silence, even though the candy is handed out in both banks."

Portfolio concentration, as was pointed out by SIB, concentrates financial risk. But it also reduces operating costs. This, then, will be the financial system's permanent temptation. The current situation of private banks ratifies the thesis: it's not that the poor are bad at paying back loans, but that they aren't allowed to owe.

Is There Willingness But a Lack of Money?

In December 1991 the deposits in the national financial system as a whole were less than credits: 1,069.5 million cordobas against 1,846.1 million. The banks replenished themselves through the rediscounts—the credits from the Central Bank to commercial banks—and foreign concessionary loans. Gradually the situation was reversed. The attractive passive interest rates—what banks pay to depositors—provoked an avalanche of savings. By June 1997 deposits totaled 9,572.4 million córdobas, while credits were only 5,355.7 million.

Experts say that the excess liquidity in the bank is not sustainable indefinitely. Over-liquidity undermines profitability. A bank has different opportunities to distribute its assets—national or foreign bonds, deposits, etc. None are as profitable or as risky as credit concessions. Given that the number of large clients is limited, the excess money will pressure the bank to distribute its credits to small and medium borrowers.

But the caution of bankers has been even more restrictive than the prudential norms of the SIB. The gap between deposits and credits demonstrates this. There are even banks that set aside excess financial cushion as a way to hide profits and lower taxes. The private banks accumulated 79% of their net earnings in the cushion demanded by the SIB during the first semester of 1997. The law suggests the trick: prudential norms fit the bankers like a glove to evade taxes.

Even though rediscounts were eliminated in accord with the first ESAF stipulations, the concessionary funds from multilateral organizations earmarked for small and medium businesses have grown. Through Servicréditos, Interbank distributed funds from the World Bank and the IDB. The IDB representative in Nicaragua mentioned that BAMER was one of its intermediaries. In October 1997 the Central American Bank of Economic Integration (BCIE) and BANCENTRO signed three agreements for a total of $4.7 million earmarked for production and exportation. The IDB promised $5.7 million for credit to small and medium rural enterprises and officialized a pledge of $130 million in financing, in part for credits. The World Bank has offered $7,500 for installation to private banks that open services in rural communities with less than 20,000 inhabitants and another $22,000 for operating costs and concessionary funds to assist small producers. Various banks have applied for these funds. The private banks are having a ball: first place in the top ten of international financial organizations.

It is clear that, in terms of both attracting the public's savings and getting resources from multilateral organizations, the bankers have money. Their excuse is not valid; there is money, what is lacking is willingness.

Private bankers have placed their unloaned funds in the stock market. From 1994 to 1997 their overall credit portfolio went from 60% of total assets to only 45%, while investments in bonds in the stock market went from 7% to 18.5%. Investment in bonds has taken place at the cost of the credit portfolio. It is a sad reality, because the stock market does not attract small investors nor do investors in the stock market have productive goals. Production requires long-term funds, and in the stock market only 10% of the bonds have expirations of over a year.

The bond market is extremely attractive. In it, investments are guaranteed and have a lower operating cost for bankers, though they also have a lower interest rate. To small producers, the stock market is a "different" reality; it's what stands in the way of their lives.

Why Are Interest Rates so High?

Money has a price: the interest rate. If the price is too high, the same thing happens as with any other product; the poor can't have any. Faced with the question of whether interest rates have to be so high, bankers reply in unison that today's circumstances make it necessary:
*Because of the high devaluation rate: interest rates include the sliding devaluation of one cent daily in the national currency since both deposits and loans are indexed to the US dollar.

*Because of the high cost of resources: high passive (savings account) rates are needed to attract resources to a still weak financial system. This need to offer high interest rates to depositors—especially certificates of deposit—limits the ability to offer low active (investment loan) rates.

*Because Nicaraguan banks have a relatively small patrimony compared to other banks in the region and thus their profits are lower.

*Because of high risk levels in the country. Macroeconomic instability, precarious governments, the culture of not repaying, the insufficient legal structure and the low credibility of the exchange rate policy—inflationary trends have a corrosive effect on financial systems—make it more arduous and expensive to attract deposits and thus raise the banks' operating costs.

*Because of low profitability in the private banks, which forces them to maintain a broad gap between active and passive rates, which is called the financial margin. This margin remains high because the banks are small and their operating costs are high in relation to the volume of operations. It is calculated that the level of assets that a bank should have for an optimum scale of operations is $100-200 million. Only three banks are in this range, and they do not surpass it: BAMER, BAC and BANCENTRO.

These bankers' arguments are not entirely satisfactory. They need to be complemented with others. The first of them is the the oligopolic structure of Nicaragua's banks and financial services in general. This is nothing new. In a seminar held at Managua's Central American University, Francisco "El Che" Lainez openly denounced this oligopoly: "Now there is a mixture of financial institutions. Now the oligopolic structure has managed to take over the business—I'll give you credit if you save in my savings institute and buy insurance from my insurance company. And they talk about freedom!"
Over fifteen years ago, when the revolution nationalized the banks, Jaime Wheelock declared: "Here the financial bourgeoisie [which dominated the rest of the economic structure] has been cut out at the roots." Well, time has demonstrated that the financial bourgeoisie is like the salamander's tail: you cut it off and it grows right back.

Who's Who in Private Banking

With a formidable recovery ability, the power groups from the Somoza period, the same ones who ran away aghast at the sound of the Sandinista sandals as well as some who tried to flourish under the regime's shadow, have reconcentrated much of their economic power. The last names of managers and majority shareholders in the private banks have the don of ubiquity. The Montealegres, Lacayos, Teráns, Gurdiáns, Mánticas, Argüellos and Holmanns that dominated the boards of directors and managerial positions of the country's main private banks and related businesses do again now. These groups participate in all areas of the economy—trade, production, communications media and the state apparatus—which gives greater cohesion to their control. These are some of the best known and public oligopolic chains:

Banco Mercantil-La Tribuna-Channel 8-Ministry of Finance (Esteban Duquestrada)

BANCENTRO-La Prensa-the Nejapa, Bolonia and Linda Vista shopping centers-FINARCA-Ministry of the Presidency (Eduardo Montealegre)

BAC-La Prensa-the Pellas clan-San Antonio sugar refinery-National Beer Plant-Flor de Caña rum-Terán Corporation-Didatsa MIL-MILCA bottling plant-Pacific Storage-Julio Martínez, S.A.-Gurdián Agrochemicals-La Colonia Supermarkets.

The power groups that competed against Somoza and were within the Bank of America, BANIC, CAPSA, Caley-Dagnall and FRANCOFIN financial institutions have now reestablished themselves as BAC, BANEXPO—apparently no longer linked to the Pellas clan—BAMER, BANCENTRO and Interbank. To these has been added, around the Bank of Finance, the new group of the "loaded fingers."

"The revolution of opportunities," as Somoza called the 1972 earthquake, was a very brief interruption for these groups, who depended on and were members of the dictatorship. They were Somoza's protected ones, those who went to the National Guard when their employees' strikes heated up, as recorded in the political diary of Pedro Joaquín Chamorro Cardenal, friend of all of them and victim of his political ambivalence.

Although all bankers complain that their colleagues don't put their cards on the table and instead negotiate interest rates with clients in private clandestine meetings, the oligopolic structure does not allow competition. Nothing, not even excess liquidity, obliges them to reduce their active rates in search of clients. Those who control the oligopoly establish rates that receive the name "market prices" and are immediately sacred. Although perhaps they settle on more favorable terms in particular negotiations, only large depositors and borrowers benefit. Small and medium users subsidize these concessions and thus reinforce the unequal distribution of resources. It should be no surprise that BAC has special credit lines to finance "producer friends" with funds captured at 4% from their branches in the Bahamas or in Miami.

Low Profitability in Private Banks?

The second great fallacy in the bankers' argument is low profitability. They justify the large financial margin by that supposed low profitability. In Belgium, the active rate is 7.5% and the passive rate 4%. Nothing like Nicaragua's 18% and 7%. Even though the development of Belgium and Nicaragua is very different, aren't eleven percentage points enough to cover the costs of a bank and generate substantial profits?

To explain what happens, one must return to over-liquidity, excess money, that idle capacity of Nicaraguan banks. José D. Gómez, correspondent for La Prensa, says that "74% of the private banks' own capital is invested in usable goods (28%) and other assets (46%) that do not generate income." He says that if the private banks would put all of their productive assets, excluding the legal reserves, in their loan portfolios and reserve 50% of current money available, the active interest rate could go down by 2.4% annually and their average capital profitability—on the patrimony—would increase. But private banks have not done that. They have chosen to put a small part of their portfolio in small businesses and the larger part in big business, and invest the rest of their assets in speculative operations.

"The bank of the future mobilizes information bytes instead of cash money," said banker and current Minister of the Presidency Eduardo Montealegre, with the result that profitability has not been greater because of excessive caution and lack of appropriate financial technology to attend to small businesses, but because of the choice private banks have made to invest in safe speculative activities. It is true that precipitous credit distributions would be paid for by the entire national financial system. But bankers' caution and their technological limitations are now being paid for by all of Nicaraguan society.

Who are the Bankers Fooling?

Costs are another area used to explain low profitability. The administrative costs of private banks represent up to 36.3% of total income and no less than 95% of interest income on the loan portfolio. How can we explain this, knowing that a good percentage of assets are placed in investments with minimum operating costs? This is terrain where hypothesis reigns.

It is a proven fact that in private banks the members of the boards of directors and the major shareholders also hold management positions, where they receive salaries. The tax imposition may be less onerous if profits are hidden as costs and appear in the form of high salaries since individuals pay lower taxes than legal entities, of travel and entertainment allowances, the contracting of professional services—most partners are lawyers, administrators or economists who sell their services to the banks—and the purchase of other services like building rentals. Thus, what the bankers don't earn as profits they get through other means, with a lower tax burden. Are they fooling the minority shareholders, if there are any? Everyone knows that the lions' share goes to the lions.

Difficult and Costly "Know-How"

There will be much more to talk about in terms of banks and bankers in the wake of BANADES' death. But the major issue is its possible "reincarnation" in the new Peasant Credit Fund, which is supposed to substitute the deceased BANADES and take on the mission that BANADES was never able to fulfill.

The plans for the Fund to distribute money indirectly will avoid some weaknesses that BANADES had, but could provoke others. The most evident problem is the lack of possible intermediaries. Training new ones will be a slow process and will very likely eat into the resources, as once happened to the institutions that today dexterously handle credit technology. These institutions are a solution, but only a short-term one.

Given these limits, part of the money for Fund credits could simply remain frozen outside of Nicaragua, as has happened with other international cooperation funds. Or it could be that the government would go to the private banks, once the obstacles blocking the path between them and small producers are removed.

It will not be easy; private banks have shown themselves to be allergic to small producers and rural areas. They have excess resources, but lack the will and appropriate technology for these sectors. The financial technology or "know-how" needed to evaluate the ability of a small agricultural producer to pay cannot be improvised. Economist and banker Javier Bone recognizes that "it is costly to supervise a producer of corn, sorghum or rice. The banks don't have the elements to do it."
Are the credit inspectors from commercial banks willing to get their fine leather shoes muddy? Can they prepare the peasants, men and women, to evaluate their ability to pay and make follow-up visits? Attending this sector while minimizing risks and costs is part of the know-how. It is not achieved in a day.

A report developed by a consultant to measure the impact of an IDB credit program for small enterprises noted that "one of the most important obstacles to expanding the credit activities of commercial banks to the micro and small businessperson is first the lack of adequate know-how and second the lack of refinancing resources."

The resources exist. There is excess liquidity in the national financial system and many funds from multilateral organizations have been supplied to private and state banks, in concessionary conditions, to attend the small enterprise sector.

But the know-how? The local director of one of the "mini-banks" promoted by Nitlapán, with 0% overdue loans, a mini-bank of the penniless, considers: "We don't think they can automatically do it better just because they are professionals." It's true. Tie and technology do not a banker make. Beyond a technocratic vision, credit is a problem of human relations: investment in people, training of local agents who contribute to management and understand the situation and history of their neighbors. In this the Superintendent isn't wrong: it's difficult to give credit to low-income sectors. There's a reason why private banks fear them and hang on to their excess liquidity.

At Least Three Conditions

Some NGOs that offer credit have now acquired experience in this sector. For example, they accept letters of sale as guarantees and mark the cows offered as collateral with the bank's brand, avoiding troublesome paperwork that can increase costs. Though this practice is not all that heretical and is actually close to financial leasing, it requires user confidence in the institution and vice versa. That confidence also makes it possible for the bank to cut its promotion costs, because users themselves do the publicity.

If the private banks are the ones that end up working with the new Peasant Credit Fund they should dedicate time to learning about the credit record built by the NGOs. The NGOs could transfer clients to the private banks so they can get going more rapidly and efficiently. In such a case, there would have to be three conditions.

First condition: the Peasant Credit Fund would have to pay these NGOs for the costs of creating that credit record, given the economic benefit that it represents to the country. In exchange, the NGOs would become the plows opening the land for credit. Knowing who the best clients are always has a price. As a credit promoter said at a workshop in Somotillo, "Everyone wants to stay with the 'sweetest clients,' but the challenge is also to finance the riskiest."

Second condition: the state should establish an institute where the NGOs and their representatives can participate in designing criteria with which to qualify those who intend to be intermediaries of Fund resources.

Third condition: in cases where the private banks receive Fund resources for small rural producers, they should be subjected to regulations to fulfill the credit lines with minimum profit, since the credit records are being donated. This would be an unusual and impermanent regulation in the country's financial system, but necessary nonetheless. Until now, the SIB has fulfilled its function: taking care of the public's deposits. Why not begin to care for the public even more by giving it access to deposits? Who do we put first: money or people who need money?
If these three conditions are met, perhaps we will begin to achieve a financial system that is no longer geared to telling the poor who ask for loans that they are "shameless."

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