1.  You became interested in rural finance from a young age. Was this for personal reasons?

It had to do with my upbringing. I lived in Costa Rica at a time when banking was run by the State. In 1948, the Costa Rican banks were nationalised, on the grounds that this was necessary to encourage more democratic lending. So, throughout my youth, I had to put up with all the inconvenience of inefficient, bureaucratic banks.

While still a university student in Costa Rica, I wrote a paper where I identified the enormous concentration of the system’s credit portfolio. At that time, just 10% of the borrowers from the supposedly democratizing State-owned banks held 85% of the country’s outstanding credit. I was amazed by the contradiction between intentions and reality. There might have been a political will to democratize access to loans, but lending was enormously concentrated in surprisingly few hands. My undergrad paper measured borrowing in the country and found it was more concentrated than land ownership or the income distribution.  And I learned my first key lesson, which laid the foundations of my professional career: Good intentions are not enough.

The concentration was especially marked in agricultural borrowing, while I had been interested in the issue of poverty from very young, especially in the rural areas, where poverty tends to concentrate. Of all the portfolios, it was lending to farmers that showed the highest concentration. That was when my interest in the impact of policies on rural finance was born.

2.  How is rural microfinance different from other kinds? What are the main problems? What do you think of farmers insurance?

There are two dimensions to this. There is a territorial dimension. Rural living means long distances from urban centres where people are concentrated and there is sufficient market size. It means low population density and high population dispersion. But there is also a sectorial dimension. Farming and activities related to the use of natural resources in general are enormously important in rural life.

These two characteristics set up barriers. First, distance is a tremendous barrier, pushing up transaction costs and making it hard to reach your customers. It is hard to get to know them and it becomes difficult to separate them according to their risk profile and demands. Distance pushes up the cost of monitoring, makes it expensive to visit the clients and to check out the results of their projects.

Second, rural populations are more heterogeneous than other populations. One plastics factory is very much like any other. One farmer and another, even at two-hundred meters distance, are tremendously different… You just have to go round the curve in the road and things change. The farmer on the other side of the hill cannot grow flowers because the sun does not hit his land in the same direction. So information, which is a key determinant of financial transactions, becomes a more significant problem in the case of rural finance.

Third,  being dependent on agriculture means that farmers depend a lot on things beyond their control: weather, nature, plagues, natural disasters… And these events tend to be systemic. They affect all the farmers in the same area at the same time, creating high covariance. This is the biggest problem for a financial institution wanting to work in rural areas. If something goes wrong, it is going to go wrong for all your customers at the same time. You can’t diversify.

So you have to find a tool to tackle this systemic risk. The only tool we have discovered so far has been insurance against catastrophic events. But developing such financial tools is an area still very much in its infancy.  Little experimentation has been undertaken to learn what might be done.  Once this type of insurance exists, rural finance will have made real progress.

 3.  What do you consider to be the causes behind inequality increasing, even as GDP rises in Latin-American countries?

This is a tremendously complex issue, which possibly varies from one country to the next. But I can imagine two key determining factors, among many:

–          The declining quality in education, as it lags behind advances in technology and the information economy, while more complex processes of value generation require human capital with high-level specialisation.  The holders of this human capital (engineers, system designers, software and robotics producers, etc.) can use it to earn high incomes. However, less qualified workers, with less such human capital, are held back by the shortcomings in education systems that have not kept up with the times and do not enable them to improve their productivity or their wages. So the incomes of the highly educated continue to go up while the low-skilled workers, without much education, are stuck where they were. And the gap widens, even among people who depend solely on their work to generate income.

–          At the same time, in some countries there are high legal, regulatory and bureaucratic barriers to moving from the informal economy to the formal economy. This is an issue that could be of great interest for your journal. How much does it cost to get a licence to operate? How much does it cost to get through the red tape? What are the asymmetries between being regulated or unregulated, in the formal or the informal economy, when you factor in taxes, requirements and other charges?  All this leaves a lot of people trapped in the low-productivity informal economy. And these barriers prevent small family businesses becoming small firms that might employ say ten to fifteen workers, simply because it would require them to jump through so many hoops that doing so becomes horrendously expensive. It stops them before they start.

 4. How do you see the medium-term future of the industry? What role will commercial banks and microfinance institutions play? Do you think the growth of this sector will slow down?

It is now fashionable to talk about financial inclusion. I think we should recognise various things here:

First, microfinance is an innovation for producing specific types of financial services, essentially for self-employed workers, family firms, small businesses, etc. It is one way of achieving financial inclusion, but not the only way.

A second observation is about a major paradox. On the one hand, mainly in a large metropolis such as Lima, Bogota or Quito, financial inclusion is substantial and even certain segments of population are over-indebted. On the other hand, in the same countries there are regions where the population is essentially excluded. This coexistence is a very typical phenomenon in developing countries. You have over-borrowing for some and a total absence of institutional access to borrowing for others.

The future is to be found by resolving this paradox. This will entail discovering institutional, regulatory and technological mechanisms to reduce the incidence of over-indebtedness. And, at the same time, there must be a new wave of innovations, to enable us to reach out to where there is no institutional supply of financial services at all yet. Where there is nothing, there will be enormous opportunities for growth.

Perhaps the saddest thing is when the job is botched, when the credit decision is low quality and people are given more credit than they can afford. All they get is an ephemeral, transitory and fragile inclusion. Then, when it ends, they fall into a black hole, even harder to get out from than where they were to start with. They are penalized in credit bureaus, lose their reputation and are unlikely to be granted any further loans.

Who could do what is needed? A diverse range of entities; there is room for different kinds of players: banks, non-bank microfinance institutions, even some NGOs highly specialized in certain segments of the population. Each of them could operate alongside the rest, because they would have competitive advantages operating in some market segments and not in others, and vice versa.

However, we could imagine that commercial banking will continue to have a corporate emphasis, and it will take advantage of new information and communication technologies to develop transactional services, above all payments systems, money transfers, public utility payments, etc. The people who are currently customers of microfinance entities will also have access to these services. Nonetheless, at the end of the day, the banks that are newly trying to enter the microfinance sector with credit services are going to lose the game against the entities that started up doing microfinance, which will have already developed strong relationships with their customers.

Because history matters. Arriving ten years earlier means ten more years of learning, ten more years of getting to know your customers and developing loyalties. You can’t reproduce that from one day to the next. Moreover, the banks’ corporate culture doesn’t allow them to have the patience to enter into this segment for ten years just to see if it might work out. Either they get an immediate payback when they try it or else, as soon as they don’t do so well, they will leave. So I think that for the segment we are talking about (household-businesses, small self-owned firms, production-oriented microenterprises, etc.), the entities that have a microfinance focus and a microfinance technology, those that have cultivated direct relationships with their clients, are the ones that will survive in this segment of the market.

We are clearly entering a new stage in microfinance. There has been a structural discontinuity in what we could call the natural rate of growth in this sector. The first stage was about filling the void, at a time when one could grow very fast. But in any area of life (in physics, biology, markets, etc.) never-ending exponential growth is impossible. In the places where they have been operating (the others are still empty), these entities face a new era of slower growth, which we hope will be more prudent. For the larger entities, with a larger scope of operation, growth opportunities will be in new regions, new kinds of customers, new kinds of products, in a greater range of circumstances, rather than in doing more of the same in the same places that are already saturated.

 5.  Do you think that microfinance institutions should gain scale through consolidation? If so, where especially?

Scale matters a lot, because scale is the source of all kinds of economies. It enables you to dilute overheads, diversify and attempt different kinds of outreach, because you can operate in different locations and avoid the vulnerability of working in places of limited scope. Very local entities are tremendously vulnerable when something goes wrong. Say they are coffee producers in Oaxaca and there is a natural disaster or maybe international coffee prices fall. A cooperative there which only has coffee producers on its books cannot survive.

So, volume of transactions matters, to generate economies of scale.  And geographic outreach matters, to reduce covariance. And portfolio size matters, to diversify over different sectors and diversify across the size of your customers. Scale allows you to bring down costs and reduce risks; and that is good for everyone. Because if having some medium-sized customers in the portfolio enables you to dilute overhead and other fixed costs better, then interest rates can be lower not just for the medium-sized but also for the small customers. Yet, you couldn’t have brought down interest rates if your only customers were small customers.

How do you get scale? There are many ways. It could be through mergers. I am slightly fearful about that. Putting two poorly performing small entities together to make a larger one does not necessarily make for a good entity. So mergers for the sake of mergers cannot be a panacea. But it is possible for an entity with sufficient capacity and clout to transform entities whose weaknesses have more to do with their size and limited capacity to raise debt, so what they are lacking is capital. There, in a takeover, merger or suchlike tone may take advantage of assets such as the local knowledge or the social and human capital that the weaker entity might have. Because, although it is possible that a given entity might enter into the business on its own, simply because it is bigger and has sufficient capitalisation to do so, in practice local human capital and knowledge are difficult assets to reproduce immediately. So you can go down different routes. It depends on the country, on the entities and on the market structure.

There are two issues that we should perhaps mention. What is this market consolidation going to be like? Well, that depends on the regulatory framework: the rules for getting a license to operate or for exiting, the requirements the entities must comply with. What should really happen is that the prudential regulator says, “Here is the market structure I want to have within five years or ten years.” First you have to visualise what you want. “I want to have a financial system with robust, low-cost entities that offer access to different customer profiles, etc.” Then you must ask “What regulatory framework must I adopt to reach this ideal structure I am proposing?” It is not a matter of creating ad hoc rules and putting out fires. The regulator must have a long-term view.

One of the things that the Peruvian regulator mentioned in Iquitos and I mentioned in my talk in Madrid is that “entities are lacking a long-term vision.” But the regulator must also have a long-term vision. Indeed, it must have a longer-term vision, given that the regulator has to understand how the whole system needs to evolve over time. I think that in this long-term vision, it is more useful to society if a structure is developed with a reasonably small number of robust entities than with a multitude of fragile, perishable ones. The “reasonably small number” does not worry me in terms of competition, because I have learnt, above all in the financial market, that competition is more ferocious when it is between four or five giants than when it is between two-hundred midgets. What you need is a competition-friendly environment.

 6.  You know the Bolivian microfinance system very well. What are its specific traits?

Bolivia is the clearest example of how microfinance can become a substantial component in the financial system and a driving force of financial development in a low-income country with incomplete institutions. Too often we think of microfinance just as a tool for alleviating poverty or some such thing. But Bolivia is an example of how microfinance can also be important for the financial development of a country, for the evolution of the entire financial system.

Nowadays the loan  portfolio of the microfinance institutions is substantially more than one third of total lending in the entire Bolivian financial system. Three quarters, nearly four fifths of the customers of any type of institution (banks, mutuals, cooperatives, etc) are customers of a microfinance institution. The microfinance institutions are close to accounting for 20% of the total Bolivian Domestic Product. These data show how much microfinance matters as finance, and how important it can be in the evolution of the financial system.

This was reached by a felicitous convergence of three sets of circumstances:

–          A tremendously innovative environment with market freedom and a great diversity of entities (individual credit, solidarity group loans, village banking) with different orientations but an enormous emphasis on innovation, where the quality of the customer relationship is at a premium as the central focus of innovation.

–          A particularly well-suited specialized regulatory environment, which emerged from a continuing conversation and a dialectic process between the regulator and the market operators where, for example, Bancosol proposed doing something different, and the regulator said, “OK, let’s see what happens.” That way, the regulator learned and then formalised the new way of doing things, and thus the conversation unfolded. While reality was one step ahead, it was followed closely by the regulator, refining procedures and interacting with the players in the market.

–          A non-opportunistic governance structure where, unlike banks and State-run financial institutions, the microfinance entities did not expect the government to do them any favours. They had no expectations of being bailed out if things went bad. And as there was no possibility of a bail-out, they were responsible, prudent. They took care and did not behave opportunistically (like the banks did, leading to the world-wide crisis). They did not expect anything from the government, and the government did not get involved either (not until last year). So there has been a process in which the microfinance institutions blossomed into the dominant sector of the financial system, thanks to the State refraining from imposing guidelines of one kind or another, capping interest rates or requiring portfolio quotas, and thanks to an environment of ultra-low inflation and reasonable economic growth.

Perhaps I should add something else. Why is Bolivia different from other microfinance experiments? Because, right from the outset, Bolivia was an enormous laboratory. There was nobody saying “Microfinance can only be done Grameen style or else it’s not microfinance.” No. There were credit institutions lending to individuals, there were group-credit institutions with joint liability contracts, village-banking institutions… All of them, right from the start, were trying to find solutions from their very different perspectives and with connections to very diverse international groups.

Bolivia was the arena on which the battle to discover best practices was fought. So, Accion International (the godmother to Bancosol) said, “No, what really works is solidarity groups.” And IPC from Germany, with Andes Procredit, said, “No, what you have to do is individual loans”. And Pro Mujer said, “No, let’s do village banking.” And, there in Bolivia, all these visions went into battle to see which one could outsmart the others. And, in this process, they made an all-out effort to do things well, but also learned from their peers. There were tremendous externalities, collective learning. Employees from one institution went to work at another. Know-how was spread around and mixed between them and a kind of cross-fertilisation took place that was enormously beneficial. In the end, the best versions of each model developed in Bolivia, with individual lenders, such as FIE, and village-banking lenders, such as CRECER, both of which have won several international awards for being the best in their class.

 7.  What are the main points that microfinance legislation should cover for sustainable development of the sector? 

The regulator must understand that microfinance is different. But the difference that matters from the regulatory viewpoint is not that of good intentions. It is not that a different regulation is needed because the customers are poor or because they are women. Rather, it needs a different kind of regulation because the risk profile is different and because the credit methodology used to analyse this risk profile is different from the one that traditional banking applies. It the regulator does not realise that it is different, and tries to apply the same rules to both traditional banking and microfinance, as if they were the same thing, this will never be efficient. So that’s where it has to start.

Second, the regulator needs to recognise that the costs of reaching the previously unbanked population are higher and behave differently from the costs of commercial banking. Consequently, it should not interfere in price-formation policies, because these must reflect the cost differences and make sure the institutions are sustainable. And also, when distinguishing between risks, the regulator must clearly understand that consumer loans for wage-earners have a completely different risk profile from credit for self-employed customers working in a productive activity rather than drawing a wage. It you treat consumer lending the same way as microfinance, you kill microfinance.

There is definitely a lot of debate right now about the need to protect customers. It is obvious that if microfinance is a more customer-oriented business, on the grounds of minimal respect, there must be transparency and fair play towards the customers.

8. What role do you think multilateral entities and social-responsibility funds should play?

A negative role and a positive role… or what we could call a do-nothing role. Perhaps what is most important is to ensure an even playing field. Allowing a donor or an organisation to come along and give a million dollars to an NGO and say “Here’s your million dollars to give credit at 2% interest rates, and if people can’t pay, it doesn’t matter if you don’t recover the loan and everything else”, and then allowing the NGO to survive and expand in a market where it is going to destroy the culture of repayment, where it is going to distort notions of contract, alter price structures, etc. well, that is destroying the even playing field. That kind of intervention is harmful to the ones that are doing things properly, who are really working well. It creates unfair competition, which is tremendously damaging to the sector. Many donors, many governments have these outdated notions, this kind of paternalism that makes them fund entities that are not going to survive.

Part of the consolidation process we were talking about before has to do with the need for an exit mechanism, so that entities that aren’t doing their job properly and are doing damage can disappear.

On the positive side, there are two things the donors and funding agencies can do. One is to contribute to the creation of public goods and, very fundamentally, to the formation of human capital for the sector: grants, courses, internships, exchanges, etc. And contribute to the development of new technology, promoting pilot projects, the design of new products in their experimental stages and suchlike, to promote technological change in the sector. In the case of the investment funds, their role is to complement the entity’s resources with funding in a responsible manner. And that means not just putting up money, but really taking responsibility for the entity’s decisions and performance; behaving like a real owner. You can’t just let someone put money into the fund for reasons of social responsibility or whatever, and then not oversee the entity or contribute to its management. You have to bring in know-how, new ways of seeing things, other ideas, professional management, along with the funds.

 9.  How important is corporate governance for the sector’s transparency and restructuring?

An entity’s performance, how much outreach they have, who they service, the quality of their services, how efficient they are, will very much depend on the decisions taken by all the stakeholders: credit officers, branch managers, regional directors, the risk unit, etc. And these decisions are not taken in a vacuum. Rather, they will be a response to the incentives structure, which says what consequences there will be for me, for the others, for our mission, if I behave in one way or another.

The key role of corporate governance is to appropriately and clearly define the incentives, reward structure. Some rewards will be monetary and others not, such as the possibility to grow professionally, job stability, being given tasks that you find stimulating, and suchlike. A structure where doing things well is rewarded and doing things badly is punished one way or another. But what is to be done must be clearly understood. Designing this kind of incentives structure is not a trivial endeavour, because you need insight into what drives people, what motivates them to do things well.

 10.  As a trustee in our Foundation, and someone who knows the microfinance institutions making up our group, what do you think is the hallmark Grupo Microfinanzas BBVA? What makes us different from the rest of the microfinance institutions or groups currently operating in this world?

I think two inputs into the process make us different and, as a consequence, the results we get.  One is the quality of the Foundation staff, both in the Madrid Foundation and in each of the entities. I go to the Dominican Republic; I go to Colombia; I go to Peru; I go to Chile… and wherever I go I am amazed at how special the people there are. They have a real integrity, real quality as human beings. I am not only impressed by their professional skills and abilities, but by their commitment, their charisma. You really feel that charisma throughout the Foundation.

The second difference is having found a formula to combine local knowledge, experience and reputation in one particular field with things that are harder to acquire without scale: systems, control mechanisms, tools, etc, coming from the expertise in the headquarters. Despite all the tremendous difficulties involved, the Foundation has managed to bring together both these facets.

The consequence of this has been rapid expansion, prestigious award-winning operations  and being able to offer customers quality service with an eye to the future, a notion that coming into a relationship with our entities is not a one-off exercise but something that looks ahead to the longer term. It is a bit giving our customers a sound view of their future with the Foundation institutions. Other entities have this to different degrees, but all in all, with our operation in Latin America, this is the group that has it the most at present.

 11.  You have published masses of papers, reports and books. What would you like to write now?

There is a subject that is definitely applicable to finance, but applies to economic policy in general and even to people’s lives, and that is the importance of history. And how, although it is important, we find it so hard to learn from it, and so repeatedly commit the same mistakes.

Latin-American governments had capped interest rates, imposed portfolios quotas, engaged in inflationary policies and other forms of financial repression, at least until the end of the Seventies. The consequences were disastrous and reform was inevitable. The stranglehold was loosened, allowing the market to breathe.  But now, three decades later, the world has forgotten the lessons it had learnt and is trying to do the same as it used to do, using repression again. Why do they never learn? Especially the policy makers, why can’t they learn the lessons of history? I would like to illustrate this with some examples from finance and microfinance.

 12.  What is the most pleasant moment in your day?

The sunset. There are two dimensions to this. I love dusk, when a palette of colours is combined with a feeling of peace and serenity. It is a moment each day when one says, “How marvellous, another day gone by in which I have done things, embraced someone, stretched out my hand…”

13.  Tell us something that you really like, apart from research and writing.

I like a whole bunch of things, but there are two things I am especially passionate about. I love Nature, and when I have the time and the opportunity I go out hiking in the mountains or along the beach, just to walk and observe Nature. But I am also passionate about art. I love all kinds of music, visiting museums, and am a movie-addict.

 14.  Do you get on well with lawyers? Any stories you could tell us?

I have a surprise for you: I am a lawyer! My grandfather and my father were lawyers before me. Even as a child, my father used to sit me down next to him and discuss his cases, telling me about the litigation he had underway, the contracts he had drawn up… From very young, I helped him with documents, you know, like writing up deeds in a protocol or whatever.

I studied law and when I graduated, I got a British Council scholarship to go to London to do my Master’s degree. After that I never went back to practice law professionally. But my legal training has been enormously useful for learning how to debate, how to organise arguments, how to think about things within a logical structure… So I am very happy to be a non-practicing lawyer with a legal training.

 15.  If you hadn’t been a teacher, researcher and writer, what would you have liked to be?

I would have liked to be everything, but if I had to choose just one: then an architect. I would have liked to be an architect who would have been especially skilled in finding equilibria between what comes from Nature and what is human, able to design spaces where Nature and our humanity could meet in harmony.

16.  A final confession: tell us something you have not yet done and would like to do.

Write a novel that had nothing to do with economics. A novel on the multiplicity and complexity of human relations; a novel in which the characters have more than one relationship and all of them are highly complex.

17.  What character from history would you like to have known?

I could think of three, for different reasons and at different levels:

–          Jesus. Regardless of his divinity, because he was the human being who most transformed the way human beings see others.

–          Leonardo da Vinci. Because of his tremendous imagination, his capacity to imagine multiple worlds.

–          Nelson Mandela. He is a recent, contemporary example of the power of forgiveness

On 12th March 2014, the European Parliament adopted the text proposed by the LIBE Committee Civil Liberties, Justice & Home Affairs) giving the go-ahead to the reform of the European Data Protection Framework. All it requires now is approval from the Council for the new regulation to replace the prevailing directive 95/46 (dating back to 1995).

The draft includes the Regulations as such, plus a directive of minimums, which will be applicable to personal data processed in the framework of police and judicial cooperation.

The reform is aimed at modernising European legislation on data protection in response to the latest communication and technology systems, establishing new control mechanisms and grievance procedures for data processing, as well as the standardisation of the currently inconsistent patchwork of laws in different member states.

The proposals have been highly controversial, eliciting criticism from different sectors, but especially from business associations, due to the proliferation of regulations the reform would introduce, which could overload companies with checks and controls, and expose them to the risk of extremely tough fines.

The main changes contained in the proposal include:

• Apointment of Data Protection Officers throughout Europe
• Privacy by design and privacy by default requirements for products and services. (The aim here is to protect product users’ privacy with a set of measures to provide greater control to stakeholders on the dissemination of their own data and the way it is processed)
• Privacy impact assessments. (Data controllers and processers are obliged to assess the impact of data protection)
• Principal of accountability. (The company assumes overall liability for any data process, whether done in-house or outsourced to a third party).
•  Obligation to report incidents. (Notification must be submitted to the Control Authority and the parties affected by the incident).
• Audits and controls on compliance.
• Fines: up to €100m or 5% of global annual turnover. (Discretionary fines disappear).

European Data Protection Seal. (This is awarded as a guarantee that personal data are processed in compliance with EU standards)

Developing economies need to encourage greater domestic production and entrepreneurship within the country in order to reduce poverty indexes. Since the beginning of the last century, microfinance has proven itself to be the most efficient way of channeling financial resources to the parts of the population excluded from formal banking services: enterprising people who can set up and manage micro enterprises.

In Latin America and the Caribbean, microfinance has been the most efficient, most sustainable way of helping people escape the poverty trap¹. Nonetheless, if we wish to continue to combat poverty through economic development driven by microfinance, we need a competitive regulatory and supervisory environment that helps entities servicing the productive activities of the unbanked population to grow responsibly.

Regulating an economic sector only makes sense if the regulations take its particular characteristics into account. Each industry and each market segment will have peculiarities that require made-to-measure responses from the regulator.  If regulation is slapped on without sensitivity towards the differences between the composite parts of the market, it can end up exerting far too much pressure on some and insufficient pressure on others.

Finance is a complex industry. It requires different standards for the different types of financial services that it provides. An obvious example is retail banking and investment banking. These are not comparable, since retail banking takes the public’s deposits and investment banking does not. So although there may be grounds for regulating investment banking², the requirements regarding capital, provisions and reserves cannot be the same as those applied to retail banking.

The microfinance industry provides small sums of money to people with low incomes and entrepreneurs wishing to develop small enterprises. Its scope of operation is highly specific. Consequently, the microfinance has to work in a highly specific way too.

Microcredits are at the very heart of the microfinance industry. They are targeted at low-income brackets of the population (often operating in the informal sector or underemployed) and to people wanting to establish small businesses. In general, the customers of microfinance entities are concentrated in specific geographical areas, which tend to be eminently rural or still underdeveloped) or specific social strata (the least well-off. Due to their geographical location, their social characteristics or the size of their businesses, the potential demand for microcredit tends to come from those encountering difficulties in obtaining finance from retail banks. Microfinance involves small amounts of money, with relatively short repayment terms and no liquid collateral.

Analyzing micro-credit risk is a complex, decentralized activity, because many microfinance customers live in rural or semi-rural areas, do not have a credit history or can not even show proof of their income, which is likely to come from undocumented sources. Their credit risk analysis has to largely rely on the work done by commercial agents who can go out and visit the customers at their homes or workplaces and help them fill in the forms needed to give them access to funding.

The regulation and supervision of microfinance entities requires in-depth knowledge of the business model that such entities employ. The Microfinance Workstream of the Basel Committee on Banking Supervision³ has specifically recognised this. If regulators do not have the necessary insight into how the microfinance system works, their regulatory policies can only be based on their experience of traditional banking. This could lead them to impose excessive costs on the microfinance industry, discouraging investment in this vital financial sector.

Certain aspects of the financial industry are considered to require an approach that can focus on the particular issues of the entities involved in providing microfinance. The requirements regarding aspects such as capital and liquidity requirements, the assessment of credit risk, operational risk, provisions and reserves are highly specific to this industry.

Of all these aspects, perhaps the most relevant are those relating to credit risk and operational risk.

In the microfinance business, the customer profile, product design, credit placement methodologies and, in general, its core business model, have to be based on the existence of very specific risks. The regulator must understand the specificities and know how to manage the tools used for their identification and quantification, and not be content to simply apply the regulatory tools conceived for traditional retail banking.  For example, although the regulator must require the microfinance entities to submit written credit policies, these must contain some flexibility to deal with the real situation of the market segments they are meant to be targeting.  Decentralised credit analysis, decentralised pay-out, the use of alternative collateral instruments, and group loans are all likely to form part of these policies as standard practices that although unusual in traditional banking, have to be commonplace in the microfinance business model by dint of its very nature.

Likewise, regulatory requirements on contract documentation must take into account that the bounded-rationality problems besetting retail banks are enormously accentuated in the microfinance segment. Thus it makes no sense to oblige microfinance entities to disclose sophisticated information or include clauses in their contracts that have nothing to do with the products being offered to their customers.

With regard to operational risk, regulation must acknowledge that the tendencies and practices in the microfinance sector differ significantly from those of retail banking. Different regulation is required to adapt to operational and internal-control policies tailored to a highly decentralised process for granting microcredit. It should also take into account that the operational risk associated to commercial advisors is the microfinance entities’ biggest single risk, as these advisors’ business is quite different from those of the staff selling traditional banking products. Similarly, given the high degree of decentralisation and deconcentration of the segment serviced, the regulations must facilitate the use of new information technologies to enforce regulatory standards, such as remote supervision systems (pre- and post-disbursement), control systems and reporting systems.

Right from the outset, microfinance has enabled certain vulnerable sectors of the population world-wide to escape from the indignity of poverty. Without the microfinance industry, millions of people all over the Earth would simply not have the possibility to access funding. Of course regulation is necessary, as the microfinance entities take funds from the public.  However, to apply the same qualitative and quantitative rules to these entities as are applied to the retail banks may have a seriously adverse impact on the growth of this financial sector. It can generate the imposition of inefficient compliance costs if it fails to take into account the business model or the size of the enterprise. It could also lead to high concentration in the sector, as the smaller entities, unable to bear the burden of such compliance costs, simply give up the struggle.

There is thus a clear-cut argument in favour of the need for adaptation, so that each jurisdiction has a regulatory and supervisory framework in keeping with the characteristics of the sector, promoting its development by ensuring a correctly targeted risk-management, with robust corporate governance and transparency in microfinance institutions.

Just as regulators have decided to regulate investment banking in the light of its specific characteristics, they must also adopt a specific set of regulations for microfinance. The regulatory framework should be informed by the real business model employed by the microfinance sector, so that it can be tailored to the size and type of credit transactions actually required.

In the BBVA Microfinance Foundation Group, we are working towards a better future for the people who are at present most economically disadvantaged. We aim to sow wealth by encouraging the growth of enterprises conceived by people currently excluded from the formal economy. We are convinced that microfinance is a force that can drive forward a society’s development. Thus, within the framework of our mission, we want this publication to benefit all the stakeholders in this industry. We aim to facilitate the information required to reach informed decisions that can encourage the healthy growth of this sector and provide key assistance in the fight against poverty. Accordingly, this issue of Progreso discusses the recent Microcredit Regulation approved by the Monetary Board of the Dominican Republic as well as other legislation enacted in the different jurisdictions of Latin America and relevant for the microfinance industry.

The Ministry of Finance & Public Credit in Colombia published a decree on 17th December 2014, creating a new line of credit for low amounts, called “el crédito de consumo de bajo monto”.

Under this decree, such low-volume consumer credit is granted exclusively to finance individuals. The maximum term will be 36 months, and the maximum amount of the transaction will be two minimum monthly wages. Under the current legislation at 2014 prices, this would be COP 616,000; approximately US$ 268.

The specifications for this line of credit are: i) It cannot be a rolling credit line; ii) It cannot be offered over credit cards; iii) The lender must first verify that the customer does not have an outstanding debt balance of more than two monthly minimum wages; and iv) The lender must define maximum repayment terms and instalment frequencies.

The regulation does not establish any more than a very general framework for the approval of such lines of credit. It leaves this to the discretion of the lender. Colombia is expecting the financial watchdog, Superintendencia Financiera, to put out some standards for them, especially with respect to how the risk on such credit should be managed.

Over-indebtedness is a shadow that always hangs over the microfinance industry, especially when it is providing lines of credit for consumers without any specific purpose. This decree was intended to expressly establish the requirement that lenders must first check the borrowers’ overall borrowing balance before allowing them to make any drawdown against these low-volume lines of consumer credit. In order to be able to get a precise estimate of such balances, the financial institutions must establish a methodology that will take into account the payment obligations that the potential borrower currently has with the financial sector and other sectors. For this, they will have to use the information filed at the financial information central offices for such purpose.

The decree is trying to regulate a kind of credit that already has some antecedents in mechanisms for offering small amounts of credit, for example in order to buy household appliances, which were settled in the accounts of some public services or through department store cards. Recognising such practices, it has expressly highlighted the importance of including a way of avoiding over-indebtedness so that borrowers cannot accumulate more small debts than they can afford.

As the first issue of this publication went to press, the Congress in Colombia held the final reading of the Bill 181-S/2014, debating the final details regarding Specialist Electronic Payment and Deposit Companies, known as Sociedades Especializadas en Depósitos y Pagos Electrónicos or SEDPES. On 21st October 2014 it passed Act 1735/ 2014, setting forth measures to promote access to transactional financial services and establish other provisions.

This act creates the figure of SEDPES, defining them as financial institutions with the exclusive mission of: i) Raising funds through electronic deposits; ii) Making payments and transfers; iii) Taking loans inside and outside the country for the specific purpose of funding their transactions; and iv) Sending and receiving  money orders.

Some significant changes were brought into the text as it went through parliament, although the bill maintained its core purpose of creating new financial service companies with an exclusive mission, whose constitution would be subject to less demanding requirements.

The act makes it clear that SEDPES are not allowed to grant any kind of credit. They must comply with all provisions applicable to the entities under the oversight of the Superintendencia Financiera, with respect to money laundering and the financing of terrorism.

The SEDPES may be constituted by any individual or organisation, including operators of postal services and providers of telecommunication services and networks, as well as public home services, following verification of certain conditions. The act incorporates the possibility of financial-service companies holding an interest in SEDPES’ equity. It includes provisions empowering SEDPES to provide their financial services through correspondent institutions. And finally, recognising that a large percentage of the users of such entities will be of limited resources, it establishes that the transactions carried out in SEDPES’ deposits will be exempted from the tax on financial movements¹.

The final version of the bill tackles the issue of data protection and processing, establishing that a SEDPE may exchange data-base information within its group holding.

In summary, several aspects of importance came up during the parliamentary debate. Those mentioned were timely inclusions to achieve a more suitable regulatory framework for these new types of entities.

Following in the footsteps of countries such as Chile (Act 20555); Mexico (Act on the transparency and regulation of financial services); Peru (Act 28587), on 26th December 2014 the Colombian Congress approved Act 1748/2014, establishing the obligation for financial institutions under the oversight of the Colombian financial supervisor, Superintendencia Financiera de Colombia, to inform their customers not just of the interest rate effectively paid or collected, but also, where the nature of the product or service permits, the Total Unified Value (valor total unificado or VTU) for all the items that the customer actually pays or receives on their loans and deposits. The new regulation also makes it mandatory for these institutions to provide customers with a VTU projection before they sign a contract, where appropriate to the product or service being arranged, so that they know in advance how much they will be effectively paying or earning on their money.

VTU will be the consolidated value of all the items linked to the financial product or service. This will include, amongst other aspects, interest payments, insurance premiums, charges, contributions, expenses, fees, taxes, etc.

The value must be expressed as an effective annual percentage for the expected term of the product, and as an absolute figure in Colombian pesos. It must be given the same publicity as the interest rate related to the product or service being offered.

Apart from this, the act also includes provisions regarding financial services provided by the Pension Fund Managers working under the individual savings regulations.

It is important to note that within no more than 90 days after the enactment of the law, the Colombian government will have to regulate the form and periodicity with which the entities under the supervisor’s oversight must present the information. At the moment there is much debate regarding the financial methodology by which customers and potential customers will be presented with the VTU. The entities will be forced to introduce significant changes not just in the financial methodology they use to report their products’ yields and costs, with the impact this will have on their IT systems, but also the way they market their offerings, since it is not advisable to overload potential consumers with information they do not really need, use or understand. It would be positive if all financial operators, and not just those within the remit of the financial supervisor, were obliged to provide the price of the products they offer in the manner established by this act. This would not only improve the probability of the impact that this legislation seeks actually materialising, but would also avoid regulatory arbitrage between unregulated and regulated operators.

Last November, the Legislative Assembly of Costa Rica adopted Act 9274, ovehauling the earlier Act 8634 regulating what is known as the “Banking System for Development” (“Sistema de Banca para el Desarrollo”). The main objective of the reform is to encourage more funding for feasible, profitable projects, in line with the country’s development model.

The act includes definitions of the system’s goals, its beneficiaries, and its regulatory supervisors (the Consejo Rector and the Technical Secretariat).  It also identifies three sources of funding for the system:

• Fideicomiso Nacional para el Desarrollo, administered by a public bank following instructions from the Consejo Rector.
• Fondo de Financiamiento para el Desarrollo, a fund for financing development. Each bank must have its own fund, administered by the banks themselves.
• Fondo de Crédito para el Desarrollo, a fund for providing development credit. Set up with contributions from all the Costa-Rican banks, it is administered by a public bank (more specifications laid down in the law’s subsequent implementing regulations). The Consejo Rector will indicate to private-sector banks what percentage they must transfer to the administering bank by way of contributions to this fund.

Previously, the legislation did not specifically regulate the microcredit industry, so what is new in this law is its explicit recognition of microcredit’s importance for inclusion and development.

The act also deals with the regulation of the following aspects:

• It defines microcredit borrowers as  subject to the regulations of the Banking System for Development;
• Projects funded by microfinancial entities through microcredit will be given priority treatment.
• It encourages the simplification of information requirements in credit dossiers.

It establishes schemes specifically to help small and micro businesses to flourish: the special fund for the development of MSMEs (Fodemipyme) and a support programme for SMEs (Propyme), to finance activities promoting and improving management and entrepreneurial skills. It also obliges the National Apprenticeship Institute (Instituto Nacional de Aprendizaje) to contribute 15% of its budget to financial-education programmes providing technical assistance and training and skill-building programmes.

Costa Rica’s government is making an outstanding effort to promote a framework for robust growth of the microfinance industry by strengthening the Banking for Development System. In the future, it should consider giving publicly-run banks a lower profile in order to leave room for more active participation from the private sector. This would generate greater efficiencies and benefit from best practices in other countries of the region.

In order to promote transparency in microfinance transactions, on 26th May 2014 the National Assembly of Nicaragua approved a new regulation, “Norma sobre Transparencia en las operaciones de Microfinanzas” which repealed the regulation on information transparency from the previous year, “Norma sobre Transparencia de la Información”, 2nd August 2013.

The new legislation firstly regulates the content, scope, dissemination and delivery of contracts signed with Intermediary Financial Institutions, to guarantee their transparency and clarity and avoid any clauses that could be damaging to users’ interests. Secondly, it establishes the means for calculating and disseminating the information on rates, fees and expenses charged to borrowers.

Although it does not bring about any substantial modifications with respect to the regulation it repeals, it considerably broadens the range of protection given to people using microfinance services.

Specifically, it imposes more stringent rules on minimum conditions and content that must be stipulated in contracts, adding nominal interest rates and the requirement that the contract be written in the customer’s native language or tongue when financial institutions are located in autonomous regions. It also forbids changes in the current interest rate if not expressly agreed beforehand as a variable.

The range of infractions classified as sanctionable have also been expanded. Some examples of what are now minor infractions: not handing over proof that the policy includes the customer under collective insurance cover and not providing the public with a credit simulation. And any action that may prevent customers from repaying their loan with the intention of pushing them into arrears is now typified as a serious infraction.

Finally, it introduces an obligation for microcredit intermediaries to organise financial education campaigns to inform users about the concept and aim of the effective annual cost rate, known as the TCEA (tasa de costo efectivo anual) and establish means to disseminate these.

The new regulation takes a decisive step forward in establishing a specific regulation for the microfinance sector, which had been badly hit by the economic recession as well as the political instability besetting the country between 2008 and 2011 (the “no pago” movement encouraging non-payment).

Over the last three years a comprehensive package of regulations has been enacted specifically for microcredit, and a specific regulator set up to supervise the sector. This demonstrates the existence of an environment that is propitious for further development of the microfinance industry.

Executive Decree 947, 5th December 2014, reorganises the Financial Analysis Unit for the Prevention of Money Laundering and Terrorist Financing, in order to align it with international standards. These include the establishment of national financial-intelligence units to receive and analyse reports on suspicious transactions.

The decree establishes the Financial Analysis Unit (Unidad de Analysis Financiera or UAF) as a state security body, under the umbrella of the Ministry of the Presidency. The amendments to its duties are mostly related more to their form than their content. These duties include:

• Providing Financial Intelligence Report to the public administration when an investigation should be started. This used to be the duty of the National Public Prosecutor’s Office.
•  Carrying out strategic analyses to determine patterns, risks and types of behaviour related to money laundering. This must be shared with the supervision and control bodies, the public administration and the national police.
• Keep statistics on movements of cash and quasi-cash and on suspicious transactions.
• Organisation and conservation of the files obtained in the performance of its duties.
• Represent the state at the Financial Action Group and assist the financial and non-financial regulators.
• Share financial intelligence information with similar security bodies abroad is maintained. The decree now adds that information may also be shared with jurisdictions that do not have specific agreements with Panama, provided they belong to the Egmont Group.

The regulation is focused on restructuring the administrative management of the UAF. It includes the requirements that the Director and Deputy Director must meet to qualify them for their positions, and some modification to their duties. It establishes that the unit must work closely with the High-Level Presidential Committee for the Prevention of Money Laundering and Terrorist Financing and tasks it with the actions agreed by the international bodies to which Panama belongs.

Previously this Committee only acted as an advisory service for the Republic’s president. It was reorganised under Executive Decree 948, 5th December 2014.

Having a legal framework in line with international standards strengthens the financial sector. It helps to improve the country’s image and performance with respect to preventing money laundering and the financing of terrorism. It should keep Panama off the list of non-cooperative jurisdictions.

Last 11th September 2014, the Banking, Insurance and Pension Fund Supervisor, Superintendencia de Banca, Seguros y AFP´s, adopted Circular G-176-2014 on Customer Care Services, in order to have tools enabling greater control over the financial-customer care service, which was then amended on 31st December that same year. The main obligations that the Circular establishes for financial institutions include:

1. Implementation of manuals for queries, complaints and information requests;
2.  Quarterly reporting on complaint performance;
3.  Dissemination of statistical data on the website regarding complaints most frequently presented by users;
4. Filing of quarterly statistical data with the supervisor, SBS, regarding complaints, to presented within fifteen          days after the end of each natural quarter; and,
5.  Preparation of an annual training plan for the staff dealing with the public’s complaints and/or queries.

These obligations will impose higher costs on the financial institutions, while the benefit for the users is not especially clear, as the reporting required of the institutions is mainly intended for the regulator. The information is statistical in nature, leading some to question just how helpful it will really be to users, who are usually more concerned about the non-statistical aspects of their finance.

Martín Naranjo

The Microcredit Regulations approved by the Monetary Board of the Dominican Republic in August 2014 were an important step forward for the microfinance industry in the region. The document was drawn up following a broad-ranging consultation with the country’s financial authorities and financial institutions, as well as multilateral organisations and other expert bodies and individuals. It reflects local and international expertise and best practices, synthesising them into a set of regulations well suited to the industry´s objectives.

The regulations clearly define the specifications, limits, requirements and responsibilities relating to microcredit. They also give detailed criteria for the assessment and classification of borrowers’ eligibility and the risk categories and provisions associated to such loans. They also detail the mechanisms for implementing the internal models for managing risk on the microcredit portfolios.

The regulations define a microcredit as credit that is: (i) requested by persons with their own small-scale business or activity producing revenues or invoicing up to RD$6m (US$136k) a year; (ii) intended to fund production, marketing or service activities; and (iii) whose principal source of repayment is the proceeds from the sales and revenues generated by such activities. In order for a loan to be considered a microcredit, it must also meet other specifications: (iv) the term should be 1 year or, exceptionally, 3 years; (v) the instalments should be paid every 30 days or less; and (vi) the borrower’s consolidated debt should not be more than 40 minimum wages.

The regulations of most South-American countries run along similar lines. Practically all of them define microfinance as a way of funding production, marketing or service activities. This is the case in Argentina, Chile, Colombia and Peru. It is also usual to limit the total amount of consolidated debt, although the limits vary. They are set at US$50k in Panama; 120 minimum monthly wages in Colombia (~US$35k) and ARS60k (~US$7k) in Argentina; while in Peru the limits are PEN20k (~US$6.7k) for micro enterprises and PEN300k (~US$100k) for small enterprises. Panama or Peru do not specify any definition of borrowers. In Argentina, the borrower’s total assets are limited to a total of 50 basic baskets; in Chile the borrower must be classified as among the 50% most vulnerable in the total population. And in Colombia, micro enterprises, small enterprises and medium enterprises are defined according to the number of workers: 10, 50 and 200, respectively; and by the value of their total assets: 500m 5k and 30k minimum monthly wages, respectively. (The minimum wage is defined in the prevailing legislation).

It is important to bear in mind that any definition of microcredit has the unenviable task of categorising a heterogeneous, constantly changing sector. A legal definition, or even just a working definition, must somehow manage at the same time to be sufficiently broad and sufficiently restrictive. Broad, so that it will not exclude micro enterprises, and restrictive in order not to include sectors that fall outside the scope of such regulation.

It makes sense for regulators to opt for simplicity, breadth and flexibility. They must recognise that the costs of unnecessary exclusion tend to be greater than the costs of misguided inclusion. Moreover, the costs of compliance and supervision increase in parallel to the complexity of the regulation; and a straitjacket can introduce discontinuities that have real effects on the dynamics of wealth creation among the population that can benefit from microfinance. Obliging the microcredit borrowers to comply with requirements regarding their income, total assets and consolidated debt, and demanding that the credit term, rates and instalments meet specifications, could bring in constraints which, if applied across the board, would establish a complexity that made compliance more difficult and, above all, the job of the banking supervisors extremely arduous.

For example, verifying consolidated debt imposes a burden on the supervisor and on the industry as a whole. They must both coordinate their information on borrowers and manage it in a suitable manner. This will become more difficult, there are delays in disseminating the consolidated information. And apart from debt, on the income side, verifying the revenues of micro enterprises also entails significant extra work for the supervisor, which will have to validate the methodology used to report income in somewhat informal business settings. In order to have a regulation that can be enforced efficiently and transparently, the supervisor must tailor supervision procedures to focus on how suitable the methodologies are, and the capacity of intermediaries to successfully use and control the methodologies required of them.

The challenges of dealing with intermediaries in this context are contemplated in the articles on responsible risk management, microcredit risk management and the credit information system. These establish that entities must manage risks with an infrastructure and control function in keeping with their nature, size, complexity and risk profile. The Regulation makes the board responsible for supervising compliance and the senior management responsible for the application of risk policies. It also requires a specific unit to take responsibility for managing microcredit risk, with well-defined duties and sufficient independence. The banking authority (Superintendencia de Bancos) approves the microcredit risk management model for each entity.

The Dominican regulations correctly emphasise the importance of the borrower’s payment behaviour or track-record as a key element in determining the risk associated to each transaction, and require detailed records in the dossier drawn up for each borrower. However, they include the possibility of using digital or partially digitalised files for this. This helps everyone. The intermediaries’ storage costs and the search times can be significantly lowered. And digitalisation will also enable the supervisor to exercise remote oversight and reduce time spent on site-inspections.

The document allows the roll-over of loans to business units that have met up to 75% of their debt obligations, without having to reclassify to a higher risk, provided there is no impairment in their conduct. What the legislator is trying to avoid is the possibility of letting borrowers with outstanding loans simply repay those loans by taking out new ones. However, this has to be offset with the common practice in micro enterprises of taking out loans on longer terms than they need, as an implicit liquidity insurance. They then often end up repaying the loan ahead of schedule and taking out further loans for new amounts almost at the same time. It is hard to establish the common threshold, because the problem is not fixing a parameter. For the intermediary the problem is one that needs to be dealt with through implementation of admission and monitoring policies. And for the banking supervisor, it is a problem of evaluating the criteria and supervising the admission and monitoring capacities of the intermediary.

Another interesting element is the reclassification of the portfolio. The Dominican regulations establish that when the banking supervisor sees fit to increase the risk ratings for more than 5% of the loan portfolio reviewed in its inspections, the intermediary must set aside additional provisions for deficiencies in their classification of risks according to a table. This can mean up to 2% additional provisions for discrepancies of over 30%. It thus becomes important to identify sources of possible discrepancies in advance. Specifically, because the Regulations classify borrowers by days in arrears and demands one sole classification per customer. They take into account the consolidated debt held by each borrower in the entire system. If the classification is based on days in arrears, then this should be done automatically.

The Dominican regulations consider collateral to be a secondary element in managing microcredits, and it is not taken into account either in the classification of the borrower or in the constitution of provisions. Despite its effect on expected loss, it is reasonable to exclude collateral from the provision calculations as in the micro enterprise sector, when there is collateral, it is nearly always from informal guarantees, and is hard to realise and even harder to set a value on.

The document also forbids the payment of fees up-front and compensatory balances. The borrower can redeem the loan early without any penalties, and the financial institutions may not establish any condition that forces the borrower to deposit part of the microcredit in a specific account within the lender’s bank. The Regulations are clearly trying to protect borrowers from predatory practices. But at the same time, they make it impossible to develop financial-inclusion products that use balances in savings accounts associated to the microcredit as a form of education in the use of savings products. These type of products would have to be re-defined in order to comply.

The Dominican regulations are an important step forward in laying down the right kind of banking standards. They reflect best regulatory practices and experience gathered from other jurisdictions, while at the same time taking advantage of the definitions and expertise made available to them by leaders in the Dominican microfinance industry. This ability to strike a balance can also be seen in the management of intermediaries and, especially, the management of banking oversight. However good regulations may be, they are not much use if they cannot be supervised and enforced. There is little point in extrapolating criteria from the oversight of traditional banking and slapping them onto the microfinance industry. The regulations must recognise that this sector has a different mission, a different scale and that its incentives are also different. Its efficiency requirements are resolved differently and its systemic risks are quite different from the traditional banking industry.

Thus, the Dominican regulations also require a significant investment for the supervisor. In order to achieve compliance with the regulations, the supervisor must ensure it has an adequate oversight strategy. This will mean modifying its organisation and its allocation of human and financial resources, as well as its systems. The success of these new regulations largely depends on the Dominican supervisor’s ability to live up to this challenge.

A bill has been put before the Colombian Congreso de la República that would add two paragraphs to article 2455 of the Civil Code in order to facilitate access to mortgage loans for livestock and arable farmers.

The proposed legislation aims to make it possible to constitute more than one mortgage against the same property asset, without needing to divide it up or break it down prior to the constitution and / or filing of the encumbrances.

This is a novel initiative that would allow farmers to have easier access to finance, even when the property asset has already been mortgaged, without the earlier mortgage encumbrance discouraging potential lenders willing to put up the finance.

To understand the background to this, it is important to understand that in Colombia, although it is possible to take out more than one mortgage against the same property asset, mortgages are ranked by seniority, which reflects the order in which they were filed. This means that the first-degree lenders, ie, those that granted the first mortgage, have more senior claim to repayment than the subsequent mortgagers. The other lenders may only pursue what is left over once the first-degree lender has received repayment in full.

In tackling this situation, the proposed legislation benefits both lenders and borrowers in the agricultural sector. For the lenders, the initiative would mean de facto elimination of the senior versus the more junior ranking.  No one mortgage lender’s claim would be any “better” or “worse” than the others’. Lenders could thus make a better assessment of the mortgages, so that they are better placed to increase their offer of finance accordingly. For the farmers, it would mean greater access to finance, especially when they need to request several loans for smaller sums than the value of the asset they are using as collateral.

Another key aspect is the possibility to realise the collateral without, in principle, prejudicing the other mortgage lenders. In effect, if the Congress of the Colombian Republic passes this law, it will allow a lender whose borrower has not repaid their debt, to realise their collateral by dividing up the mortgaged asset for a sum equivalent to the amount used to underwrite the loan.

This, then, is an initiative that will encourage greater access to finance for farmers, as the financial institutions will have more interest in offering them credit once they have more guarantees that collateral on loans to this sector will be realisable. Likewise, the farmers will be able to take out loans from more than one financial institution when they need to do so

Act 546/1999 established the general framework and standards regulating home loans in Colombia. Amongst other aspects, it tried to encourage more buyers for both newly built and second-hand homes, as well as to boost the number of new homes built. These were laudable goals, especially at the end of the last century, in a context in which Colombia was trying to tackle the consequences of a financial crisis that had to some extent been caused by an imperfect mortgage market.  However, the act did not go far enough for the home owners that needed an affordable mechanism to finance improvements to their homes, as they had to access other lines of credit to do so, which were usually more expensive than mortgage-based loans.

This bill is intended to make up for this gap in the legislation, by extending the application of Act 546 to lines of credit requested for the funding of owner-occupied home refurbishment, repair or improvements. It would also allow such lines of credit for a term of less than five (5) years, provided home-owners’ creditworthiness makes this financially feasible. The bill would incorporate the possibility of presenting collateral other than a mortgage for cases in which the home loan is for the refurbishment, repair or improvement of the owner’s home.

Additionally, the bill includes a provision that “in view of the borrower’s repayment capacity, and verifying the conditions established in section number 9 herein, mechanisms will be establish to finance individual home loans that will allow for funding of up to one hundred per cent (100%) of the property’s value”. This aspect should be carefully analysed by the legislator and by the financial industry. At first sight, one might think it would facilitate access to home loans. However, it will be vital to avoid people taking on more debt than they are able to repay. In this sense, the bill does not make it clear under which conditions it would be feasible for a borrower to finance their home with 100% leverage.

A 100% Loan-to-Value Ratio in Colombia, where practically all loans have a 70% LTV, will mean that additional collateral may need to be required, over and above that of the property whose acquisition is being financed. This is something that lenders should study in depth. Their involvement is important, as they have experience enabling them to understand what impacts such a measure could have on the Colombian housing market. Nobody should forget that excessive housing credit leverage, without due mitigation measures, was one of the causes of the latest international financial crisis.

The purpose of this bill is to: i) Authorise entities to grant home loans; ii) Permit authorised entities access to the Reserve Fund for Mortgage Portfolio Stabilisation (Fondo de Reserva para la Estabilización de Cartera Hipotecaria or FRECH)¹; iii) Place all the entities under the oversight of the financial watchdog, Superintendencia Financiera de Colombia (SFC); and iv) Oblige the entities to earmark between 10% and 25% of their gross loan book to the financing of construction, refurbishment and acquisition of social housing (Vivienda de Interés Social or VIS) during the 15 years following the approval of the law.

The key aspects of the bill are related to the inclusion of new entities empowered to grant mortgage loans; and their obligation to include lending from their total available credit for construction, refurbishment and acquisition of social housing.

Allowing new entities to give mortgage loans may help to avoid regulatory arbitrage, but care should be taken to ensure that all the lenders meet the requirements for current lender institutions, eg, with regard to the risk management systems, in order to avoid uncertainty regarding the sustainability and fairness of home loan placement.

An obligation on lenders to earmark a minimum percentage of their loan book to funding VIS acquisition would seem to ignore the freedom of enterprise enshrined in the Colombian constitution. Under this principle, there are now several financial institutions in the country lending in very different niches. Some target micro enterprises, others the retail sector, etc. The have thus become experts in managing credit risk for those specific markets, but not necessarily for the housing market.

If the bill is to create another kind of lending that will be mandatory for the financial institutions, it will be important for it also to include other compensation to offset the obligation, such as mortgage bonds or mortgage warrants originating from the securitisation of the social-housing loan portfolio.

Act 19496 on Consumer Rights Protection regulates relations between suppliers and consumers, establishing which actions may be deemed harmful to consumers and what procedures should apply in this area. It gives powers of oversight to the Spanish national consumer service (Servicio Nacional del Consumidor or SERNAC), which can also impose fines. It also encourages more robust public involvement in consumer-related matters.

The main changes in the law are as follows:

i.        SERNAC will be empowered to enforce the law; impose fines under administrative proceedings resolved by SERNAC’s regional director; lay down general instructions and standards; interpret and apply regulations and, finally, use collective mediation as a preliminary step prior to taking cases to court.

ii.        It stipulates that consumer associations may enter into civil and mercantile contracts to finance their business. This allows them to engage in profit-making activities.

iii.        It increases the amounts of fines for infringing consumer protection legislation.

iv.        It extends the statute of limitations for actions stemming from breaches by suppliers from 6 months to 2 years.

The bill aims at protecting consumer rights, by alloweing SERNAC to apply harsher measures in the event of failures to respect the principles of protecting customers’ interests.

The use of an electronic payment system, such as credit and debit cards, is widespread in Chile and elsewhere in Latin America. Many countries in the region make it necessary to hold a bank account and be able to prove appropriate capacity for debt repayment in order to use them.

This bill aims to encourage financial inclusion by allowing non-bank entities to issue payment instruments following prepayment by the holders, who can then pay using cards, internet accounts, mobile telephones or any other support.

This bill places companies issuing such payment instruments or operating such payment systems under the oversight of the country’s financial watchdog, Superintendencia de Bancos e Instituciones Financieras. It also stipulates that they will be subject to the Financial Analysis Unit (UAF) and the legal provisions on money laundering.

These prepay systems do not require consumers to enter into a formal relationship with the issuing entity, thus keeping issuance and operation costs down.We consider that this makes such systems easier and more affordable for users and encourages people often excluded from the formal economy to engage with the financial system.

Following the financial crisis in Spain and its impact on corporate capital and equity, the legislature is trying to establish more efficient funding for businesses. This bill thus aims to: (i) make bank borrowing more affordable and more flexible for SMEs; and (ii) regulate more novel funding methods, such as crowdfunding and crowdlending, which fund projects over technology platforms by multiple investors, without the involvement of traditional banks.

Regarding bank finance, it adopts measures such as:

• Obliging lenders to give notice before any line of finance to an SME is terminated or reduced.
• Requiring financial institutions to prepare a mandatory credit report for the SMEs and show it to them. This must be drawn up with information of standardised quality and with a uniform method, established by the supervisor.
• Facilitating access to funding for Mutual Guarantee companies through an improvement in the legal standards that allow such companies to capitalise the counter-guarantee granted by the Spanish Counter-guarantee Company (Compañía Española de Refianzamiento).
• Establishing the legal framework for Financial Credit Establishments (Establecimientos Financieros de Crédito);
•  Introducing further measures to enhance the transparency, quality and simplicity of securitisation issues in Spain, and
• Eliminating caps on bond issuance.

For the first time ever in Spain, the bill attempts to establish a regulatory framework for a world in which people’s lives and businesses are ever more engaged with new technologies, and raising finance for projects over participative funding platforms is increasingly common. Crowdfunding has shown itself to be a dynamic economic driver in countries such as the United States, which already has crowdfunding legislation, as do the UK, Germany and France.

Thus, the Bill targets those activities whereby investors seek an economic return either by taking out shares or a stake in the business (crowdfunding) or by putting up a loan (crowdlending). Such lending is a core activity for the microcredit industry, working online with borrowers.

The Bill regulates the legal framework and permits required from the government authorities to establish platforms (the CNMV securities commission and the Bank of Spain). It also seeks to protect investors, recognising that this is an intrinsically risky activity in which there is little guarantee of the solvency or feasibility of the project in which they are investing. The Bill includes measures establishing the type of information that should be made available to the investor and caps the overall amount of money invested, depending on whether it is made by an accredited investor or not. Accreditation is a function of the investor’s wealth or income. The Bill also emphasises the transparency that must be built into the system to deal with possible conflicts of interest that may arise in such activity.

On 11th December 2014 the lower chamber of the Paraguayan parliament passed a bill amending Act 1969/02, regulating private information.

This bill regulates the processing of personal data included in archives, registries, data bases or any technical medium containing public or private data intended to issue reports, in order to enforce their holders’ rights.

The bill amends articles 5 and 9 of Act 1969/02, which establish, firstly, in which cases the data on a person’s wealth and commercial and financial obligations can be published (under the necessary condition of express, written authorisation); and secondly, prohibitions against the disclosure or dissemination of such data by companies or organisations providing information on banks’ customers’ wealth, economic solvency and/or compliance with their commercial obligations.

In the first reading in parliament, two significant amendments were put forward to the draft bill. Borrowers with debts of below 50 minimum-wage days and all debts repaid would be eliminated immediately, and no record of the borrower’s late payment would remain.

The final version of the bill only included the amendment regarding immediate exclusion from the data bases for borrowers that settled their debts, regardless of how long they took to do so.

The Chamber of Deputies also approved including positive data on borrowers that are up to date on their payment schedules.

Paraguay’s Central Bank has criticised this bill in the media. It considers that it does not help the financial-inclusion programme defined by the Paraguayan government. Specifically, the PCB predicts that the bill’s provisions will restrict credit and make it more expensive, since lenders will not have sufficient information to evaluate the risk for loan requests.

This legislative initiative places Savings & Credit Cooperatives (Cooperativas de Ahorro y Créditos or COOPACs) under the direct supervision of the Superintendencia de Banca, Seguros y AFP. These cooperatives had not previously fallen within the scope of the supervisor’s remit.

At present the COOPAC are supervised by the National Federation of Savings and Credit Cooperatives of Peru (Federación Nacional de Cooperativas de Ahorro y Crédito del Perú or Fenacrep). This organisation is made up of the COOPACs themselves, and membership is voluntary. Its mission is more one of support than regulation, as it provides defence, technical assistance and training services. It does not exercise oversight. Consequently, the COOPACs lack robust corporate governance policies and their management systems are not always suitable for tackling the kind of risks to which they are exposed.

With this proposal, the Superintendencia aims to amend the current model of oversight for the COOPACs and provide real safeguards to depositors entrusting funds to them. If the proposal prospers, these depositors will be protected in the event of bankruptcy or liquidation of the COOPACs. The protection would be backed by an independent Cooperatives Insurance Fund parallel to the Deposit Insurance Fund, and one single registry for these Cooperatives, so that the Cooperatives System can grow more healthily.

In the field of personal data on creditworthiness and financial solvency and its filing in what is, commonly known as the “registro de morosos”, the Spanish Supreme Court has handed down a ruling on the litigation between a security services company and some individuals affected by the inclusion of their personal information on the registry where credit history and financial solvency data are filed. The Court ruled that such inclusion, in order to be considered legitimate and not to infringe the accusing party’s rights to honour, should comply with Spanish legislation and, in particular, with Organic Law 15/1999, 13th December, on Protection of Personal Data, and the provisions contained in its implementing regulations. Fundamentally, it indicates that personal data filed with the registry must be true and exact, as well as decisive in judging the economic solvency of the interested parties.

The Supreme Court, basing its arguments on its jurisprudence, establishes that companies may not use the threat of being filed in the financial solvency registry as means of coercion to claim back possible debts, taking advantage of people’s fear of personal discredit and the difficulty of accessing formal credit once one’s name is filed in the registry.

Likewise, the input of people’s information into the registry must respect European regulations on personal data. This fundamental right is contained in article 8 of the European Union’s Charter of Fundamental Rights and Directive 1995/46/EC, 24th October, by the European Parliament and the European Union Council. This set of EC regulations broke new ground when enacted and laid the foundations for the configuration of a system guaranteeing protection of personal data in all the different domestic legislations of the European Union member states.

The possible failure of a financial institution to comply with the duty to provide customers with adequate information on a specific financial product initiated legal proceedings that concluded with a ruling from the Supreme Court of Spain.

The Supreme Court, in view of the domestic and EC legislation, and specifically the Securities Market Act and Directive 1993/22 of the European Union Council, emphasises that the obligations of financial institutions include providing customers with clear, correct, exact and sufficient information on the service or product they are considering taking out. The Court has also stated that such information must be given in sufficient time to avoid its incorrect interpretation.

It also emphasises that customers must be informed of the characteristics of the products, and that special attention and diligence must be displayed when dealing with non-professional customers.

Although there are specificities relating to the country, the financial institution, the product and the customer in the ruling, the guidelines established by the Supreme Court reflect international tendencies in the area of customer protection, which the microfinance industry should incorporate due to the special vulnerability of its customers.

The Principles of Customer Protection set forth by the BBVA Microfinance Foundation Group are part and parcel of its system of Corporate Governance. They reflect a firm commitment to a line of action. In this way, the Group is promoting two fundamental principles, in keeping with the arguments of the Supreme Court:

• The Duty of Diligence in two senses. Firstly, the products designed and marketed by the entities belonging to the Foundation Group should not be complex and must be easy for its customers to understand. Secondly, member entities are obliged to help customers avoid over-indebtedness by offering financial products that are suited to their needs.
• The Principle of Transparency. The Foundation Group supports this principle, ensuring that its customers must be provided with clear, pertinent information that is sufficient to be able to understand its products, apprising them of their rights and obligations so that they can take informed, well-grounded decisions.

By way of demonstrating the Group’s commitment to transparency, as part of its Entrepreneur Training project, it has created an educational dossier that it intends to distribute among its customers along with the rest of the contractual information. Its aim is to ensure they can master the core concepts of financial education (what a microcredit is, what an interest rate is, fees and charges to be paid, etc).

The document “Estrategia Nacional de Inclusión Financiera 2014-2018 (ENIF)” was presented on 2nd December 2014 in Paraguay. The report laid down the guidelines for the government’s nationwide development strategy, a vital part of the drive to achieve full financial inclusion by 2030, established under the National Development Plan.

The strategy in based on an analysis of the current state of financial inclusion in the country, using the results of the 2013 financial-inclusion survey, Encuesta de Inclusión Financiera (EIF). It identifies realistic targets and establishes a coordinated action plan involving the public and private sectors and civil society, in order to reduce poverty and boost economic growth in Paraguay.

The report sets forth four objectives to be met by 2018:

1.  Reduce the financial vulnerability of households at the foot of the socio-economic pyramid.
2. Attain more widespread provision and uptake of financial services in a secure, competitive market.
3. Help economic development and growth by giving MSMEs and larger businesses greater access to financial products.
4. Promote financial inclusion, striking a balance between the interests of the financial sector and consumer education and protection.

It identifies five groups in the population (people living in extreme poverty; living in less extreme poverty; people with an average income; with a medium-high income and with a high-income) and studies the demographic and financial profile of each, along with their specific financial servicing requirements.

The strategy sets up seven groups to work on different aspects of finance, in order to meet these requirements and comply with the four main objectives of the strategy plan. These are the Savings, Credit, Insurance, Payments, Financial Education, Consumer Protection and Vulnerable Populations Working Groups.

Under Decree 1971/14 the Comité Nacional de Inclusión Financiera was set up to boost financial inclusion, under the umbrella of the ENIF. It comprises representatives of the Paraguay Central Bank (BCP), the Ministry of Finance (MH), the National Cooperativism Institute (INCOOP) and the Technical Planning Secretariat (STP).

The last section of the report includes a list of the forty nine (49) tasks in the action plan. It ranks them by priority, deadline and the group responsible for their roll-out.

Reynaldo Marconi’s book, El milagro de inclusión financiera: La industria microfinanciera de Bolivia (1990-2013) [The Miracle of Financial Inclusion], provides a comprehensive analysis of the inclusion process, the development, promotion and consolidation of the microfinance industry in Bolivia.

It provides the reader with a detailed comparison between the 1993 Financial Institutions & Banks Act and the Financial Services Act of 2013. The author describes the transformation that has been brought about in the country, with analytical insights into the current environment in which these latest microfinance policies are being implemented.

Reynaldo Adán Marconi is an economist by profession and has worked on various technical and executive aspects of microfinance. His positions in the microfinance industry have included those of executive secretary of the Specialist Microfinance Entities’ Association in Bolivia (ASOFIN), founding member and president of the Credit Information Bureau (INFOCRED BIC S.A) and founding member and president of the Latin-American and Caribbearn Rural Finance Forum (FORO LAC FR).

This report Cingano, F. (2014), “Trends in Income Inequality and its Impact on Economic Growth”, OECD Social, Employment and Migration Working Papers, No. 163, OECD Publishing, studies income inequality and how it can have a sizeable and statistically negative impact on countries’ development.

The analysis shows the importance of a two-prong strategy to tackle inequality and promote access to public services for the entire population:

•  It recommends that governments take a new look at their legislation and try to increase taxation for high-wealth brackets and eliminate or reduce the deductions from which these brackets benefit. It advises they implement mechanisms to promote and facilitate universal access to public services (universal health systems, education, etc).
• It establishes a set of measure to promote investment in human capital. The study looks into the way income inequality makes it harder for people in the lower-income brackets to access education, especially quality education.

The Economic Commission for Latin America and the Caribbean (ECLAC) presented its report on “The Social Panorama of Latin America 2014” at the end of January. The study has been drawn up since the beginning of the ‘90’s and provides a broad-ranging analysis of the most outstanding economic and social aspects of the Latin-American countries, tracking their performance over time.

This year’s report bases its conclusions on the economic data gathered in 2013 and during the first quarter of 2014. It shows that, despite the important economic growth in the region over the last decade, which was above the world-wide average, poverty and inequality have scarcely moved from their 2011 and 2012 levels.

In order to contribute to a more comprehensive design of public policies aimed at overcoming poverty and socioeconomic inequality, the report focuses its analysis on  : (i) youth and development, (ii) gender inequality in the labour market and its impact on socio-economic inequality and, finally, (iii) urban residential segregation and the reproduction of inequalities

Proposal on the amendment of the Corporate Governance Regulations, made by the banking supervisor, Superintendencia de Bancos de República Dominicana. Resolution Six, 30th October 2014.

The initiative to review the prevailing Corporate Governance Regulations, approved by the Monetary Board under Resolution Two, 19th April 2007, recognised the continued evolution of best international practices in this area. The banking supervisor wanted all stakeholders to have a say on the proposal, and published it with the stated aim of bringing the regulations into line with the Basel Committee for Banking Supervision’s Principles to enhance Corporate Governance, October 2010, and use them to add stability and robustness to the regulatory system.

The proposal, which is now in its public consultation period, contains several changes to the earlier regulations. These include the following:

• Inclusion of the fundamental principles of Corporate Governance, which provide guidelines for establishing best practices. Henceforth, companies’ internal regulation must expressly incorporate issues such as the protection of shareholder rights; independence, transparency and objectivity of board of directors proceedings; procedures for managing and dealing with potential conflicts of interest; management oversight; succession planning, etc.
• Incorporation of new definitions (Senior Management, the Assets & Liabilities Committee (ALCO), Interested Parties), and the classification and definition of different types of directorships, distinguishing between external directors –whether independent or proprietary– and internal directors (executive members).
• Addition of powers for the members of the board of directors: to approve the Internal Board Regulations, approve the strategy plan and policies of the entity, enforce good corporate governance, management and risk control, outsourcing of functions, etc.
• A longer interim before a Board Member can be considered independent. Two years must now elapse after the termination of labour or business relations with the company, rather than the earlier 6 months.
• Requirement to provide Board Members with a minimum of 20 hours a year specialist training.
• Obligation for the Board of Directors and Senior Management to carry out a self-assessment.
• The attribution of duties to the various committees assisting the Board, determining that all of them must be chaired by independent external directors. Also the inclusion, for the first time, of an Integrated Risk Management Committee and a description of its duties.

There are some proposals that catch the eye. For example, the mention of an upper age limit for directors. More recent trends in Europe and in international companies try not to restrict the age of directors, giving prevalence to the contribution each can bring to the entity with their experience and knowledge. (See Código de buen Gobierno Corporativo para las Sociedades Peruanas, Peru 2013; Código de Mejores Prácticas Corporativas (Country Code), Colombia 2014; Comisión de Expertos en materia de Gobierno Corporativo, Spain 2013; EU Corporate Governance Framework, EU Green Book 2011).

It no longer requires that the Board of Directors contain a minimum proportion of independent members, as stipulated in the 2007 regulations.

The proposal would require a significant additional workload for banks and financial institutions, which will have scarcely 90 days after the Regulations are published to comply with them

The online publication Progreso is a BBVA Microfinance Foundation (MFBBVA) initiative reporting on microfinance regulation world-wide. Our aim is to bring together the most relevant legislation, jurisprudence, and legal reports and news, providing stakeholders with a clear overview of general tendencies and approaches. We hope this will encourage more informed decision-making in the microfinance industry, as the best way to ensure the healthy growth of this new kind of loanbook, which is the most efficient way to fight against poverty.

The earliest attempts to launch a microcredit industry date back to the mid-20th century and the enactment of programs channeled through national public-sector institutions with the support of multilateral agencies. Sadly, these somewhat one-sided initiatives failed to foster individuals’ productive and entrepreneurial skills.

Insight into these shortcomings inspired the idea of using market drivers as enablers for individuals with little money but with the imagination and capacity to implement sustainable productive activity. The idea was to use a commercial model that could generate sufficient resources to become self-funding, while servicing the financial needs of a segment of the population largely excluded from formal financing.

This unleashed a comprehensive overhaul of the methods used to fight poverty. Some called it a philosophical revolution, others simply referred to it as bringing democracy to finance.

Throughout the 1970s and ‘80s, microfinance gradually took shape in the hands of non-profit institutions and NGOs who saw their activity expand significantly. From these beginnings, a fledgling industry began to emerge in what some authors have termed “the second microfinance revolution”. As it matured in the 1990s, its distinguishing features were a substantial improvement in procedures and the progressive influx of new players.

In this second decade of the 21st century, the microfinance sector has developed a complexity and professionalism unthinkable a few years ago. More important still, it has undergone significant expansion, albeit only reaching a very small proportion of the disadvantaged population as of yet. While customer numbers for the microfinance sector nowadays are far from negligible, such finance is still only available to a tiny minority of the underprivileged. If its contribution is to be significant, the sector needs to grow rapidly and make exponential gains in scale.

The MFBBVA Group is convinced that microfinance is currently poised to become a driving force in the advancement of society thanks to its accumulation of expertise, its achievements so far and its manifest capacity to rise to challenges.

In this scenario the BBVA Microfinance Foundation is determined to establish best practices in what I would venture to call “the third microfinance revolution”. This online publication will focus on two aspects of microfinance that help the sector expand more efficiently. It will highlight the most significant regulations and detect trends that may affect microfinance institutions. And it will disseminate the principles of excellence in corporate governance in order to spread a culture of transparency and credibility throughout the industry as a whole.

Progreso aims to help diminish the institutional obstacles that impact the market as a whole, such as inefficient enforcement of legal rights, gaps in the rules for foreclosure of guarantees, shortcomings in the legal system, etc. It will also tackle those specific to the individual financial institutions in the sector, such as insufficient or improper credit documentation and the absence of specific regulation, among others.

Progreso will record the latest developments in corporate governance. In the third revolution in this sector, good corporate governance will make a decisive impact on growth.

Despite some tightening of governance standards following the global financial crisis, a significant majority of microfinance institutions display notable shortcomings and very rudimentary systems of corporate governance.

More advanced and certifiable systems of corporate governance are essential for the sector to grow. This transformation will tap more private-sector funding sources, such as customer deposits and bank lending, and also make it possible to raise capital on the open market.

The BBVA Microfinance Foundation is so convinced of the importance of corporate governance that it has taken on the highest standards of excellence for itself, and also altruistically offers governance workshops for managers of other microfinance institutions for the sake of the industry as a whole.

In short, Progreso will provide an over-arching view of the regulations relating to the microfinance sector, which in the absence of its own specific regulations is too often subject to inappropriate, penalizing or distorting general rules that hamper its performance as a driving force for progress and development.

The BBVA Foundation Group has 2.7 billion reasons to exist: the 2.7 billion people excluded from formal financial systems all over the world, especially the 250 million living in Latin America. The launch of our online publication today therefore aims to shed greater light on this industry, which has an enormous under-served potential clientele and enormous capacity to generate development by enabling entrepreneurial initiatives from a segment of society currently overlooked in the formal economy.

In the last decade personal data protection has become particularly relevant throughout the world. Latin America has been no exception. Several Latin-American countries have updated their legal systems to guarantee the rights of individuals over their personal data.

With similar content to laws passed in Colombia and Peru, this law provides a set of principles and tools for comprehensive protection of personal data, whether stored in files, public records, databases or other public- or private-sector technology platforms. It also provides mechanisms guaranteeing individuals’ right to honor and privacy.

This law also regulates the establishment, organization, activities, operation and liquidation of credit bureaux known as SICs (Sociedades de Información Crediticia), which are engaged in collecting, organizing, storing, holding, communicating, transferring and/or transmitting data on consumers, goods or services related to them, and any other information provided by the banking regulator, using automated or manual procedures, in hard-copy, digital or electronic format. The databases of these entities will be integrated with the information provided directly by the contributors of data on lending and other similar transactions that these give their consumers, in the form and terms in which it is received from the contributors of data and any further information provided by the banking supervisor or other public entities.

To guarantee that people can exercise their rights over their personal information, the law creates a procedure that begins with the information owner being able to submit a claim to the database owner, to update, contrast, rectify or destroy information as well as disciplinary proceedings for entities that fail to comply with the law’s provisions.

This law incorporates the latest recommendations of GAFI, the FATF-style Spanish financial action task force set up by the government to implement international anti-money laundering standards, placing domestic Spanish regulation at the forefront of international best practices, by including the very latest international demands.

The main new feature is the further ramification of the “risk-based approach” that is already established under current law, incorporating the requirement of regulated entities to analyze the main risks they face, in accordance with the type of business, product or customer with which they establish business relationships. On the basis of this analysis, regulated entities have certain obligations of a procedural nature, to ensure a match between the internal policies and procedures and the risk profile of the respective entity.

The law also allows the State Tax Department (Agencia Estatal de Administración Tributaria) to request and obtain the information that regulated entities hold or manage, on the grounds of diligence obligations contained in the law. It also gives the regulated entities discretionary powers to check out the professional or business activity declared by its customers through personal visits to the places where they carry out their business activities.

This act transposes regulatory changes in European law into Spanish statutory law by bringing together in one act regulations applicable to credit institutions in areas such as supervision, capital requirements and penalties.

This legal measure thus establishes a single legal framework on solvency and access to the activity of credit institutions, bringing together legislation previously scattered over various different regulations, some very old and all prior to the global financial crisis. It regulates the general aspects of the system enabling lenders to be certified as credit institutions, as well as the operation of its governance bodies, their supervisors and sanctions that can be applied by the authorities, as well as establishing capital and solvency requirements and appropriate risk management.

The inclusion of Article 5, regulating the protection of credit-institution customers is particularly striking. This article empowers the Ministry of Economy & Competitiveness to issue pre-contractual rules on information to be provided to customers, so that they “explicitly and most clearly” reflect the rights and obligations of the parties and the risks stemming from the service and/or product, so that customers are able to analyze whether or not it fits their needs. The Ministry, within the powers granted, may establish basic conditions for banking services and products that must be duly complied with by entities. It also specifically regulates that fees or expenses can only be charged for services that have been “expressly requested by the customer”.

In reaction to the excesses generated prior to the economic crisis, this law empowers the Ministry to issue rules to ensure that credit institutions perform more robust risk analysis when granting loans. Lenders will be encourage to pay due attention to the customer’s income, the adjusted value of their collateral, the impact of potential changes in interest rates on variable-rate loans, etc. Ultimately the idea is to achieve greater rigour in risk assessment.

Additionally, and in order to avoid the application of arbitrary rates against which variable-interest loans are indexed, the Ministry itself or through the Bank of Spain can now regulate these indices in an official capacity.

Finally, all provisions of Article 5 are reinforced by their treatment as organizational and disciplinary regulations of credit entities, which are thus subject to the supervision of the Bank of Spain and the penalty system reflected by these regulations.

Over recent years in Latin America, e-money payments have been on the rise, and the Colombian government is encouraging the use of institutions specializing in the creation of e-money and conducting transactions using e-payment systems, in order to promote the development of products and services to facilitate financial inclusion through electronic devices.

Bill 181/2014 is currently going through Colombia’s Congress. Unlike other such initiatives elsewhere, such as in Peru and Uruguay, this bill is not focused on regulating “electronic money”, but rather grants a simplified financial license to new companies specializing in electronic payments and deposits , which must comply with some of the rules applicable to traditional financial institutions in order to be able to attract funds from the public and make drafts, transfers and payments using electronic systems.

Through this Bill, the Colombian Congress seeks to oblige banking institutions to offer preferential microcredits for setting up small businesses. This Bill sets minimum percentages for how much microlending must be provided by all institutions in the Colombian financial system.

Its provisions include, (i) cost-free processing of credit applications; (ii) assessment and granting of microcredit subject to the applicant’s business plan, and not to the provision of collateral; (iii) monitoring by the Colombian government of the growth of the microcredit loanbook; and (iv) implementation of programs to promote access to microcredits in the rural sector.

The text of this Bill is identical to that of two previous Bills (Bill 43 of 2013, Chamber, and Bill 218 of 2013 on Microcredits), which were rejected during the corresponding legislative debate and subsequently shelved.

In order to imbue Peruvians with a savings culture from an early age, the Executive has proposed that minors aged between 14 and 18, should be able to open bank accounts. Bank accounts are exclusively for depositing and withdrawing the money they receive from their parents or from third parties as pocket money or small rewards.

This system would only include savings accounts in local currency. Only male and female minors aged between 14 and 18 may be the individual holders of such accounts, and shared ownership is prohibited.

The Bill is currently being debated at Committee stage in the Congress of the Republic.

As part of the package of measures for economic recovery, the Executive has proposed this Bill with the aim of reducing costs in secured transactions  by movable assets and extending the scope of such security, in order to facilitate access to credit.

The main amendment proposals include: (i) creation of a Virtual Public Registry to replace the current Movable Property Contracts Registry; (ii) cost-free access to the Virtual Registry; (iii) immediate foreclosure of collateral without the need to inform the debtor through a notary public; and (iv) the possibility of performing legal acts relating to the collateral through e-mail notifications.

This Bill is currently under review at Committee stage in the Congress of the Republic

In relation to the protection of individuals in the processing of their personal data and the free movement of such data. With respect to a dispute between Google Spain, S.L. and Google Inc., on the one side, and the Spanish Data Protection Agency and Mr Costeja González, on the other, the Court has resolved that necessary measures should be taken to remove personal data from their index and thus prevent future access to such personal data.

Thus, when as a result of a search conducted using the name of an individual, links to websites containing information on that person are offered, he or she may contact the search engine manager directly or, if the latter rejects the request, contact the relevant authorities so that those links are deleted from the list of results, under certain conditions.

The Code of Best Corporate Practices – Country Code, published through External Circular 028/2014, will contain 33 measures with 148 recommendations on: (i) Rights and Equitable Treatment of Shareholders, (ii) General Meeting of Shareholders, (iii) Board of Directors, (iv) Control Architecture, and (v) Transparency and Financial and Non-financial Reporting. The Code’s structure will be based on the “comply or explain” principle and its recommendations are voluntary for securities issuers.

For each recommendation, issuers must describe how they have implemented it or why they have not done so. On the first occasion of reporting a recommendation, the institutions must specify the date on which it was adopted.

The Country Code establishes that the institutions’ bylaws must describe their compliance, and the compliance of their directors and employees in general, with the recommendations adopted and how it is monitored. It also sets out the institutions’ duty to submit the results of the implementation report to the Annual General Meeting.

Under this directive, the SMV (the Peruvian securities exchange commission) seeks to ensure that the Corporate Governance information disclosed to the market complies with the new standards set out in the Code of Good Governance for Peruvian Corporations that came into effect in November 2013. Thus, the Annex to the Annual Report referring to “Information on Compliance with the Principles of Good Governance for Peruvian Corporations” is replaced with the “Statement of Compliance with the Code of Good Corporate Governance for Peruvian Corporations”. In this report, listed Peruvian companies must inform the market each year of the level of compliance with the recommendations made in the Code of Good Corporate Governance, based primarily on five aspects: (a) Shareholder rights, (b) General Meeting of Shareholders (c) Board of Directors & Senior Management, (d) Risk & Compliance, and (e) Transparency of information.

The drafting of this Code is part of a wider process to reform the Peruvian capital market, intended to create a robust culture of Corporate Governance in Peru that improves investor perception of companies, promotes business development and contributes to the creation of value in the Peruvian economy.

Following in the steps of Peru, Chile and Uruguay, the new regulations overhauling the previous secured transactions system came into force in Colombia in February 2014. This new system streamlines the mechanisms to create, record, and foreclose guarantees on movable assets and thus eliminates some antiquated pieces of Colombian legislation prohibiting creditors from seizing assets directly from their debtors (under the so-called pacto pignoraticio or “pledgee agreement”).

The new legislation is based on the OAS Inter-American Model Law on Secured Transactions and the UNCITRAL legislative guidelines. Its benefits include the centralization of information in a single registry administered by the Confederation of Chambers of Commerce, which not only make it possible to file the security or collateral, but also to find out the creditworthiness of persons standing guarantee, thus providing more information to lenders and reducing the cost of access to credit.

Economic and financial literacy is one of the top priorities of the Colombian government. As in other countries in the region (Uruguay and Peru, for example), a National Commission is being created under this law, comprising various influential public-sector bodies, such as the Ministry of Finance and the Colombian financial supervisor, as well as private-sector entities. Its mission is to establish policy, guidelines and tools for implementing the National Strategy for Economic and Financial Literacy.

The involvement of financial institutions in this Commission is vital to its success, given their accumulated expertise and knowledge and their ability to measure the effectiveness of the economic and financial literacy policies established by this Commission. Also noteworthy is the progress in financial inclusion, opening up access to finance for a segment of the population traditionally at a disadvantage and not catered to by the financial system.

This law adopts a mechanism fully in line with market realities. It establishes new rules regarding the mortgaging of movable assets, thereby amending Decree 2/1955, 24th May, which was very useful in its day, but fell into disuse as market requirements changed.

This standard, which was inspired by the OAS Inter-American Model Law on Secured Transactions, seeks to facilitate access to credit by extending the categories of secured transactions to the mortgaging of trade receivables; stocks and shareholdings in any kind of corporation; inventories; property rights; copyright, etc. It streamlines the system of transactions secured by moveable assets, establishing simplified registration procedures; faster implementation mechanisms and the possibility of successive mortgages, as well as eliminating the unnecessary red tape only too common for this type of operation.

The rule benefits both parties (lenders and borrowers), who, apart from increasing their range of mortgage options, can access operations faster and at lowers costs. This will definitely make banking more attractive. It will also give a boost to the country’s competitiveness as it upgrades the system to meet international standards.

This law represents a breakthrough in the field of Microfinance as it introduces a prudential regulatory framework based on risk-management; prudential regulations and international accounting standards. This strengthens the oversight of regulated companies, of vital importance, since the country’s financial institutions (apart from the banks) and Non-Governmental Organizations had previously failed to meet international standards on these matters.

Furthermore, a definition of microcredit has been introduced for the first time, distinguishing between microcredit and other types of financing on the basis of the risks involved. The law also focuses on the use of credit technology by microfinance institutions and determines the minimum standards they should use.

Title V of the Act includes 11 sections on Corporate Governance and Remuneration Policy. It puts forward specific regulations for credit institutions, which will be completed later with the enactment of the Bill amending the Corporate Enterprises Act.

As well as setting out the obligation for credit institutions to apply the regulations contained in this section, it defines the corporate governance system as the creation in the institution of sound procedures to provide it with clear organizational structures, well-defined lines of accountability, effective procedures for identifying and measuring the risks to which the institution is exposed, suitable internal control mechanisms, and remuneration policies and practices that are consistent with appropriate risk management.

If defines the Board of Directors as the body responsible for developing its own Corporate Governance system, guaranteeing honest, prudent management, through appropriate allocation of functions within the organization, and prevention of conflicts of interest. It also sets forth the functions regarding the Governance system that may not be delegated by the Board. It incorporates the Good Governance principle of separating the Chairman of the Board of Directors and the Chief Executive Officer (CEO), unless otherwise authorized by the Bank of Spain.

Unlike the Bill amending the Corporate Enterprises Act for credit institutions, this law requires two separate committees: one for Appointments and one for Remuneration. It regulates in detail the policy and the principles underpinning remuneration policy, highlighting the mandatory requirement that no incentives should be offered to encourage risks that exceed the level tolerated by the institution.

Unlike the Bill amending the Corporate Enterprises Act, this law establishes that the Bank of Spain may require credit institutions to set up a Risk Committee, in accordance with their scale and complexity. The Committee should be made up of non-executive Board members, a third of whom and the Chairman should be independent.

In order to improve access to finance among the segment of the population most disadvantaged and not traditionally catered to by the banking industry, in January 2013 the Congress of the Republic of Peru adopted a law on electronic or e-money (Act 29985). This established a minimum regulatory framework for the use of e-money as a payment method, filling an obvious legislative gap on this matter. Its aim is to promote the development of products and services that facilitate financial inclusion, under conditions of safety, transparency and reliability for the benefit of the population.

It regulates a range of matters, including the issuance of e-money; the companies authorized to issue it; the basic specifications and requirements for e-money transactions (payment for goods, conversion and reconversion of e-money, transfer of funds, etc) and contractual requirements for them.

To ensure the safety and reliability of e-money, the law has restricted its provision exclusively to entities under the scope of supervision of the financial oversight system and mainly to those registered as mobile-banking providers. In a country like Peru, where the population is scattered over a wide area and mobile-phone penetration is the highest in the Latam region, the use of (cellular) mobile technology to provide touchpoints for accessing financial services would not only considerably reduce transaction costs but also eliminate entry barriers into the financial system.

This decree provides in-depth regulation of the operating procedures for electronic money transactions, as well as the main aspects of the e- money issuers (known by their Spanish acronym as “EEDE” or Empresas Emisoras de Dinero Electrónico.

It defines electronic money as a monetary value stored on an electronic device for the sole purpose of payment (payment system). It also sets out that the principal platform for performing any e-money transaction is the cell phone (mobile technology).

In order to operate with electronic money, customers must hold a bank account and use it to make payments and order transfers… This restriction is intended to boost security and reliability in e-money transactions, since it is more likely that systems operated by entities under the oversight of the financial regulator will properly process e-money transactions. And it also seeks to improve levels of financial inclusion, given that customers who perform simple e-money transactions and become familiar with this process are more likely to request other financial products or services.

Empirical and analytical evidence on the positive relationship between financial development and economic development indicates that one of the obstacles to economic development is the population’s limited access to financial services. In this respect, financial inclusion has become a top priority for the current government in Peru.

It has thus set up a Multisector State Commission responsible for designing and implementing the National Strategy for Financial Inclusion (“ENIF”) under this decree, to make financial products and services more accessible to lower-income brackets, enabling them to break away from the poverty and exclusion they face at present.

This commission comprises representatives of the Ministry of Economy and Finance (MEF); the Ministry of Development and Social Inclusion (MIDIS); the banking, pension-fund and insurance supervisor (SBS); the Central Reserve Bank of Peru; and Bank of the Nation

The decree details the duties of this Commission and the procedures for its formation and articulation.

This latest amendment to the regulations on transparency of information and contracts with financial system users is intended to oblige financial institutions to justify the level of fees and bank charges agreed with customers.

Thus, fees must be based on proven and effective provision of an additional service supplementing the core service to which the customer has signed up. It is noteworthy that, as a result of this Regulation, financial entities in Peru can no longer charge fees for the provision of services deemed to be “inherent” to the financial product or service taken out. For example, these entities may not charge for creditworthiness assessments, as these are an inherent part of financial intermediation.

Act 31/2014 was adopted to amend the earlier Corporate Enterprises Act in order to enhance corporate governance within the framework of the Committee of Experts’ Report on Corporate Governance. It has included nearly all their recommendations.

The act introduces other changes apart from the amendments described in our previous issue (Progreso 1). Of special importance is the section on the annual report and the annual corporate governance report on director remuneration (articles 540 and 541).

Article 540, Informe anual de gobierno corporativo, establishes the obligatory nature of an annual corporate governance report for publicly listed companies. This must be filed with the Securities Commission (CNMV), which will determine its content and structure. The report must provide a detailed explanation of the entity’s corporate governance and how it works in practice. Should the listed company be a European company, it must not only file the Spanish annual report but also another report drawn up by the board regarding oversight of its performance of duties.

Article 541, Informe anual sobre remuneraciones de los consejeros, obliges the board of directors in listed companies to prepare and publish a report on director remuneration each year. This must include the remuneration directors receive for their directorships and, where applicable, the remuneration they receive for executive duties. The information provided must be comprehensive, clear and understandable. It will be disclosed as a relevant event filing, presented alongside the annual corporate governance report. The report filed will be put to a consultative vote at the General Meeting as a separate item on the agenda. However, the Ministry of the Economy & Competitiveness or the CNMV are expressly empowered to determine the content and structure of the report.

This legal provision, as in other countries in the region (Colombia and Peru), seeks to ensure financial inclusion of disadvantaged segments of the population and those who have not been traditionally catered to by banking. It sets forth measures on:

• Establishing mandatory payment of wages and pensions through a bank account using debit cards or e-money (prepaid cards) in the formal financial system
• Free opening and maintenance of accounts for workers and SMEs
• Granting “payroll loans” that can be deducted from wages
• Reduction in value-added tax for card payments
• Restrictions on cash payments
• A savings program for house purchase
• E-money Issuers

Aspects highlighted in this law include constraints on the use of cash, expressly prohibiting its use in certain business transaction, such as the sale of goods or services for a sum equal to or above $5,000 if one of the parties meets the law’s specifications, and in certain transactions with the State.

Act 18.010/1981, on rules for credit operations and other monetary obligations, sets out that: “Payment of interest on interest payments may be stipulated, and may be capitalized at each maturity or renewal date. Under no circumstances may such interest be capitalized for periods of less than thirty days”.

There are currently two Bills aimed at eliminating these abusive practices. Both are parliamentary initiatives not sponsored by the Executive. One aims to eliminate compounding of interest absolutely and the other aims to eliminate compounding and the clause for shortening terms in financing and refinancing transactions. Both proposals are part of the ongoing efforts seen in recent years in relation to consumer rights protection, particularly in the financial sector.

In relation to the validity of mortgages established to underwrite present and future obligations, the Supreme Court of Peru has laid down that the mortgage will only cover payment of future obligations arising while the present obligation is in force. Therefore, if the latter obligation is discharged and on its discharge date no other obligation has arisen for the debtor, the mortgage is fully discharged. The Supreme Court has justified this decision on the basis of the principle whereby an individual cannot be bound contractually for an indefinite period of time, despite the fact that section 1362 of Peru’s Civil Code allows any contract entered into for an indefinite period to be terminated unilaterally.