Financial institutions must work very hard on understanding what these groups need, and offer them useful products and services

Socorro Heysen Zegarra has been Head of Peru’s Banking, Insurance & Private Pension Fund Authority (SBS) since August 2016, and is the first woman to hold the post.

She is an expert in the regulation and oversight of banks and microfinance entities. She has discharged these roles in public institutions and international financial bodies, holding high-level positions in Peru’s central bank as Deputy Manager of the Monetary Sector, in the Banking, Insurance & Private Pension Fund Authority (SBS) itself as deputy Head of Banking, and in the International Monetary Fund (IMF) as Deputy Head of the Banking Regulation & Supervision Division.

She has sat on the Boards of Peru’s National Companies & Securities Commission (now the Securities Market Authority of Peru) and of ASBA, the Association of Banking Supervisors in the Americas. She has also been a consultant for the IMF and the World Bank in a number of countries.

Before taking the post as Head of the Authority, she was Deputy General Manager of Economic Research at Financiera Confianza, an institution that is part of the BBVA Microfinance Foundation.

She has a degree in Economics from Peru’s Pontificia Universidad Católica (PUCP) and a Master’s in Economics from the University of California (UCLA).

1. Throughout your career you’ve held a wide range of posts in public and private institutions, as well as in a number of international financial bodies, so you’ve had plenty of chances to observe and oversee how banks and microfinance institutions work. How has the microfinance sector changed in the last three decades? How have Latin American microfinance institutions in particular contributed to that change?

Microfinance has changed a great deal. It was only in the eighties when microfinance began to be regulated, and now we have a mature, competitive microfinance sector with standing worldwide. Latin America, and Peru, in particular, has been one of the pioneers of this development.

In the first few years we saw the entry of microfinance institutions into a market (small and micro enterprises) that was not being served by traditional banking, which triggered the initial demand to design credit technologies suited to this segment, in the framework of regulation that was also evolving to keep up. Later, when it became clear that microfinance could be profitable, the sector had to face competition from the banks and other financial institutions that jumped in to compete for the target segment. At the moment, the process of consolidation in the microfinance sector is helping to strengthen successful business models and generating operating efficiencies (economies of scale).

2. You are currently the head of the SBS, Peru’s Banking, Insurance & Private Pension Fund Managers’ authority. What are the main challenges facing microfinance institutions, in your view?

Competition is increasing and economic growth rates are flagging, so microfinance institutions must be able to handle a range of challenges if they are to be sustainable. The list is quite long. We could start by mentioning the need to manage financial margins in the context of the trend we are seeing of decreasing profitability from the loanbook.

Then we have: adding value to financial products to retain users, who are now better informed and are demanding higher quality services (which means basing management on customer service quality); developing more efficient, more stable funding strategies; finding ways of improving operating efficiency by making investments in technology and infrastructure profitable, in order to reduce operating costs without sacrificing risk management; and having solid strategies and processes that guarantee that talent hiring, training and retention procedures are professional, specialised, committed and comprehensive.   

The final challenge is to satisfy the SBS, which now has a denser set of regulatory requirements that seek to make standards in corporate governance, risk management and market conduct more robust.

3. What would be the main areas that specific microfinance legislation should tackle in order to work towards the sustainable development of the sector?

Over the years we’ve worked on legislation that creates a nurturing environment in which the financial system and microfinance can develop. So, our regulatory arena meets international banking supervisory standards, underpinned by a set of regulations specifically for microfinance. There’s a clear definition of micro-lending so that it can be supervised, whatever the type of institution providing it. We have regulation that encourages integrated risk management and best practices in corporate governance, commensurate with the type of institution and the type and complexity of its transactions. Our regulation makes it easier to set up lean customer-service channels, such as correspondent ATMs, which do a great deal to encourage financial inclusion. In addition, while prices can be set freely, there are transparency of information requirements in place that safeguard users.

We also have a credit-ratings agency that has comprehensive information, allowing institutions to manage their risks and borrowers to check their credit ratings. We designed an app that enables borrowers to directly find out their credit rating free of charge and to receive alerts if their rating is changed. The SBS received the 2017 Good Practices in Public Management award, given by the organisation Ciudadanos al Día.

This has all meant that for nine years in a row Peru has come first in the ranking of the best environment for microfinance. Nevertheless, we have a lot of ground yet to cover and we’re going to work on three key issues.

First, in the prudential field, we want to update our regulations on classifying delinquents and provisioning, so that the mandatory provisioning better reflects expected losses from different types of credit. Second, in the field of market conduct, we have an ambitious goal: more responsible behaviour, so that customers of regulated companies receive fair treatment, with appropriate and transparent information. To this end, we’ve issued new corporate governance and market conduct regulations, which make the entire organisation accountable for an institution’s conduct and the respect it shows to its users. Third, we need to establish a framework that encourages innovation, while always keeping an eye on the risks. The current highly competitive climate makes institutions more willing to sign up new customers whom they haven’t been able to attract in the past, given the business models available to them. So now they have to innovate, and we’ll be working to facilitate that innovation.

4. What measures should institutions in the financial sector adopt to support the most vulnerable?

I believe that supporting vulnerable groups is a task for the State, using financial inclusion policies, rather than something that financial institutions should do. With that aim, Peru has a National Financial Inclusion Strategy, in recognition of the importance of policies such as this when used as instruments that promote social inclusion and the country’s economic development. The SBS took a very active part in designing this strategy and has been helping to implement it since its launch in 2015.

If the State is fulfilling this essential role of creating the right environment for financial inclusion to flourish, the role of financial institutions is to push through inclusive and responsible business models, enabling vulnerable populations to access and use financial services. To do this, they must work very hard on understanding what these groups need, and offer them useful products and services; they also have to implement policies that result in all citizens being treated with respect, fairness and responsibly.

5. BBVAMF currently serves nearly two million people in Latin America of whom 77% are vulnerable and 60% are women who have managed to improve their standard of living, their children’s education and their own human development. Do you think that microfinance is a useful instrument for empowering women and creating the right conditions for their social and economic development? What more needs to be done to provide women with greater access to the financial sector?

My answer to the first question is “definitely”. By giving them access to safe saving, financial institutions contribute to improving standards of living for women and their families, smoothing the variations in their incomes and making it possible for them to buy assets and durable goods. Micro-loans, when managed responsibly, have the potential to give them the opportunity to develop a productive business that generates enough income to pay off the loan and give them financial independence. Doing this also raises their confidence and self-esteem, empowering them to take on other goals, Finally, insurance enables families to manage their risks better, dealing with negative events such as El Niño, illness or unemployment, so that they have less impact on the household’s normal consumption levels.

BBVAMF’s experience with responsible microfinance is proof of this. I want to stress the word responsible; that is, putting customers first. Because irresponsible microfinance can be damaging. It can have a negative effect on standards of living and lead to exclusion from the financial system.

What’s more, supporting women is profitable in societal terms. A number of studies have shown that female borrowers use their income mainly to cover household and/or children’s expenses, which results in better outcomes for the family and for society as a whole.

6. You were the first woman to be appointed head of Peru’s Banking, Insurance & Private Pension Fund Managers’ authority. Do you think that the public policies in Latin American nations are driving women’s professional progress? Do you think that outlooks are changing in corporations and in society at large?

The number of women in senior management positions in both the public and private sectors is shamefully low, but it is better than ten years ago. That proves that we are making progress, albeit at a rate that should be faster. Social reforms, such as in education, are going to help speed up that progress in the long term. For the moment, we are seeing a major push for change, for equality, freedom and respect for the rights of all. I believe that this great social force for change will also trigger demands for more inclusive policies, ones that drive women’s professional development.

7. In your opinion, what do you think are microfinance’s greatest strengths and weaknesses, and what measures could be taken to reinforce its impact?

Among its strengths is specialisation in credit technology; a credit offering that is unique and can penetrate areas that are ready to be banked; not concentrated on a few big borrowers; and an attractive market for outside for-profit and social investors.  Its weaknesses include low penetration in rural areas because of high operating costs (Peru’s geography and population dispersal); informal and unregulated companies competing directly with microfinance institutions, providing finance to the same target market (small and micro-companies); and insufficient innovation in business models to adapt to the new competitive environment.  

To overcome these weaknesses, we work constantly on initiatives that contribute to a sounder, more integrated financial system. So, we now have Law 30607, modifying the operations of Municipal Savings & Loan Building Societies (CMAC in the Spanish acronym), and new regulations on Corporate Governance and Integrated Risk Management. As well as this, there is the new law on Savings & Loan cooperatives.

We’re also taking steps to improve operating efficiency and harness synergies, which will lead towards greater consolidation of the financial system; and we are very actively coordinating several sectors so that financial literacy is more widely taught, while rolling out different activities to improve financial inclusion and the use of digital payment systems.

8. A law to strengthen Municipal Savings & Loan Building Societies (CMAC) has been passed recently in Peru to make corporate governance in these institutions more robust. What is the desired effect of pushing through these good corporate governance practices in the microfinance sector?

You are right, one of the main aims of Law 30607 is to make corporate governance in municipal savings & loan building societies (CMAC) more rigorous, so that they can compete on equal terms with private financial institutions and attract new investors.

The different roles of the General Meeting and of the Board of Directors have been clearly laid out, and are similar to the roles already in place for private-sector financial institutions. Minority shareholders will also be allowed representation on the board if they have a 7.5% stake or higher, which opens up the possibility of international bodies or other institutions buying into CMAC capital. Directors are now elected for a standard three-year term of office, so they have a longer time horizon to get to know the institution and see what they can contribute to it.

This new law has coincided with the publication of new corporate governance and market conduct regulations. We are well on the way towards establishing the practices of corporate governance and conduct that are found in developed economies. This is part of the efforts all members of the OECD must make, but also part of the drive to give Peruvians a robust, comprehensive and inclusive financial system that supports the country’s development.

9. What has your first year as head of the Banking, Insurance & Private Pension Fund Managers’ authority been like? Which achievement would you be most proud of accomplishing in your time at the Authority?

It’s difficult to choose just one. I believe that a whole array of regulation and supervision is needed, as well as actions to improve the internal management of the SBS, in order to get closer to the real goal, which is for the Peruvians to have a robust, comprehensive and inclusive financial system that helps them improve their standard of living. That’s why we need an effective Authority that is conscious of the important part it plays in the country’s progress; we need regulation and oversight that creates the right environment for the financial system to develop sustainably.

10. Your recommendations for a book and a destination?

With my economist’s hat on, I would recommend “Economics for the Common Good”, by Jean Tirole. It’s a book that both economists and non-economists can read to get an understanding of some of the dilemmas of public policy. It explains how the market and the State are complementary, making clear that for markets to work well, the State has to work well.  

Peru has marvellous places off the beaten track. For example, last year on a trip to Ayacucho and Andahuaylas, I discovered Vischongo, a charming little village two hours away from Ayacucho, with extraordinary people, beautiful country like Titankayoc, the huge forest of Puya Raimondi and great potential for tourism development. Asphalting the roads has brought down the travelling time between Ayacucho and Vischongo, although telecommunications connectivity needs to be improved to make financial inclusion feasible.