Community banking, explained beautifully by Charlene Nemson, is supposed to be one of the safest ways to lend money. In Paraguay, where financial inclusion is very uneven, this type of product was only offered by foundations and NGOs until a couple of years ago. As the market is becoming more competitive, the banks and the financial institutions, or financieras, try to innovate to accomplish their goals.
One of the financieras that incorporated this product to their portfolio was Financiera el Comercio. Traditionally, this type of product does not incorporate other types of guarantees, just the joint guarantee from each of the group’s members. Their word is usually enough. However, the alarming growth of the non-performing loan (NPL) ratio in the last couple of months, particularly in the cities, has led to the Financiera’s overhauling of its processes.
This product should teach people to invest and save and become more accurate with finance. The idea is that once people get financial aid, they can develop their business and eventually earn their own personal loans. In the last couple of years, accentuated competition has brought money into communities traditionally excluded from financial services–but the informal economy in Paraguay is very important, and it has proven difficult to create healthy financial literacy around that. As a result, many people have become so comfortable with existing financing mechanisms that they are not changing their bad habits as quickly as we would hope. It doesn’t help that people in the cities know that microfinance institutions do not have a real guarantee or pressure to make them pay, so they get too relaxed about their obligations.
How can the Financiera convince people to repay their loans?