Nicaragua: Microfinance Sector Facing Increasing Challenges

The Fitch report notes that the negative effects of the global crisis have intensified in Nicaragua.

Friday, September 25, 2009

Fitch Ratings – San Salvador/San José, September 24, 2009. The risks faced by microfinance institutions worldwide have aggravated over the past year. The lesser favorable economic conditions have deeply impacted the populational sectors in developing countries that have managed to overcome poverty and compose an important segment of microfinance institutions.

This has then resulted in a significant increase of non-performing loans and a noticeable deterioration of profitability indicators. The effects mentioned above have intensified in Nicaragua given the precarious economic condition, elevated poverty levels, lower flow of remittances, narrowness of the financial markets, and the significance of the informal sector on the economy. This phenomenon is aggravated by the fact that donor countries have suspended a large portion of their monetary aid.

Furthermore, non-performing loans in Nicaraguan microfinance institutions have increased since July 2008, after the President’s public claim aimed at the debtors of such institutions to breach the payment of their obligations, thus leading to the creation of the “Movement of No-Pay.” Then also, besides having an effect on the levels of non-performing loans, this movement has also been responsible for acts of vandalism against some microfinance institutions, leading to a further escalation of the business environment risks.

In view of these events, microfinance institutions have increased their loan loss provisions, thus leading to a reduction of their earnings and a diminished capacity to internally fortify their capital. Furthermore, the increased risk profile of the target market has led to a stricter selection processes, thus, limiting the amount of loan placements and leading to an increase in interest rates. Also, microfinance institutions could face a notable reduction of exterior funding, which could further hinder Nicaraguan MSEs from obtaining valuable resources for developmental purposes. Fitch considers that, in light of the adverse local environment and the elevated sensibility of loan portfolio quality, the quality of loans will continue to decay in the short term. Therefore, Fitch projects greater levels of non-performing loans, restructurings, write-offs, and executions of foreclosed assets, which would then result in a deterioration of the risk profile of the microfinance institutions.

In consideration of the aforementioned risks, Fitch has assigned a Negative Outlook to the ratings of two of the three regulated microfinance entities rated by Fitch, and in the event of an increasing proportion of deteriorating loans, in conjunction with a weakening of capital and liquidity positions, the national ratings of such institutions could be revised downward.

Institutions possessing strong capital positions, sufficient coverage of past-due loans, as well as adequate geographical diversification of their loan portfolio, will be better prepared to face diminishing profitability stemming from a greater deterioration of the loan portfolio. Conversely, institutions that depend on the support of a majority shareholder could be affected only if, in Fitch’s view, there is a change in the capacity and/or willingness of such shareholder to provide support for the operations.

The Nicaraguan National Ratings assigned by Fitch are as follow:

Institution Long Term National Rating Outlook
Banco de Crédito Centroamericano A(nic) Stable
Banco de América Central AA+(nic) Stable
Banco de Finanzas AA-(nic) Stable
Citibank de Nicaragua AA+(nic) Stable
Banco ProCredit AA-(nic) Stable
Banco del Éxito BBB+(nic) Negative
Financiera FAMA BBB(nic) Negative
Credifactor BB(nic) Positive

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