Consumer Banking in Lima (Peru)
In the theory of economic development, one approach is to invest in large projects or corporations and hope that the benefits in their development will trickle down to the population at large. This would be the rationale for setting up all the maquiladoras that lined up the US-Mexican border where US manufacturers can take advantage of the lower wages paid to the Mexican workers. However, history has shown that the benefits are slow to trickle down. Another approach is to assist small business entrepreneurs through micro-loans to develop their own enterprises, thus creating profits and expansion. While international loan organizations can contribute some capital, the private sector has many more capital assets for this application. However, private banks are reluctant to issue loans unless the applicants are suitably qualified. Therein lies the rub: banks will not issue loans to consumers who do not have tangible assets and/or have established credit histories.
The following article appeared in the Miami Herald on lending practices in Lima, Peru:
That the lack of land titles could play a strong role in discouraging economic development may seem unthinkable in the United States, where stable land registries have existed since the 19th century land rushes. But the lack of clarity over land exists throughout Latin America and is a major contributor to poverty in the region.
Without land titles, poor families cannot obtain mortgages to upgrade their homes, start small businesses or pay for their children's schooling -- the primary means by which most Americans move up the economic ladder.
Without clear land titles, people kill each other in ownership disputes, particularly in rural areas, and governments cannot collect property taxes for badly needed schools or healthcare.
Without land titles, squatters must stay home more often to prevent someone else from seizing their illegal holdings, and their children are less likely to go to school.
And without legal titles to adequate parcels of farm lands, millions of peasants have migrated to Latin American cities, usually ending up in crowded, crime-ridden shantytowns. Handing out land titles as a poverty-fighting measure is the brainchild of Peruvian economic theorist Hernando de Soto, who says that doing so turns ''dead capital'' -- the potential worth of land and home -- into working capital. In 2000, he estimated, Peru had $74.2 billion worth of real estate in dead capital -- twice the total assets of the country's 1,000 largest private firms.
In all, Peru's government awarded nearly 1.4 million urban property titles in Lima and other cities from 1996 through February -- the most ambitious program in Latin America, although it still has nearly a million families to go.
The program has shortcomings. Most commercial banks remain reluctant to lend to shantytown dwellers, thinking they can make little money on micro-loans, said Donald F. Terry, a senior official at the Inter-American Development Bank, which is also helping to put de Soto's theories into practice. Only 14 percent of Saúl Cantoral's residents have used the banking system.
Marcelina Punto said she opted not to seek a loan and instead turned the front part of her home into Saúl Cantoral's only restaurant, waking up at 5 a.m. to sell soup to workers heading out to their jobs and then serving up $1 lunches of soup, broiled chicken, rice and beans. ''It's too risky to borrow money. . . . If you don't make a payment, you can lose your home,'' Punto, 47, said before acknowledging the positive side of having a title. ``We were afraid that any moment we could be kicked out of our home, . . . but now I feel sure that it's my property.''
Hilaria Huallpa, 32, lives down the street from Girón, in a one-room plywood house with a dirt floor, and her three children sleep in a single bed wedged into a corner. She said she can't afford even a small mortgage. ''I'd like to get a loan to fix it up,'' said Huallpa, pregnant with her fourth child. ''But they ask for 700 soles [$202] as a down payment. We could only give 400 to 500 soles.'' Her husband is a street cleaner who earns $115 a month.
Recognizing that commercial mortgages are difficult to obtain, the government's Commission to Formalize Informal Property established a new program that pairs titleholders with lenders that can make small loans at low rates. About 296,000 new titleholders have received a total of $728 million in loans since 2000, a spokeswoman for the agency said. But such amounts are small ''compared to the amount of dead assets,'' de Soto said. Nonetheless, before the government agency came to Saúl Cantoral, 75 percent of its residents lived in cardboard or straw houses. Today, 80 percent of the houses are brick.
We will now cite some survey data from the 2003 TGI Peru study. This is a survey of 3,002 persons between the ages of 12 to 64 years old in Lima, Peru during 2003. For our purposes here, we will restrict ourselves to the subsample of 901 persons who are the heads of their respective household. This is the person who is most likely to have any banking activities in the household (as opposed to the 12-year-old child or the 64-year-old grandmother).
Within this sub-sample, 40.2% of them have a relationship with a bank, which may be anything from savings accounts, checking accounts, ATM cards, debit cards, CDTs, mortgage loans, car loans, student loans, etc. The following chart shows the breakdown by socio-economic level, employment status, occupation, education and a question on financial securitiy (specifically, completely agreeing with the statement "I fell financially secure"). Access to banking is therefore not universal; it is also uneven in the sense that those with financial histories and demonstratable assets have greater access to banking services.
(source: 2003 TGI Peru)
Of all the banking activities, the most popular one is the savings account. Of these survey respondents, 31.8% have one or more savings account at a bank. The following chart shows the breakdown analysis. Since more than three-quarters of banking customers have savings accounts, the pattern here follows the overall bank customers.
(source: 2003 TGI Peru)
The thrust of the Miami Herald article is on the power of the mortgage loan that is secured on real estate property. Amongst these survey respondents, only 1.1% have existing mortgage loans. The breakdown in the next chart shows that it is in fact much more exclusive than bank access or savings account. Access to mortgage loans through the private sector is still quite limited at this point.
(source: 2003 TGI Peru)
(posted by Roland Soong, 4/10/2004)
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