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AmericasMarch 7 2005

Brazil reaches out to unbanked population

Central Bank initiatives are enabling Brazil’s low-earning citizens to access banking services. Jonathan Wheatley reports from São Paulo on the benefits for both local communities and the financial institutions that cater for them.Standing in line at a kiosk in Vila Nivi on the northern outskirts of São Paulo, Sandra, a 38-year-old mother of four, is upset. “I’ve been waiting 40 days for my bank card,” she says. “I’ve come here every day to complain.”
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Yet, despite the delay, Sandra is delighted to have opened an account at Banco Popular do Brasil, a new subsidiary of government-owned Banco do Brasil. Like millions of low income earners in Brazil, Sandra makes her living in the so-called informal economy. She buys clothes at the wholesale markets in the far-away Brás neighbourhood near the centre of São Paulo and sells to her private clientele.

With no bank account, she had to ask for payment in cash or face the humiliation of asking friends to cash third-party cheques. Now she can make deposits and withdrawals herself, and borrow small amounts at low interest rates to finance her stock. “It’s a marvellous initiative,” she says. “It’s made a lot of difference to my life. It’s much more dignified, just to be able to go into a bank like everybody else.”

Fast-paced change

In fact, “everybody else” is not quite accurate. Until recently, an estimated 40 million Brazilians, of an economically active population of 68 million, had no access to banking services. Now, thanks to new Central Bank regulations, this is starting to change – and at such a pace that hiccups such as Sandra’s delayed bank card are no surprise.

Banco Popular began operating in February 2004 and had opened a million accounts by January 2005. Caixa Aqui, a similar service operated by government savings bank Caixa Econômica Federal, had 2.5 million accounts at the end of last year. Banco Postal, operated through post offices by Bradesco, Brazil’s biggest private sector bank, had 2.8 million. The spreading reach of financial services is not measured by accounts alone. Lemon Bank, one of Brazil’s newest financial institutions, has about 35,000 accounts, but handled 72 million transactions in 2004, mostly bill payments by non-account holders.

The new services were made possible by Central Bank regulations introduced during 2002 and 2003. They boil down to two main initiatives: correspondentes bancários, or banking correspondents, and a new form of microfinance for consumers and small businesses.

Alternative outlets

Banking correspondents offer simple banking services from outlets other than banks. They operate in stand-alone kiosks and, more often, from retail outlets such as supermarkets, bakeries, pharmacies and petrol stations. Typically, they offer simple services such as bill payments, deposits and withdrawals, and they may sell simple financial products such as insurance and títulos de capitalização, low interest-paying bonds that offer regular cash prizes much like the UK’s Premium Bonds.

Microfinance regulations allow banks to take 2% of reserve requirements deposited at the Central Bank (a massive 45% of demand deposits) and lend them to low-income individuals and small businesses at interest rates of 2% a month – high by international standards, but much less than the average Brazilian overdraft rate of about 8% a month.

Lack of branches

Sérgio Darcy, the Central Bank’s director of regulations, is largely responsible for the measures. He was spurred into action by the realisation that, in 2000, some 1700 out of Brazil’s 5500 municipalities had no bank branches. “Banks were closing branches because of high running costs,” he says.

The measures introduced, he adds, have reversed that trend and produced other unexpected results.The number of “unbanked” municipalities has fallen to less than 100, revitalising stagnant local economies. Banco Postal, for example, opened its first branch at the post office in São Francisco de Paula, a remote town in Minas Gerais state. André Cano, director at Bradesco responsible for the service, says people withdrawing pensions, for instance, previously had to travel 10 kilometres to the nearest town with a bank. “They would spend the money there,” he says. “Now, that money circulates in the local community.”

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Banco Postal uses the banking correspondent system, but anyone opening an account there opens a normal account at Bradesco. Chequebooks carry a Banco Postal logo, for example, but the cheques themselves are standard Bradesco issue. At Caixa Aqui and Banco Popular, special rules apply. Crucially for their target market, customers do not have to provide proof of income to open an account; their national identity card, tax number and an address suffice. Transactions are limited to 1000 reais ($388) a month, and credit to a maximum of 300 reais. Some analysts question the profitability of such low-volume business; of 1.3bn reais available for microfinance under the new regulations during 2004, just 500m reais was used.

Low-cost acquisition

Ivan Guimarães, president of Banco Popular, says the bank will initially make most of its money from fee income. He adds that credit will also be profitable, given the bank’s very low running costs, which are achieved through simplified services and a high level of automation.

The cost of acquiring new customers at Banco Popular, he says, is just 1.50 reais, compared with 46 reais at parent Banco do Brasil. “Competition for higher-income customers is very strong,” he says. “The challenge is to grow, and this [the low-income segment] is the only way.”

Credit questions

Lemon Bank is the latest venture from the people behind Patagon, the online brokerage sold to Banco Santander at the height of the internet boom. It has no high street bank behind it and is the only bank to operate entirely through banking correspondents (customers of Banco Popular, for example, may also use branches of Banco do Brasil).

Under microfinance regulations it could tap other banks’ reserve requirements to offer credit at 2% a month, but has no plans to do so. “There’s a grey area here between public policy and the private sector,” says Michael Esrubilsky, CEO. “A good bank has to be economically viable, and we’re not sure if credit at 2% a month is viable or not.”

Instead, he says, Lemon Bank uses cost savings to offer credit at 10% to 15% below market interest rates. Lemon Bank began operating in June 2002 and went into profit in the fourth quarter of 2004.

Brazil’s experiments are attracting international attention. A World Bank delegation made the rounds of several institutions in December. Mr Darcy at the Central Bank says the response to his initiatives has been “fantastic”.

So far, Sandra and millions of others like her agree.

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