Researched by: Saydra Battersby Quintanilla, Credit Suisse
- Introduction – Executive Summary
- Microfinance Institutions
- Legal Framework
- Consumer Protection
- Special Development Regions (REDs) of Honduras
Introduction – Executive Summary
The Honduran banking system remains strained following an extended period of political and economic uncertainty. Of the more than seven million Honduran citizens, 70% live in poverty, 44% live on less than $2 a day and 20.7% live on less than a dollar a day. Wealth and income disparity remain a constant challenge and financial support is not always easily accessible. Limited quantities of microloans are available but they are not always overtly attainable outside of larger city centers, which is where they are most needed. Rural communities do not have access to the same level of financial services as their wealthier counterparts and they are more likely to live in poverty. Honduras experienced a 2.1% decline in nominal GDP in 2009 largely due to the impact of the global financial crisis on the country’s major trading partners, and the impeachment of their president in June 2009. Following this political disruption, the IMF reduced financial support to the country and the United Nations placed limitations on their role in UN activities including trade negotiations. The global financial crisis adversely affected all industries in Honduras, but primarily agriculture, trade, transport, construction, and industry. Exports decreased by 20% as compared to 2008 and inflation, as measured by the consumer price index, decreased by 7.8%. In 2009, the financial services sector slowed despite declining interest rates and relaxed reserve requirement policies that were meant to accelerate private sector credit. Due to the political and financial uncertainty in the country, the financial sector invested heavily in government securities in 2009, driving a 50% increase in public sector credit. This substantial increase was the highest in Central America, mostly due to declining foreign aid funding to the national budget.
The World Bank offered numerous economic, financial, and regulatory assessments of Honduras in their “Doing Business in 2011” report that helped illustrate the development and sophistication of the Microfinance industry within the country over the last few years. Honduras earned a ranking of #131 out of 183, in the World Bank’s “ease of doing business” category, but their year-over-year ranking in ease of doing business has improved significantly so that they are now one of the top 10 “most improved” of the countries evaluated (they rank #7). This suggests that the recent government attention on strong governance will continue to improve its position. Despite improvements in financial markets and the overall economy, Honduras’s minority consumer protection index rests at zero out of ten on The World Bank Scale. This low ranking was assigned to the country despite the introduction of a consumer protection law, which was enacted in 2008, suggesting that enforcement of these new legal protections are weak. New legislation is further expected in 2012 to address the consumer protection challenge.
- The consumer protection law is general and loosely defined. A handful of government agencies and institutions have formal mandates and responsibilities to protect consumers, but they lack clear consumer protection regulations for financial services. This means that the interests of banks and consumers are not adequately defined and differentiated in the existing laws.
- Microfinance is a growing industry in Honduras, but the necessary standards, formalization, and regulation to support its expansion is limited. Informal collectors and creditors have the advantage of being close to the population they serve and can offer immediate service, but their support of consumer protection is unknown and many of these institutions are not part of any industry association that helps to define good governance and best practices. This trend is improving over time as more programs are being offered by credit agencies like Organizacion de Desarrollo Empresarial Femenino (ODEF), but further support, commitment, and involvement from government institutions are needed in order to ensure protection of Honduran citizens.
- A variety of Microfinance Institutions and Networks, to be discussed in some detail below, have launched campaigns to increase financial literacy and educate consumers regarding their rights and available resources. It is hoped that through these self-empowerment efforts, clients will also develop the knowledge to protect themselves.
According to the World Bank’s 2011 “Doing Business” report. This suggests that they are one of the most difficult countries in which to conduct business easily and effectively. According to the CGAP 2008 Microfinance funder Survey for Latin America and the Caribbean, Honduras (with 50 to 100 million USD available for funding) is a lower middle income country in the microfinance sector. Therefore, the accessibility of Microfinance institutions to provide safe and accessible financial services for this population is necessary for their economic development.
Firms in Latin America and the Caribbean continue to spend a substantial amount of time (385 hours a year on average) physically paying taxes. The law requires an average of 33 different payments a year, and changes to these laws have enabled tax payment processes to become much more efficient, saving businesses three days a year. As of 2004, Honduras has eliminated notarization requirements and introduced online filing and payment systems, and in addition, they also eliminated the need for 25 separate tax payments each year, which has helped to reduce time in compliance review by 11 days (83 hours) on average.
The Economic Commission for Latin America and the Caribbean in Honduras conducted a Microfinance study in 2009 to collect client and loan portfolio data that illustrated the variety of providers and services in the financial sector that serve micro-and small-scale enterprises in Honduras.
- Financial Institutions
- Private Development Organizations
- Financial Private Development Organizations
- Credit Unions
- Alternative Rural Financing Systems (organization structure in not standardized, but this category includes the following Community Association of Savings and Loan AC, Caja Rural Community Bank, and others).
There are two primary banks that support Microfinance clients in Honduras, Banco Popular and Finsol, both of which are committed to expanding access within the country’s borders. In 2010, $221.6 million dollars in loans were provided to 161,447 active borrowers across all microfinance institutions in Honduras. The presence of Microfinance Institutions in the region expanded to 21, five of which exceeded a loan portfolio of $20 million [ProCredit-HND, Banco Popular, ODEF Financiera, Fundevi, and Finsol (Financiera Solidara S.A.)]. Such rapid expansion in the industry suggests that standardization of procedures around client protection is secondary to expansion and portfolio growth. Policies that do exist are likely to be unsophisticated, untested, and inconsistent. Financiera Solidara S.A. is known as the first regulated microfinance institution in Honduras though the specific regulations applied to the institution are not widely available. In addition to the large microfinance institutions previously discussed, there are four additional small institutions in Honduras, each with a gross loan portfolio under $1m, and the remaining ten medium sized institutions hold portfolios of between $1m and $20m. A group of private investors established Finsol as Honduras’ first private microfinance institution in June 2009. There are 12 main Funders of Microfinance Institutions in Honduras, that include Oiko Credit (that funds 6 different MFIs), Hivos-Triodos Fun (which funds two different MFIs), and 10 others who each fund a single MFI.
Between 1993 and 2003, the CARANA Corporation partnered with 12 NGOs and private banks to develop financial services for micro-entrepreneurs in Honduras. They helped to provide governance, policy, strategic planning, management systems, and microcredit methodologies in collaboration with the government to develop the country’s legal/regulatory environment, which included a focus on client protection. This partnership extended to policy management and implementation of new legislation that is expected to be enacted in 2012, and CARNA further developed audit and inspection policies for the Honduran Banking and Insurance Commission. The regulation is intended to prioritize protection of the end-consumer, but time will tell whether it succeeds due to the complex nature of the partnership and the potential conflict of interest. Between 2008 and 2009, MFIs in Honduras showed a higher concentration in home loans amounting to 21% of the portfolio (excluding Foundation for the Development of Social Housing Urban and Rural (FUNDEVI), which is limited to housing). Including FUNDEVI funding, the microfinance portfolio represented about 36%. Microfinance showed declines between 2008 and 2009 due to economic hardship throughout Central America, with the median value of borrowers decreasing by 12% and ending at $5.3million. The fall in the portfolio may have been greater if not for the increase in housing products during this time, an industry that relies heavily on microenterprise credit and domestic consumption. The median return of Honduran institutions dropped sharply in 2009, so by evaluating Honduras MFIs in the MIX Market based on legal status, they did not achieve financial self-sufficiency (in both NGO peer groups and non-bank financial intermediaries) during that year, resulting in negative ROAs in both groups (-6% and -0.8% respectively).
Additional research has shown that he NBFI financially outperformed the NGO portfolio largely due to their management of operating expenses and lower losses. Risk indicators for 2009 also impacted the portfolio of loans in Honduras because institutions largely increased punishment for loans not paid back within 30 days (despite the 120 day law), which drove a rise in the median ratio of punishment as high as 4% of gross loans. NGOs showed the largest portfolio declines (13%) by institution while punishments made up 5.3% of the average portfolio according to MIX.
The Banco Central de Honduras is the regulator of financial markets within the country’s borders and it performs the following functions:
- Formulates and directs the monetary, credit, and exchange policy of the country and issues the corresponding regulations
- Issues bills and coins
- Enables the changing agents that could negotiate exchanges
- Manages International Monetary Reserves
- Sets the exchange rate in the functions of the offers and demands
- Manages credit operations to address Financial System liquidity needs
- Manages monetary stabilization
- Practices the duty of bankers, fiscal agents, and economic/financial counsellor of the State
The Central Bank of Honduras has set the example for the governmental sector in promoting and demonstrating good governance, fairness, and protection, though it trails behind other developing nations with regard to regulation and development of a strong financial framework. The Central Bank defined and developed key policies with regard to monetary, credit, and exchange policies under their oversight and they also delivered the publication of a summary of laws and rules that concern the financial system, the National Payment System, Bloomberg Indicators, and others.
The Credit Policy of the Central Bank of Honduras Monetary Authority has focused on the country’s economic restructuring plan (with a free-market emphasis), while stimulating private sector financing and reducing the financing to the public sector. The entity aims to increase banking credit by redirecting resources to the productive areas of the economy, thus reducing reserve requirements for institutions in the financial system that invest their portfolios in these areas (agriculture, manufacturing, construction), while decreasing lending for consumption and trade.
There are four credit bureaus in Honduras, TransUnión, Data Crédito, Equifax, and Central de Riesgo de la Comisión Nacional de Bancos y Seguros. In addition to these local credit bureaus, there is a U.S. company called Central Risk of the National Commission of Banks operations in Honduras in 2001 that is working to develop customer credit management through delivery of credit reports, which includes the following details aimed at ensuring responsible lending practices:
- Borrower Details (Name, Address, and Date of Birth)
- High Risk Factors (fraud, legal proceedings, etc.)
- Historical Past Due Payments for the last 36 months
- Current Past Due Payments
- Commercial Debts
- Credit Card Debts
- Microfinance Debts
- Banking and Financial Liabilities
The Law of Financial Institutions (Decree number 170-95) was issued on October 31, 1995 to regulate organization, establishment, operation, merging, transformation, and liquidation of institutions within the Honduran financial system.
The National Commission for Banks and Insurance Companies (CNBS, Comisión Nacional de Bancos y Seguros) supervises and regulates banks, securities operations, and insurance companies in Honduras. In September 2011, they released an updated version of the Financial Consumer Protection Regulation No. 1631, as well as a set of rules that complement these provisions (No. 1632). This new protection law expands upon the existing obligations and conditions set upon the institutions that it regulates, and includes detailed descriptions on how an institution can meet these requirements. The regulation delivers transparency through information disclosure that further dictates that information must be shared at multiple stages of a transaction. This additional communication and verification ensures that clients understand their contracts, and that they are accurate and transparent. The law further requires institutions to promptly respond to consumer inquiries about their rights and obligations, and to advertise their services with a sufficient level of transparency and disclosure to that of a formal contract. The institutions must have a department with a manager dedicated to consumer protection.
The Honduran Consumer Protection Act was first enacted on April 7, 1989 by Decree No. 41-89 and its main objective is to protect, defend, promote, publicize, and enforce the rights of consumers. Actions covered by this act include protection of consumers from price gouging, assurance in the use of the words guarantee or warranty (use of which must be approved in advance by the General Production and Consumption Department), being unforthcoming about risks, lack of transparency around product information, and standardization of weights and measures used in all manners of sales. It does not permit loose usage of the terms “discount” or “deal” unless an offer is legitimately lower than market value. It further provides a mechanism for consumers to log complaints and a process for investigating such complaints. This law was further enhanced on July 7, 2008 by Decree No. 24-08. As part of their breath of oversight, the ODEF Government Support Agency created an enforcement policy for debt collection that appears in the procedures of the Manual of Credit and Portfolio Management, which specifies the accepted standard collection process and the methodology. The official legal collection policy states that escalation of collection methods may not begin until a repayment is 120 days late, though enforcement of this law is weak. Additional protections are available to MFI clients in Honduras, including a program offered by the Organizacion de Desarrollo Empresarial Femenino (ODEF) that allows Hondurans to transfer remittance monies to lenders from abroad in order to increase client choice and protection, though the systems are much less developed outside of major towns. ODEF partners with a federation of credit unions connected to US credit unions to enable Honduran emigrants to send money home to their country, and disburse the funds to end clients through its branch offices, which helps to protect borrowers from a cycle of debt.
Special Development Regions (REDs) of Honduras
The Honduran Congress introduced Special Development Regions [Región Especial de Desarrollo (RED)] in 2011 to introduce reform and governance across numerous Honduran institutions. RED collaborates with international partners to provide effective governance, establish the rule of law, and ensure equal treatment under the law for all residents. This reform initiative is unique in a volatile political climate because it received near unanimous support across party lines that are often ideologically divided, but united in their desire to strengthen existing institutions. The special development regions hold promise but progress is expected to be slow because a basic governance framework has yet to be created. Congress developed smaller special zones around export-processing manufacturing in free trade zones, but this expansion was not accompanied by improved legal protections. The hope is that by reforming these small zones, Hondurans will value the opportunity that restructuring can deliver. The constitutional provisions for Honduran REDs provide two anchors for governance, an external court of appeal and a nine member Transparency Commission to serve as the anchor for the executive and legislative functions in the zone. Among their most important near-term responsibilities will be their ability to establish a process for receiving development proposals from potential investors and to ensure that business dealings related to the RED remain transparent, competitive, and free of corruption. As the population of the RED grows and conditions of safety and trust emerge, the Commission will transition to local democratic selection of the governor and legislature.
The RED zones hold a great deal of promise for consumer protection in Honduras because the regions have a built-in domestic check on the conduct of the Transparency Commission, which helps to limit opportunity for corruption and rogue governance. Treaties negotiated by the Transparency Commission and approved by the current Honduran Congress can further offer additional protections to firms and residents under international law.
There are only two MFI networks headquartered within Honduras, Red Katlaysis and REDMICROH. Red Katlaysis was introduced in 1994 and incorporated in 2002 as a Central American Microfinance Network. They aim to strengthen the role and governance of microfinance organization in Central America by applying principles, values, and quality standards across management within these organizations. These activities improve efficiency and profitability, while helping to create jobs, alleviate poverty, and promote gender equality. The REDMICROH network includes 22 organizations across Guatemala, El Salvador, Honduras, and Nicaragua, and helps to provide training and business advice to Microfinance institutions, and partners with Katalysis Bootstrap Fund in the U.S. that helps with funding resource management. It is headquartered in Tegucigalpa and is recognized by the Government of Honduras under Resolution No. 465-02. One particular program implemented by Katalysis was a market research and credit demand study called,“ “Products Design for Medium and Long Term in Honduras” Red Katalysis,” which provided an institutional diagnosis of the microfinance sector, a study of loan suppliers and conditions, product manuals, and a policy for developing product costing models.
REDMICROH is a private non-profit operating in Tegucigalpa, which was created by Law No. 1366-2003 and issued by the Ministry of Interior and Justice on August 13, 2003. The mandate of this network is to provide its microfinance institution members with an opportunity to channel resources into strong partnerships that deliver common benefits to the sector through capacity building. This approach helps institutions to manage volatility in the industry due to competitiveness, while maintain quality and efficiency and accessibility to end-clients, particularly women. In February 2011, REDMICROH introduced a technical training unit to serve as an intermediary that facilitated guidance and technical services needed by microfinance network members and affiliates. This enables knowledge transfer, skill development, and the platform for developing standards.
The legal framework for consumer protection in Honduras is weak but continues to improve as the government works on creating the necessary infrastructure and systems in order to deliver good governance. Introduction of the new special development regions (REDs) and the focus on client protections and social performance through legislative action is slowly changing the landscape. Full scale reform will take time to improve regulation (despite dedicated efforts by non-governmental organizations and independent associations) because of the lack of basic institutional infrastructure. The Central Bank’s mandate includes a duty to protect the interests and rights of consumers, but transparency and enforcement must follow in order to usher in change and enable them to deliver on this pledge. The government institutions must also ensure that there is a properly centralized body that provides oversight to all sectors of the Microfinance industry to ensure consistency and equity.