1. Presentment of microfinance

Some decades ago, financing services for the less fortunate sectors of the population were considered unfeasible. Family businesses and low-revenue businesses were not attractive to banks due to the high risk involved in lending to this sector.

Today, this paradigm has shifted at the international level. New organizations have emerged that have been able to develop non-traditional financial techniques that have allowed them to identify what guaranties this sector of the population can provide.

More and more, it is being attempted to develop guaranties not so much in tangible forms but in the valuation of intangible assets; i.e., the microenterprise sector’s potential to obtain future revenues and generate the ability to pay.

1. International context

Since the 1980s, a process has been underway aimed at greater financial inclusion and the democratization of credit. Microcredits have a favorable impact on reducing poverty, society inclusion, and represent a factor for major change in the lives of vulnerable groups. A key component is to find a proper balance between social impacts and the return on equity microfinance entities should aim for their sustainability.

Pioneer microcredit institutions in Latin America were created in the late 1980s and early 1990s. Most of these entities were organized as Non-Governmental Organizations (NGOs) that issued credit and had a strong social mission. Others were created as true financial intermediaries specializing in microcredit with various institutional formats depending on the regulations existing in each country.

 

1. How Cuba fits into this reality

Cuba’s financial system during the past decades has targeted credit towards the public sector and agricultural cooperatives.  The private sector (the self-employed) has been marginalized with respect to bank credit.

In 1998, individuals were allowed to apply for bank credit for personal (non-commercial) purposes, but that policy was quickly canceled without its implementation being of any consequence. These loans were only granted to government workers and retirees, and were limited to a maximum of 3,000 Cuban pesos.

In the 2000s, and mostly in relation to the “Energy Revolution,” loans to individuals cropped up for the purpose of defraying the cost of replacing low-efficiency appliances. These appliances were sold to the population on credit. These loans were virtually compulsory, and a good portion of the population has yet to repay them. In some cases, this has been due to lack of liquidity in their family finances, and in other cases people have felt they have the right to not repay a loan that was imposed on them.

Given this state of affairs, Decree-Law No. 289 on Loans to Individuals and other Services was published in Official Gazette # 40 dated November 21, 2011, with the objective of establishing the general principles and procedures that regulate loans and other banking services for individuals. This represented a radical change in the relationship between private businesses and Cuban banks. Although this law has not had the expected impact, this has been due in good measure to the lack of a credit culture on the part of bank agents and Cuban entrepreneurs.

According to official sources, more than 47,000 loans had been granted throughout the country by June 2012, 6 months after being implemented. Most of these loans have been used to repair family dwellings rather than to inject money into private businesses.

1. Principles of the new regulations

Decree-Law No. 289 sets forth a series of principles based on which the central bank must implement its lending policies; following are some of the most important ones in order to analyze the scope and real possibilities that the same can represent for the population.

• Loans are granted in Cuban pesos exclusively.
• The law does not establish a maximum amount for the loans.
• The property that is the debtor’s permanent dwelling may not be offered as collateral.
• The debtor’s or a third party’s bank accounts, personal property, mortgages on vacation homes and vacant lots may be used as collateral.
• Individuals may have access to loans in order to obtain funds for private businesses, for construction materials to repair their homes, to purchase items for their own property or to satisfy other needs.
• Non-public sector workers may open checking accounts.
• Individuals may use the following payment instruments in addition to cash:
  • bank transfers
  •  
  • payment order
  • debit or credit card
  • local letter of credit issued and notified by Cuban banks
  • bill of exchange
  • promissory note

1. Implementing the law.

Implementing this Decree-Law is up to the Central Bank of Cuba, which establishes by means of Resolution No. 99/11 published in the abovementioned Official Gazette No. 40 of 2011 the standards for granting credit to individuals. Hereinbelow we will try to summarize the fundamental elements of implementing the granting of credit to individuals.

• Terms and objectives.

Loans earmarked for working capital will be granted for a term not to exceed 18 months, and loans for investments will be granted for a 5-year term, depending on the activity to be financed and the collateral guaranties proposed.

During a visit to a Havana bank in charge of these matters, we were informed that the term could be up to 9 years. These somewhat discretionary issues are defined by the banking institution’s internal memos, to which there is no access.

•  

Although the law does not establish a maximum amount for loan applications, the amount will depend on the bank’s availability at a given moment.

The only information which we were able to access in relation to this topic was that if the loan requested is for less than 10,000 CUP, the bank where the loan has been requested has the authority to approve it or not. If the amount requested is greater, it must go to the provincial committee to be studied.

c.         The application process

Individuals authorized for self-employment or other forms of non-governmental management may request loans at the bank branch in their municipality that is in charge of these services (only 1 per municipality). Right now, it is indispensable that the self-employed person have at least 6 months of experience to be able to opt for a loan, being required to present the following documentation:

• Loan application from the financial institution attesting to the feasibility of the business, estimated earnings and potential market, as well as the collateral guaranties to be given. (See Exhibit 2)
• Identity document;
• Official document that authorizes the individual to be self-employed or to carry out other forms of non-governmental management.
• Enrollment in the Taxpayer Registry (ONAT).
• Most recent proof of payment of taxes.
• Financial statements or Income and Expense Reports, depending on the income bracket.
• Collateral guaranties.
• Any other document that the financial institution may consider necessary based on the characteristics of the authorized activity and how it is marketed.

If the loan requested is within the jurisdiction of the municipal office in charge of the matter, the response will be given within 20 days. If the application needs to be sent to the province due to the loan amount (over 10,000 CUP) or some other factor, the term for the response shall be 30 days.

d.        Interest rates

Interest rates are set by adding a margin approved by the Central Bank to the interest rates on time deposits, in Cuban pesos. Right now, interest rates on time deposits range from 4% for a one-year term, to 6.50% for a five-year deposit.

Margins approved depend on the purpose of the loan and have a range within which banks may move based on the risk analyses performed thereby.

• Working capital or investment up to one year:1% ± 0.5%
• Working capital or investment over one year: 1.5% ± 1%
• Purchase of const. materials or OM payment:0.25%
• Durable and consumer goods: 2% ± 1% (loans for this purpose have not yet been implemented)

See Summary Table in Exhibit 1

Late fee may not be more than 4% above the agreed interest rate.

e.         Collateral Guarantees

The following may be used as collateral; they may be subject to lien or to precautionary or security measures:

• bank deposits of the applicant himself or of third parties
• surety bonds
• present or future personal income or remuneration
• bills of exchange or promissory notes backed by a financial institution
• personal property
• mortgages on vacation homes, as well as vacant lots

 

Per bank officers, the mechanisms to use the last 3 points have yet to be created, which does not mean that they may not be implemented in the medium term.

6.         Summary of the most significant factors.

By way of summary, several aspects of the new policy regarding credits existing in the country bear pointing out. Beyond the hits and misses of this measure, it may be affirmed that it has opened a door to question the use of credit and other bank facilities such as checking accounts in the management of private businesses. Although at the international level these elements may seem closely linked to the business world, for Cuba’s private sector (self-employed) they are new elements about which they must be trained.

Low interest rates  Interest rates between 2.5 and 10% for loans up to 9 years are low by international standards.

Low risk for banks. The requirement to have 50% of the loan in a bank account belonging to the guarantors (which account will be frozen) may be considered a major obstacle for many.

No loans are given for seed capital. The requirement to have been self-employed for at least 6 months shows that there is no intention at present to provide credit to start new businesses; rather, the development of those already in existence has been prioritized.

A highly cumbersome process. From the lack of training of bank personnel in this area, to the excessive documentation that needs to be submitted (bureaucratic and non-technical documents), all contribute to entrepreneurs cutting short their efforts in the face of the obstacles placed a priori by the Bank.

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• Central Bank of Cuba, Resolution No. 99/11.
• Central Bank of Cuba, Resolution No. 100/11.
• Central Bank of Cuba, Resolution No. 101/11.
• Granma, “Por la Cuenta Corriente de la Actualización” November 25, 2011, Havana.
• Granma, “Nueva política crediticia cubana. Un proceso en ascenso” June 28, 2012, Havana.
• Ministry of Justice. Official Gazette No. 040, Extra Edition. November 21, 2011, Havana.
• Vidal, Pavel, “LA APERTURA A LAS MICROFINANZAS EN CUBA”, Center for Studies of the Cuban Economy, University of Havana. Paper for 2012 CSCE Seminar
• Vidal, Pavel, “Pasos hacia la bancarización del sector no estatal cubano.” www.desdelaisla.org, December 2011.
• Personal visit to Banco Metropolitano located at 29 and 42, Playa, Ciudad Habana
• Personal visit to Banco Metropolitano located at 5th and 84, Playa, Ciudad Habana

 

 

Anexo 1 Tabla resumen

 

Sujetos	Período de vigencia	Mínimo	Máximo	Concepto
Personas Jurídicas, TCP, agricultores pequeños, otras formas de gestión no estatal	Menos de 6 meses (3-5 meses)	2,50 %	3,50 %	Capital de trabajo e inversión
	Menos de 1 año (6-11 meses)	3,00 %	4,00 %	Capital de trabajo e inversión
	Hasta 1 año (12 meses)	4,50 %	5,50 %	Capital de trabajo e inversión
	Hasta 2 años (13-24 meses)	5,50 %	7,50 %	Capital de trabajo e inversión
	Hasta 3 años (25-36 meses)	6,50 %	8,50 %	Capital de trabajo e inversión
	Hasta 5 años (37-60 meses)	7,00 %	9,00 %	Inversión
	Más de 5 años (61-72 meses)	7,50 %	9,50 %	Inversión
	Más de 6 años (73-84 meses)	7,60 %	9,60 %	Inversión
	Más de 7 años (85-96 meses)	7,70 %	9,70 %	Inversión
	Más de 8 años (97-108 meses)	7,85 %	9,85 %	Inversión
	Más de 9 años (109-120 meses)	8,00 %	10,00 %	Inversión

 

Sujetos	Período de vigencia	Mín - Máx	Concepto
Personas naturales	3 meses	2,25 %	Mano de obra y materiales de la const.
	6 meses	2,75 %	Mano de obra y materiales de la const.
	12 meses	4,25 %	Mano de obra y materiales de la const.
	24 meses	5,25 %	Mano de obra y materiales de la const.
	36 meses	6,25 %	Mano de obra y materiales de la const.
	60 meses	6,75 %	Mano de obra y materiales de la const.
	72 meses	7,25 %	Mano de obra y materiales de la const.
	84 meses	7,35 %	Mano de obra y materiales de la const.
	96 meses	7,45 %	Mano de obra y materiales de la const.
	108 meses	7,60 %	Mano de obra y materiales de la const.
	120 meses	7,75 %	Mano de obra y materiales de la const.