Regulatory Approach to Promote Micro and Small Enterprises financial access The Peruvian case Fiorella Arbulú Diaz Superintendency of Banking, Insurance Companies and Pension Funds Regional Symposium “Best Practice Regulatory Principles Supporting MSME Access to Finance” June, 2011

Peruvian socio-economic context

Peru Population: 29´475,856 inhabitants Area: 1´285,215 km² Population density: 23 (/km²)

Macroeconomic Context

Poverty reveals a downward trend in the last decade Poverty rate (as a percentage of population) Source: National Institute for Statistics and Information (INEI)

Peruvian business is predominantly composed by microenterprises. However, a great percentage of these firms is still within the informal sector Source: INEI-ENAHO 2007, SUNAT Small Enterprise Big & Medium Enterprise Micro Enterprise Compositon of Small & Micro Business according to taxing formality Micro EnterpriseSmall EnterpriseSME´s

Peruvian Microcredit Supply

More than 50% of the micro and small enterprise credit supply is explained by specialized institutions * As of March 2011.

MFI account for more than 70% of micro and small enterprise debtors * As of March 2011.

Recent Trends

Micro and Small Enterprise loans have grown significantly

During the last five years, the number of micro and small clients has notably increased Source: SBS.

Microcredit interest rates have experienced a downward trend MFI: Interest rate for microcredit granted in local currency

Role of the Regulator in promoting greater access to financial markets

 Improving transparency of information: Provides detailed information about interest rates and commissions of credits and deposits, such as characteristics and costs of each product. Credit bureau.  Supporting consumer protection: Promotes transparency and diffusion of relevant information regarding contracts (price transparency, fair disclosure). Promotes an adequate customer service (transparency of information, adequate resolution of consumer complaints). Determines and corrects unfair contract’s terms. Role of the Regulator in promoting financial access

 Improving the regulatory and supervisory framework: Municipal Savings and Loan Institutions were allowed to operate in other regions (even in the Capital). SBS expands the operations undertaken by non-banking institutions. Currently, NBMFI are allowed to offer factoring, leasing, rebates, financial consulting. Additionally, services of non-banking microfinance institutions were expanded by allowing greater access to capital markets. Improves prudential regulation.  Promoting the use of new technologies to deliver financial services at lower costs: Improves financial outreach through banking agents (from 1,689 to 9,204 banking agents in the last years). Relaxes anti money-laundering conditions for the use of agents to open deposits. Promotes mobile phone banking (E-money law proposed). Role of the Regulator in promoting financial access

 Promoting financial literacy: SBS has launched a financial literacy program for training school teachers about the financial and insurance systems and pension funds (in coordination with the Ministry of Education). Virtual classroom available online. Role of the Regulator in promoting financial access

Microfinance Regulation

Regulatory Framework for Microfinance Institutions  Equal regulatory treatment to all financial institutions: General Law of the Financial and Insurance Systems (Law N° 26702). Rules for evaluation and classification of debtor (SBS Resolution N° ).  No special treatment for Microfinance Intitutions (create a level playing field).  Regulation of microfinance activity instead of regulation of microfinance institutions.

Credit Types (*) Effective since July 2010.

Main issues of Prudential Regulation  Entry regulations. Feasibility study, suitability and solvency of organizers and shareholders. Minimum regulatory capital required Financial Intermediation is the only allowed activity. Requisites for directors and managers (experience, know-how).  Regulation of specific risks: Minimum capital ratio : Regulatory capital must be greater than 9.8% of total risk- weighted assets and contingents (market, operational and credit risks). Prudential capital adequacy: 14.3% for NBMFI (10.5% for banks)

Main issues of Prudential Regulation Credit risk: Debtor classification and loan-loss provisions based on loan status procyclical provisions Rules for managing over-indebtedness risk of retailer borrowers (SBS Resolution N° ). Liquidity risk: Minimum requirements of liquidity ratios: National currency 8%, Foreign currency 20% Reporting requirements of assets and liabilities mismatching, by maturity, under regular and stress scenarios and a contingency funding plan.

Main issues of Prudential Regulation Market risk: Adequate administration systems of market risk Limits for foreign exchange risk exposure: Long net position < 60% of capital, Short net position < 15% of capital. Operational risk: Adequate administration systems of operational Risk Specific regulation to manage technology risk Information Safety Plan Business Continuity Plan to ensure an acceptable level of operation of critical processes in case major internal or external failures occur.

Thank You

Entry Regulation Minimum Capital requirement for entry April- June 2011

Minimum Capital Ratio Capital ratio exceeds international standards and prudential requirements

Credit Risk Regulation Debtor risk rating according to the number of days overdue

MFI liquidity ratios remain well above the minimum required by regulation