1Ó G LEY D E ADUANAS

MFIs were the first to identify the unserved demand for microcredits and to develop models for the provision of credits and other financial services to low-income people. Driven by their determination to achieve their social support goals and financed by governments and donors, many MFIs expanded their activity and started experiencing growing financing needs. In several cases, due to failure to satisfy those financing needs through founder contributions or government subsidies, MFIs chose to become regulated financial entities authorized to capture deposits from the public. This gradual process known as upgrading allowed MF to reach a growing number of clients requiring microfinance services.

In contrast to this process, a new approach is emerging for the provision of microfinance services in a profitable, sustainable, unsubsidized and large-scale fashion through commercial banks, which have already detected the existence of this market and are increasingly venturing into the MF business.

Several reasons have led banks to become engaged in the downscaling process, including MF profitability and growing competition in the medium-sized and large businesses financing market.

There is not one single way in which banks become engaged in MF. On the contrary, there are several methods applied around the world without one being preferred over the other in absolute terms. The superiority of one model will depend on the bank characteristics, the purpose of the proposed business and the regulatory environment.

Downscaling models can be globally classified into direct or indirect according to the type of contact the bank has with the client. There are four downscaling models generally used: the creation of an internal unit in the bank developing the MF activity, the establishment of a financial subsidiary legally separated from the bank undertaking the microfinance activities, the creation of a service company that is not a financial institution and that generates bank- owned microcredits, and the formation of bank strategic alliances with non-banking institutions that are already engaged in the MF business (financing for MFIs, a contract to provide the bank with certain services related to the MF activity, and access to the bank branch networks, among others).

In Argentina, BCRA regulations allow regulated institutions to venture into MF through the use of some of the above mentioned models. Institutions can grant microcredits directly (Internal Unit model) using the legal figure of limited amount loans (whose main advantage is that documentation requirements are fewer than for other loans: only the client’s ID is required) or using the credit scoring and screening systems (although these tools are designed for the provision of loans with consumption rather than commercial purposes). As regards the Financial

Subsidiary, in Argentina any institution serving as regular intermediary between fund supply and demand is regulated by the BCRA, so this model requires a financial institution to have equity holdings in another bank or financial institution regulated by the BCRA. In that case, the subsidiary could only target part of its activity to the MF business (same regulations covered in the Internal Unit model). The Service Company model can be used only if the activities undertaken by the company in which the bank has equity holdings are complementary to the financial activity or are expressly authorized by the BCRA (excluding credit risk assessment and loan development). These considerations apply to shareholdings over 12.5% of equity or votes; for lower shareholdings, participation is allowed but not higher than 15% of the institution’s RC.109 _{When a bank signs a contract with a Service Company for the provision of}

MF-related activities, BCRA regulations apply to the outsourcing of transactions. The outsourcing of administrative and non-operational activities is allowed, without externalization to the public. These can include MF-related activities, although the outsourcing of credit development and its risk assessment and the promotion of bank products are not allowed, provided they generate the underwriting of risks not assessed by the institution. As regards the wide range of relationships that a bank can establish with an MFI (covered under the Strategic Alliances model), local regulations do not constitute an obstacle for the provision of logistic or technical support services (access to branch networks and ATMs, credit collection, transaction processing, etc.). However, to provide financing to MFIs, the easiest and most commonly used way of strategic alliance, Credit Graduation regulations may have successful results in practice due to possible low capitalization of those institutions (mainly foundations and MFIs).

A recent study110 _{conducted in Argentina estimates that there will be 440,000 potential}

microcredit clients in Buenos Aires metropolitan area only, which could require AR$574 million. This estimate could increase in a context of higher competition and decreasing interest rates. On the other hand, RADIM estimates that, at the end of 2006, the microcredit supply of all its members across the country reached 19,000 credits worth AR$27.3 million. To this, we should add 11,000 extra credits granted by smaller MFIs, totalizing a portfolio worth around AR$40 million.

These data would clearly indicate that there is a large unserved demand for microfinance services, which could be served by means of a rapid expansion of existing MFIs’ operations. However, the magnitude of that demand could require the complementary venturing of more banks in this segment. Commercial banks could make the most of their experience in the provision of financial services, its vast network of branches and their technological infrastructure to serve the MF segment. This, plus specific training and counseling on how to best serve this sector or the establishment of strategic alliances with MF-specialized institutions under an appropriate regulating framework, would allow them to cost-effectively serve the low- income sector.

109 _{The RC percentage can increase based on transactions’ guarantees; Credit Risk Fractioning regulations also}

apply.