Microfinance: Modification in treatment under the rules of the Central Bank

On December 26, 2008 the Central Bank of Argentina (“BCRA”) issued Communication “A” 4891, establishing new regulations on microfinance to foster the inclusion of “families, entrepreneurs and small-sized businesses in the financial system”.

In this voluminous Communication, the BCRA amended the regulations applicable to loans granted to small-sized entrepreneurs and financing given to microcredit institutions.

Firstly, the BCRA established that not only microcredit institutions but also banks will be authorized to offer microcredits to the public (the latter for a maximum amount of AR$ 15,000). In this respect, a special category was introduced for financing to be granted using origination and follow-up techniques typical of microfinances, based on information and close control of clients. This should facilitate the provision of financing by financial entities to small-sized entrepreneurs directly, since a special treatment adapted to the characteristics of this sector has been contemplated.

Secondly, it will be easier for microcredit institutions to obtain funding from financial entities, which will be considered within a new special category. “Credit degree” regulations will be waived with respect to such credits. Thus, the amount of the credit to be disbursed will not be limited to the capital stock of the applicant (microcredit institution). Financial entities will act as “second floor banks” through the granting of financial facilities to the microcredit institutions.

Finally, within the complementary activities that financial entities may carry out, participations in institutions that have as their purpose the granting of microcredits, was included. Accordingly, banks will be allowed to acquire holdings in microcredit mnstitutions and increase their capital.

In addition, regulations on classification and provision of debtors were adapted, granting microcredits a treatment similar to consumer goods credits.

The aim of this modification is to expand the scope of the microcredits in Argentina.

Although the legal framework for microfinance is not yet well adapted to allow the growth of this area to its full potential, compared to other countries of the region, these regulations suggest that local authorities have become aware that microfinance raises particular issues and are moving towards an “ad hoc” legal framework for such activity.