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FINCA Peru

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GiveWell aims to find the best giving opportunities we can and recommend them to donors. We tend to put a lot of investigation into the organizations we find most promising, and de-prioritize others based on limited information. When we decide not to prioritize an organization, we try to create a brief writeup of our thoughts on that charity because we want to be as transparent as possible about our reasoning.

The following write-up should be viewed in this context: it explains why we determined that we wouldn't be prioritizing the organization in question as a potential top charity. This write-up should not be taken as a "negative rating" of the charity. Rather, it is our attempt to be as clear as possible about the process by which we came to our top recommendations.

A note on this page's publication date

The last time we examined FINCA Peru was in 2010. In our latest open-ended review of charities, we determined that it was unlikely to meet our criteria based on our past examination of it, so we did not revisit it.

We invite all charities that feel they meet our criteria to apply for consideration.

The content we created in 2010 appears below. This content is likely to be no longer fully accurate, both with respect to what it says about FINCA Peru and with respect to what it implies about our own views and positions. With that said, we do feel that the takeaways from this examination are sufficient not to prioritize re-opening our investigation of this organization at this time.

Published: August 2010

Summary

FINCA Peru is a microfinance institution. FINCA Peru offers loan products; it does not offer savings services, though it encourages its clients to save through other channels.1

Our review of FINCA Peru consisted of reviewing rating reports of FINCA Peru and a phone conversation with Viviana Salinas Lanao, FINCA Peru's Manager of Solutions for Human Development.

We do not currently recommend FINCA Peru, feeling that the Small Enterprise Foundation provides a better opportunity for donors interested in supporting microfinance.

Key questions about social impact

In evaluating FINCA Peru, we asked our key questions for evaluating microlending charities. The sections below cover its answers to our key questions (see the previous link for why we consider these questions important).

Is the organization focused on social impact?

How frequently do borrowers drop out of the program?

FINCA Peru told us that it does not regularly track a drop out rate, though drop out rates are calculated annually by rating agencies.2

According to the rating agency MicroFinanza, FINCA Peru's "net client exit rate" (client exit rate minus client re-entering rate) was 46% in 2006.3 MicroFinanza reports FINCA Peru's drop out rate as 43.8% in 2008 and 40.8% in 2009 (it is not clear if these rates include re-entering clients).4 We do not know how these rates are calculated. MicroFinaza considers FINCA Peru's exit rate to be "rather high."5

For more information on microfinance drop out rates and how they are calculated, see our microfinance glossary.

Does FINCA Peru monitor why borrowers drop out?

In 2006, the primary reasons clients dropped out were:6

  • Loan default (39% of dropouts)
  • Travel (15%)
  • Business problems (15%)
  • Other, including health, poor attendance, and family problems

It is not clear how this data was collected.7 FINCA Peru told us that it does not have data on the reasons why clients drop out for years since 2006.8

Does FINCA Peru prevent client over-indebtedness?

According to FINCA Peru's Social Performance Standards report for 2009, FINCA Peru does the following to prevent over-indebtedness among clients:9

  • Evaluates clients' ability to repay during loan approval process
  • Rewards staff for maintaining high portfolio quality

FINCA Peru reports tracking what percentage of its clients borrow from other institutions through the credit bureau of Peru and estimates this at 40% for 2009.10

We do not know whether there is an process for monitoring whether these practices are effective at preventing over-indebtedness.

MicroFinanza's 2007 assessment of FINCA Peru notes:11

The measures taken by Finca Perú to mitigate the risk of clients' over-indebtedness are improvable:

  • Policies: not always prudential and not uniformly applied by the field staff
  • Loan officers: assessment of repayment capacity not always adequate (including visiting clients), especially for larger loans; criteria applicable to Finca Perú loans not replicated dealing with internal loans.
  • Supervision: improvable supervisors' performance in monitoring, guidance and follow-up of loan officers' activity, as well as enforcement of rules.

Are borrowers protected against harassment by loan officers and group members?

According to FINCA Peru's Social Performance Standards report for 2009, FINCA Peru trains staff to communicate product terms, rights and obligations to clients.12 We do not know how this process works in practice or whether it is effective at preventing harassment.

A 2007 survey of clients found that about 80% of clients rated the quality of loan officers to be "very good" or "good," and the remaining found them to be "fair."13

Loan officers are rewarded for maintaining a high repayment rate and a large portfolio.14 It is possible that such incentives could lead to loan officers pressuring clients to repay or to take out loans they wouldn't otherwise have taken out. We have not seen evidence of whether or not this occurs.

What interest rates does FINCA Peru charge?

A independent evaluation of FINCA Peru in 2008 reported that FINCA Peru charged between 68.7% and 79.6% "effective" annual interest, excluding the effect of compulsory savings (which may raise the effective rate significantly) on the loan type that accounted for 87% of FINCA Peru's portfolio.15 We do not know how the evaluator defines "effective."

For reference, the "Interest Policy Rate" reported by the Central Bank of Peru was 1.5% (as of May 2010).16

We asked FINCA Peru for repayment schedules for each of its loan types but did not receive them.

For more information on microfinance interest rates and how we calculate the cost of a loan to borrowers, see our microfinance glossary.

What is FINCA Peru's repayment rate?

FINCA Peru reported low portfolio at risk and write-off ratios in 2005-2009, and reported very few rescheduled loans to Mix Market.17 We do not have enough information on FINCA Peru's repayment history to calculate a lower-bound collection rate.

For more information on collection rates and other forms of microfinance repayment rates, see our microfinance glossary.

What are FINCA Peru's clients' standards of living?

A 2007 survey of 195 new clients18 found that 13% of FINCA Peru's new clients lived on less than $2 PPP per day and 4% lived on less than $1 PPP per day.19 It is not clear to us how client income levels were determined.

In addition, the survey found that 22% of the sample lacked access to an improved water source, 30% to improved sanitation, and 4% to electricity,20 which the rating agency MicroFinanza noted indicated that FINCA Peru clients had better access to basic services than the average Peruvian.21 34.4% of clients interviewed had a telephone in their house and 7.2% had a car.22

Room for more funds

FINCA Peru told us that it does not use donations to fund its loan activities, which are self-sustainable. Donations are used for programs such as financial education for clients' children, gender equality training, and scholarships for clients' daughters.23

We do not know how much additional funding these programs could productively absorb in the next year.

Remaining questions

  • Repayment rate. Does FINCA Peru track a repayment rate? Can it share data on loans disbursed, written off, rescheduled, and in arrears over time?
  • Interest rates. What effective interest rates does FINCA Peru charge, including the effect of compulsory savings? How is this rate calculated?
  • Clients' standard of living. How were client income levels determined in the 2007 survey? Does FINCA Peru have data from after 2007?
  • Client indebtedness. Is there a process for monitoring whether procedures for preventing over-indebtedness are effective?
  • Client protection. Does FINCA Peru have information on how effective its practices are at protecting clients from harassment? How is staff performance evaluated and rewarded?
  • Satisfaction survey. Can FINCA share the report from its 2009 client satisfaction survey (mentioned by MicroFinanza in its 2010 rating)?
  • Room for more funds. How much in additional donations could FINCA Peru productively use in the next year?

Sources

  • 1.

    "The civil association is not allowed to collect savings from the public, but plays a promoting role of the saving mobilization within village banks." MicroFinanza, "Social Rating of FINCA Peru (2007)."

  • 2.

    Viviana Salinas Lanao, phone conversation with GiveWell, June 4, 2010.

  • 3.
    • "Client exit rate = No of members who exit during the period / average no of members during the period; Client re-entering rate = No of members who re-enter during the period / average no members during the period; Net client exit rate = Client exit rate - Client re-entering rate. Please consider that the client re-entering rate includes all clients who re- entered during a period, regardless of the length of the “resting” period." MicroFinanza, "Social Rating of FINCA Peru (2007)," Pg 20.
    • "Client drop–out rate: (number of active clients at the beginning of the period + number of new (first time) clients entering during the period – clients written-off during the period – number of active clients at the end of the period) / (number of active clients at the beginning of the period)."

    MicroFinanza, "Social Rating of FINCA Peru (2007)," Pg 24.

  • 4.

    Original text: "Aunque existe una tendencia a la disminución de la tasa de deserción19 de los clientes, respecto a la última evaluación, ésta se mantiene en niveles altos, equivalente al 44,5% durante el período abril 2009- marzo 2010 (40,8% en 2009 y 43,8% en 2008)."
    Translation: "Although there the client drop out rate has been decreasing, at the most recent assessment, it is still at high levels, equivalent to 44.5% during the period April 2009 - March 2010 (40.8% in 2009 and 43.8% in 2008)."
    MicroFinanza, "Social Rating of FINCA Peru (2010)," Pg 24.

  • 5.

    MicroFinanza, "Social Rating of FINCA Peru (2007)," Pg 20.

  • 6.

    MicroFinanza, "Social Rating of FINCA Peru (2007)," Pg 20.

  • 7.

    The rating agency, MicroFinanza, reports receiving drop out reasons from "information available at institutional level." MicroFinanza also reports, "The monthly management reports produced at branch level present the number of drop-out clients, of new members and re-entering clients. The main reasons of drop out are also described, even if the “default” reason, which is prevailing, is not further investigated," but does not describe how this data is collected.
    MicroFinanza, "Social Rating of FINCA Peru (2007)," Pg 10 and 20.

  • 8.

    Viviana Salinas Lanao, phone conversation with GiveWell, June 4, 2010.

  • 9.

    FINCA Peru, "Social Performance Standards Report (2009)."

  • 10.

    FINCA Peru, "Social Performance Standards Report (2009)."

  • 11.

    MicroFinanza, "Social Rating of FINCA Peru (2007)," Pg 13.

  • 12.

    FINCA Peru, "Social Performance Standards Report (2009)."

  • 13.

    MicroFinanza, "Social Rating of FINCA Peru (2007)," Pg 19.

  • 14.

    Viviana Salinas Lanao, phone conversation with GiveWell, June 4, 2010.

  • 15.

    Planet Rating, "Rating de Desempe̱o Social РFINCA Per̼ (2008)," Pg 5-6.

  • 16.

    Banco Central de Reserva del Perú 2010.

  • 17.

    Portfolio at risk > 30 days (as of December 31):

    • 2005: 0.49%
    • 2006: 0.65%
    • 2007: 0.53%
    • 2008: 0.55%
    • 2009: 2.39%

    Write-off ratio (as of December 31):

    • 2005: 0.81%
    • 2006: 0.00%
    • 2007: 0.15%
    • 2008: 0.25%
    • 2009: 0.84%

    Mix Market, "Data on FINCA Peru (1997-2009)."

    Number of renegotiated loans (as of December 31):

    • 2005: 0
    • 2006: 0
    • 2007: 0
    • 2008: 4
    • 2009: not listed

    Mix Market, "FINCA Peru: Data, Indicators."

  • 18.

    "In order to provide a complete description of the poverty outreach, a survey on recent clients has been realized. Recent clients are defined as those clients with an active status at the date of the evaluation, who took their fist loan with the MFI in the 12 months preceding the social rating. A sample of 195 clients has been selected. Clients were extracted proportionally from anyone of the branches." MicroFinanza, "Social Rating of FINCA Peru (2007)," Pg 22.

  • 19.

    MicroFinanza, "Social Rating of FINCA Peru (2007)," Pg 1.

  • 20.

    MicroFinanza, "Social Rating of FINCA Peru (2007)," Pg 1.

  • 21.

    "Access to basic services higher than national average." MicroFinanza, "Social Rating of FINCA Peru (2007)," Pg 2.

  • 22.

    MicroFinanza, "Social Rating of FINCA Peru (2007)," Pg 17.

  • 23.

    Viviana Salinas Lanao, phone conversation with GiveWell, June 4, 2010.

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