A longstanding need: Credit for the rural poor

Poverty is greatest in Nicaragua’s rural zones. How do the rural poor survive? How has their world changed? What’s the history of rural credit? Are the banks and micro-financing institutions offering credit to the poorest in the countryside today?

Lucía Hernández Moraga

Even though Nicaragua’s poverty is concentrated in the rural zones, the country has no national rural development plan that includes all sectors. The lack of credit for the poorest in the rural zones is only one indication of this absence of a national plan. Another is the lack of protection from the State and yet another is the urban logic of the economic model, which privileges the export sector. And of course climate change is also doing its part… we hear the clamor year after year from farmers concerned about whether the rains will arrive or not.

Less credit means less investment and more poverty, forcing the poor to wager on non-agricultural activities to survive, resulting in accelerated migration out of the rural areas. Over time this is endangering the country’s food security, the local economy and the employment sources from service sectors that depend on the rural production chains.

Maize and beans:
The basics

Before looking at the credit situation, let’s get a good picture of Nicaragua’s rural world, the part scratching out a living in poverty. The countryside today has some 300,000 small and medium farmers, 60,000 of them women. Although the majority of these farmers are invisible in the agricultural censuses, the country’s food security is in their hands. They are also the ones who invigorate the local economies.

Maize and beans are this population’s basic crops, their daily diet. In fact these two crops are the basic diet of the Nicaraguan people as a whole, typically guaranteeing 48% of their caloric intake.

Nicaragua produces roughly 4.5 million quintals of beans, of which it exports almost 1 million. Each hectare produces between 5.5 and 9 quintals. Micro and small producers use traditional methods as they lack appropriate technology and depend totally on the rains. There are bean production zones in the north and center and in the Segovias that enjoy three crop cycles per year: May- July, August-October and November-December. The low cost of bean production allows various rural sectors to dedicate themselves to this crop.

In its study of beans and food security in Nicaragua, the UN’s Food and Agriculture Organization identified three types of farmers. The smallest growers annually sell some 17 quintals, as they consume the majority of what they produce; what are designated as small farmers sell between 18 and 30 quintals and medium farmers sell between 33 and 200 quintals. The small and medium growers are more specialized and own their own land. Compared to coffee growers and cattle ranchers, bean farmers have little capacity to negotiate since they are very diverse and not organized.

Maize is also grown everywhere in Nicaragua, although 68% of the total is from Jinotega, Matagalpa, Boaco, Chontales and the south Caribbean. The majority of the maize cultivated is for the growers’ own family consumption.
Some of the poorest rural sectors also grow coffee, which they sell locally. Some 40% of the country’s coffee growers are poor and also plant maize and beans. And then there are also poor peasants who mix these agricultural activities with small-scale cattle rearing.

Peasant out-migration

The rural reality has been modified in today’s countryside, with an accelerated change to fewer individual peasant plots triggered by lack of opportunities. In order to survive, the poorest rural population has had to seek out other means of survival: commercial activities, wage work, emigration… All of this can now be seen in Nicaragua’s deepest interior, where traditionally only agricultural activities were seen.

Emigration is playing a very important role in diversifying the earnings of the poorest rural sectors. In fact agriculture is largely being financed by the remittances of those who have left. In 2013-2014, the Free University of Brussels studied 50 cases in León, Nandaime, El Viejo, Estelí, Bocay and Pantasma, verifying that the majority of those interviewed who worked in agriculture also migrated, with migration their most important source of income.

There are entire areas, such as the old La Chipopa agricultural cooperative in Nandaime, where the majority of men go to Costa Rica from November to March, returning to Nicaragua in time for the first planting cycles of the year, leaving the women to head the family for months. These migrants don’t send their remittances back through the formal system, but with friends and acquaintances. The money they save in Costa Rica is invested in agriculture back home, and is also used to pay for informal credit.

Peasants switching to small commerce

Climate change is now in Nicaragua to stay. It has forced the rural poor to start cultivating more resistant crops, such as Flor de Jamaica (a hibiscus flower used to make a drink) and chia, and even to switch to unusual activities that break the peasant paradigm, which has traditionally placed agriculture at the foundation of their economy.

In the 50 case studies conducted by Brussels’ Free University, commercial activities were identified particularly in the Pacific’s rural zones: sales of homemade bread, naca¬tamales and rosquillas, as well as clothing and cosmetics. There are communities where women trade clothing and costume jewelry for agricultural products, selling their products on credit against collection at harvest time. We also find both women and men from the poorest rural sectors working as farm hands or coming into the cities and towns to get jobs as assemblers of apparel and other goods for re-export in the spreading free trade zones or as domestic employees.

Some of these small farmers now converted to wage workers on farms and ranches and/or migrant workers have a miserable life. One example is those who work in the CASUR sugar refinery in Rivas in the slow season then at high season go to Costa Rica to work in sugar cane or other plantations. If they get kidney problems, which often happens to sugar workers, no one will give them work in either country and no one takes any responsibility for their health.

Inequality in the countryside

The enormous inequality gaps Nicaragua is experiencing with the current economic model are notable among the rural poor. They are most profound in areas engaged in export categories such as beef and sugar.

In Chinadega and León, many poor and landless peasants live as José does, planting maize and sesame, and competing to rent land with the Pantaleón and Santa Rosa sugar refineries. These companies are continually looking to expand sugar production and can pay a higher rent.

In the Cosigüina peninsula, we found many like Ramón, poor farmworkers who had been cooperative members during the revolution, had no titles to the coop land and thus couldn’t get credit, so they divvied up the land and sold it cheap to Pantaleón and now live at the side of the roads, renting small plots to sow basic grains for self-consumption.

In the central and northern areas of the country we found cattle exporters who pay many men such as Felipe to go into the mountain and cut down whole areas of the forest so they can move in afterwards to turn the deforested area into pasture for more cattle.

In Rivas’s coastal beach areas, small farmers have given up agriculture to work in the tourist centers. Like Pancho, many sold their property to retiring foreigners or to tourist businesses for a song, and exchanged their machetes for rakes or other tools to become gardeners or carpenters’ assistants for the new owners. Or, like Tencha, many women stopped raising pigs and chickens to become cooks or laundry women, while their daughters wait tables in the new tourist businesses.

Cattle and sugar
are favored for credit

Cattle-raising and sugar are the agricultural sector’s most favored and capitalized categories, both in tax exemptions and amount of credit they receive.

The Enrique Bolaños government (2001-2006) made major investments in cattle-raising and opened the door to exonerations, as it was one of the “clusters” that would attract investment. Many of the private and state credit programs were designed to promote investment in milk collection centers, improved pastures and transformations in the cattle herds. New roads and highways were opened to facilitate the transport of milk and meat. Cattle-raising was conceived as an important motor for the country’s growth.

The current government has a similar vision, attracting foreign investors. Mexico’s Sukarne meat processing corporation has opened slaughterhouses in Nicaragua and Lala, also Mexican, has bought out Nicaragua’s Eskimo ice cream company, expanding it to the production of other dairy products such as butter, cream and yoghurt for both domestic and export sales. For this year the government announced a plan to strengthen and modernize the cattle sector with the goal of doubling meat and milk exports from 13% of total exports to 26%.

Both cattle-raising and sugar cane, however, are very damaging to the environment. Great areas of forest are cut down to create pastures and the monoculture promoted by the sugar refineries utilize a lot of pesticides, wear out the soil, and compromise the cane workers’ health. Despite all this, however, both categories are growing incessantly, mostly in the hands of large businesses, and contributing little or nothing to the country’s food security.

Economic groups in the Somoza era

Three important stages of rural finance markets can be distinguished in Nicaragua. The first began with the consolidation of the agro-export model in the 1950s and continued to the fall of the Somoza dynasty in 1979. The second was the model employed during the 1980s and the third began with the structural adjustments initiated in 1990 and is still in effect.

In the 1950s, public and private financing promoted exports (coffee, cotton, sugar cane, tobacco, bananas and cattle). Private banks were created with funds from the agro-export sector. In those years three economic groups were identified. One evolved around Banco Nicaragüense (BANIC), whose principal shareholders were from largely Liberal families dedicated to the cotton agroindustry in the northwestern departments of León and Chinandega: Montealgre, Callejas, Reyes Cardenal, Guerrero, Gurdian and Blandon. While BANIC first mainly financed cotton, by the mid-sixties it had grown into one of the most powerful groups in the country and began to focus on real estate and housing construction. Its growth at the time was favored by the peak years of the Alliance for Progress and the formation of the Central American Common Market.

Another economic group revolved around Banco de América (BANAMERICA), founded in 1952 by the Conservative Pellas, Chamorro, Benard, Baltodano and Hollman families and representing the interests of the eastern and southern sectors linked to cattle and the commercialization of sugar and rum. At first it was a traditional banking entity that sought resources and financed agricultural activities, but the group grew by merging investments in the fields of securities, traditional banking and industry. Its expansion facilitated the pact between Somoza’s Liberals and the Conservatives. Another important private bank of the era was Caley Dagnall, which hegemonized coffee production.

The third economic group was that of the Somoza family itself. It had investments in practically all important categories, although it kept its fortune in international banks. The family worth was estimated at some US$400 million. With its capital the Somoza group created its own businesses including Banco Centroamericano, although in practice they used BANIC to make themselves loans.

How rural credit was
assigned under Somoza

Agricultural credit was provided by the private banks as well as the state development bank, National Bank of Nicaragua (BNN), started in 1912. Some of its former managers say it assisted some 40,000 agricultural producers through its 69 agencies, recovering 95% of the credit. It also provided technical assistance.

In 1968 the Inter-American Development Bank declared Nicaragua’s rural credit program one of the best in Latin America. But Somoza also used the BNN as a political tool: the cotton growers’ outstanding balances and Somoza’s use of refinancing in times of crisis, all to buy votes, were famous.

Changes were made in the credit policy in 1975 to incorporate the poorest segment of the peasantry. The Peasant Welfare Institute (INVIERNO (which is also the word for winter or rainy season in Spanish) was created and proceeded to introduce changes in the rural credit programs. Branches of the program existed in different points of the country and employed agronomists and sociologists as well as administrative personnel. Credit was conceived to go directly to the community and follow-up and training were provided as well. Peasant stores were created, alliances with state institutions were promoted to repair roads, and seeds were given out to farmers. Credit was provided under a five-year credit line that the producers used during the planting season.

INVIERNO financed between 5,000 and 8,000 families and over 11,476 hectares of maize and beans. Documents of the Inter-American Institute of Agricultural Cooperation define the program as a successful experience in comparison with others in Latin America. Nonetheless, the year after it was created beans occupied 50-60% of the country’s cultivated area but only received 10% of the institutional credit, benefitting barely 10-15% of the peasant families. The immense majority of small and medium farmers remained outside of the credit institution. Some of INVIERNO’s resources were diverted to other sectors of the economy. In 1978, 22 million of the 27 million córdobas received from the US Agency for International Development were siphoned off to the private banking system, to which only big businesses had access.

The big hacienda owners with access to formal credit established a variety of unequal go-between relationships with their landless farm hands and small-holder peasants. They rented them land in exchange for a good part of their harvest and also provided them personal loans with high interest rates. There was also the practice of colonatos, lending land in exchange for personal benefits. All of this increased the cost of credit for the poor rural sector.

Credit during the revolution

During the revolutionary decade, the Sandinista government changed the BNN’s name to Banco Nacional de Desarrollo (BANADES). It massively extended the granting of rural credit and technical assistance programs. The financing was channeled via the savings and credit cooperatives and the state-run businesses known as Area of Peoples’ Property (APP). With the credits now being received by small and medium farmers, maize and bean production respectively increased 29% and 51% in 1981 over the two previous years. BANADES acquired 80,000 agricultural clients.

These were the years of agrarian reform, state intervention and a change in the rural populations’ payment culture. In order to increase production, interest rates for loans to the agriculture and agroindustrial sectors were kept at between 8% and 22% between 1980 and 1985, and to stimulate agricultural investment, long-term loan rates were set lower than those for short-term loans. Yet in that same five-year period from 1980 to 1985, inflation spiraled 35% to 334%. The unreal interest rates were an incentive for indebtedness, particularly since the córdoba was not indexed to the dollar.

By 1983 the Central Bank was admitting that the active interest rates were negative and that a loan made in January of 1984 depreciated in real terms by more than 50% by December of the same year. In these conditions, the lack of indexing the dollar to the amounts loaned in córdobas allowed a credit to buy a tractor one year to be paid years later with córdobas whose dollar value was barely sufficient to buy a pig.

By constitutional mandate, the public banking system was extremely generous in granting credit to the productive sectors. ”Physical production is more important than money,” said the state officials. And since the objective was to raise production, the credit analysts’ conclusions and suggestions were ignored. This led the producers to fall into the vicious circle of debt.

By 1985 the military conflict had worsened and the economy had gravely deteriorated. Public credit was converted to a subsidy to avoid collapse. Each anniversary of the revolution another debt pardon was announced. This was the final kiss of death for the financial system and credit culture.

Did the revolution succeed in democratizing agricultural credit? Various authors have pointed out that in this stage credit was still concentrated in the large private and state businesses, which received 65% of the total. Others note that the wealthiest sectors with more political clout at the local level obtained more credit, paid less back, and took more advantage of the government’s credit subsidies than the poor peasants.

The changes of the nineties

In 1990, with the end of the revolutionary government, state monopoly over financial activities ended. This in turn altered the credit policy yet again. Private banks, which had disappeared in the eighties, reappeared in 1991 and in that same year the Superintendence of Banks was created as a state agency to supervise both state and private commercial banks.

BANADES was closed at the end of Violeta Chamorro’s term in office, reputedly bankrupted by its main executives, among them then-Minister of Agriculture Roberto Rondón, who allegedly had used the bank’s funds to finance his own agricultural businesses in the center of the country. The truth isn’t known as the list of the bank’s main debtors never came out, but what is known is that this state development bank had left many farmers without any financial recourse. Of the 80,000 farmers, most of them small growers, that it still served in 1990, only 7,000 were left in 1997, when it closed definitively.

Arnoldo Alemán’s Liberal government (1997-2001) gambled on ”reincarnating” it, but that idea didn’t go over well with the multilateral lending banks, since they knew about the previous crisis. Instead the Rural Credit Fund was created to replace it, but it had limited resources and coverage and remained that way through to the end of the Bolaños government in January 2007.

The Alemán government was generous in bestowing promises of agricultural resources. Among many others were ones to finance the planting of maize and beans by more than 34,000 families; Bancentro’s Certified Agriculturalists Program (Certiagro) and a commitment that all the new private banks would provide 900,000 cordobas in agricultural sector credits. And of course the main promise, the centerpiece of Alemán’s electoral campaign, was to make Nicaragua the “Central America’s granary.”

1990: The birth of the MFIs

In 1990, with this sudden dearth of credit to the war-devastated rural areas in particular and small urban and rural businesses in general, a new credit alternative was born: micro-financing institutions (MFIs). They were based on successful experiences in various Latin American countries that in turn had replicated the experience of the famous Grameen Bank in Bangladesh.

Their objective was to capitalize small urban and rural businesses traditionally excluded from the formal finance system. Among their innovations, for example, was group credit, which recognizes that the rural poor don’t have collateral so they are asked for the group’s joint liability to receive credit. Some of the MFIs were innovative: they developed community savings banks, authorized environmental credits for the cattle sector and prioritized the inclusion of rural women.

There are currently 24 MFIs under the umbrella of the Association of Micro-financing Institutions (ASOMIF). They are regulated by the National Commission of Micro-financing Institutions (CONAMI), while the 11 banks and financing institutions in the private sector are regulated by the Superintendence of Banks and Finance Institutions (SIBOIF).

History is repeating itself today

Albeit with different paradigms, history seems to be repeating itself today, as the statistics demonstrate. At the end of 2007, with the FSLN government back in power, only 13.6% of the over US$2.183 billion in the national financial system’s banks was invested in the agricultural sector, and this portfolio was concentrated in export products: sugar cane, peanuts, cattle…

Of the US$218.7 million in the combined MFI portfolio, 47% was invested in the agriculture and livestock sector, but only 13.3% of that percentage was agricultural credit; the rest was principally dedicated to cattle. The MFIs were also the main providers of services to the agriculture and livestock sectors, with 74,576 clients, but again, only 28,959, less than 39%, were agriculture clients.

Seven years later, at the end of 2014, the situation has only worsened. The commercial banks have decreased their support to the agriculture and livestock sector by 3.6%. And the MFIs have reduced it by an even greater percentage, giving them only 27.3% of their portfolio, which amounts to almost US$12 million less. There was also a decrease in the agriculture and livestock clientele to 56,998 clients, 24% fewer than before. Of those, 23,000 were from agriculture and livestock, but an already more capitalized portfolio: coffee or banana growers, not bean or maize growers.

Three months later, in March of this year, these same trends are being maintained. The commercial portfolio of both the banks and the MFIs has increased 12%, a sign that credit is shifting to urban centers. And the banks are still conspicuously absent from the agriculture and livestock credit sector, even though the liquidity of these banks is 70% greater than in 2007.

The MFIs’ credit is expensive,
but so are its administration costs

In the microfinance conference held earlier this year, Bayardo Arce, President Ortega’s economic affairs adviser, mentioned that MFI credit is still expensive. This comment harkens back to a never-ending debate, given that it’s much costlier for rural producer not to have access to credit at all.

An MFI can end up charging interest rate as high as 30% to 36%. But between 14% and 20% of what comes in is paid out in operating expenses: for processing the credit, offices, personnel, movement and paying the interest and principal on the loans it receives to operate with. Among the many differences between commercial banks and MFIs is that the former attract much of their operating capital from savings and checking accounts, whereas MFIs are by law financial intermediaries: they negotiate large loans from different sources in order to offer loans to clients the big banks aren’t interested in, and the cost of doing so is some 8-10%.

The commercial banks in the urban centers charge much lower interest rates—between 10% and 14% or even less, since they work with their own capital, have clients in accessible areas, only lend to people with sufficient collateral and have much more streamlined repayment schedules. If the loan client also happens to have an account in that bank, it’s a simple matter of a computer automatically deducting the monthly payment for a home or automobile loan, for example, from the client’s account. The MFIs working in the rural economy have a much more hands-on system. They have to have more branches in outlying rural areas and much more complicated financial products. For example, a credit typically isn’t payable in some abstract calendar period that a computer can control, but rather is often based on the sale of a harvest, or of a sow’s litter, etc.

The unexpected contingencies and adversities farmers live with—droughts, floods, pests, changing input costs, bad roads and the like—all increase the risk of not recovering the credit and strengthen the banks’ fear of placing credit in that sector.

Another obstacle to banks entering the rural sector are the regulations of SIBOIF, an institution conceived with an urban and international banking logic that isn’t adapted to the specific needs of rural credit. The country’s large private sector, which seems uninterested in investing in activities important to Nicaragua, has left the task of supporting the rural sectors to the MFIs, who are exposed to risks that are not cushioned by their higher rates.

The “Non-payment movement”
and Ortega’s hostility to the MFIs

Although the MFIs worked hard and largely successfully to restore the culture of payment lost in the eighties, and thus were able to show both that the rural poor do pay and the rural sector is profitable, the emergence of the “Non-payment Movement” in 2008 revived the non-payment culture, with a series of ripple effects that caused Nicaragua’s rural sector to be looked at even more askance.

Daniel Ortega first inspired the creation of this movement during the 2007 election campaign by imprudently defining the MFIs as usurers and promising to pardon all outstanding loans to them if elected. Once President he encouraged their clients to demonstrate in front of their offices and threaten not to pay. While he then backed off, a chain of events had been set in motion that seriously increased the arrears rate of the MFIs, made their own working loans (and thus those of their clients) more expensive, increased the requisites for clients to be approved for loans and even involved violence in some rural areas. While all this affected the MFIs’ portfolios, with some never managing to recover, the greatest losers were the decent rural credit clients. Money became harder to get and cost more, with some MFI’s even pulling out of the rural areas for good, and farmers in general were seen as politically manipulated.

The movement affected not only the MFIs and their rural clients, but also the country as a whole and deteriorated the good payment image of the rural poor. Yet the leaders weren’t the rural poor, they were medium-sized producers from the center and northern part of the country, particularly the Segovias, who had become over-indebted. Ortega’s return to government had revived the expectations of debt forgiveness that BANADES had accustomed them to in the 1980s.

Another hypothesis about the cause of the emergence of the Non-payment Movement is that Ortega mistrusted the MFIs because it was a broad movement with many clients and resources and thus wasn’t dependent either politically or economically on his government. In this hypothesis he saw the extensive independent MFI network as an obstacle to his rural ”clientelism” project.

The current government’s rural programs

What has this government’s rural credit record been beyond the “Christian, socialist and solidary” discourse it touts? Since 2007, under the Zero Hunger program, it has given poor rural women who have at least a .7 hectare-plot a food production package. In 2010 it inaugurated Banco Produzcamos, a new state development bank. And in 2011 it launched the Cristian, Socialist and Solidary (CRISOL) program for small farmers of different categories. But all these initiatives haven’t managed to cover the sector’s demand: only 10% of the rural poor had access to credit in 2012.

Banco Produzcamos, which absorbed the Rural Credit Fund and other programs implemented by the Alemán and Bolaños governments, was supposedly created to attend to the needs of small and medium farmers, but it has increasingly been investing its portfolio in the countryside’s more capitalized sectors and has already decided to privatize 60% of its assets. In 2014, according to the little information that appears on its website, Banco Produzcamos invested US$44 million in the agricultural and livestock sector, of which only US$6.9 million went through the CRISOL program for bean planting, a crop almost totally in the hands of small farmers. The other 74% of the bank’s credit portfolio is apparently earmarked for the most capitalized rural sectors, as deduced from the collateral requirements for granting credit, which exclude the poorest who have neither titled land nor other real guarantees. Today the MFIs give more credit to the rural sector than Banco Produzcamos does.

The CRISOL program

The government started the CRISOL program to attend to small poor rural farmers of different crops. Since its creation, the farmers who receive credit through this program, which now depends on the prolonged restoration of the Ministry of the Family, Community, and Associative Economy, have been given incentives to plant black beans instead of red beans and sell their production to state supply centers for export to Venezuela to help pay for the petroleum products that come from Caracas. It may be true that black beans are more nutritious, drought resistant and productive, but they are not well accepted in the Nicaraguan diet.

In 2013 the CRISOL program was said to have worked with 50,000 small farmers; in 2014, the figure used was 30,000; and in 2015 it was 26,000. In short its clients seem to be decreasing each year. Some reports have indicated that the program, while providing cheap credit, isn’t fulfilling its goals. Apparently, while having no shortage of discourse, it doesn’t have enough implementation capacity, as is also the case with the Zero Hunger program’s food production package.

The credit CRISOL provides is also political bait, with recovery possibilities seemingly having less value than vote buying. The recovery rate is reportedly only 50%, which encourages the culture of non-payment and doesn’t contribute to a solid portfolio, much less to development, because it promotes the idea that ”we’ll eat today even though we’ll be hungry tomorrow” This, naturally, is having an impact on the reduction of credit.

For things to change…

Data from the 2012 National Agriculture and Livestock Census show that 14.7% of the rural population said they had received credit at some point that year. Only 12% of those who raise cattle received credit together with only 10% of those cultivating crops. This means that all but 38,680 of the 360,000 men and women who make the earth produce are invisible in statistics and censuses because they don’t own land or receive credit.

According to both government and MFI figures, the number of credit beneficiaries increased in 2014 to 53,000 farmers. But despite the scarce and relatively unreliable information provided by CRISOL as well as the inclusion of coffee and banana growers in that progra, both of which tend to have more capital, we can argue that only some 35,000 poor farmers are provided credit by either the government or the MFIs. It’s both a dramatic number and a challenge: barely 9.7% of our country’s rural poor have access to credit. Changing this number is crucial to changing things in Nicaragua.

Nicaragua needs an inclusive rural development bank. It needs the private banks to include the rural sector in their different activities. The rural population needs the MFI’s innovative credits: group credit, environmental credits and land purchase credits. It also needs technical assistance to adapt to climate change, financial education and follow-up to its investments. Perhaps most of all it needs its productive sector to be viewed as a fundamental strength for development and not just a political clientele as it has been seen historically. 

Lucía Hernández Moraga is the head of client management and social performance of Nicaragua’s Local Development Fund (FDL).

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