At the IDB’s annual FOROMIC conference in El Salvador in 2007, I knew there was a bubble as I watched investment funds competing to get face time with a number of Nicaraguan MFIs. Already, the market had grown substantially since 2004, Findesa (now Banex) had a loan portfolio of US$125 million, up from US$33 million at the end of 2004. I wondered why it made sense to lend to so many small MFIs in one country with 5 million people, 600,000 informal sector workers and 300,000 credit clients. How much growth would be reasonably expected and would these MFIs not be better off merging at some point? One MFI Manager at the conference said to me: “Now I have access to credit, so why should I merge with someone else. I should focus on growing and increasing the value of my MFI, when I am big, I will be able to negotiate better terms if I get bought out.”
I visited Findesa later that year in Managua and asked the CFO what the institutions’ main competitive advantage was. His answer reinforced my fears. He said, “we are very good at raising money from foreign investors.” Debt financing was clearly flowing to Nicaragua, with high profile, fast growing institutions like Findesa bringing in the bulk of the money; yet how would these MFIs’ loan portfolios grow? Mostly, by trying to compete for each others’ clients, ultimately adding to the clients’ debt burdens. Implicit in this strategy is a loosening of credit methodology.