What is the NICA Fund?
Why does WCCN have a credit project in Nicaragua?
How does the NICA Fund work?
For how long has WCCN been directing funds to
Nicaragua?
What makes the NICA Fund different from other
approaches to socially responsible investing and microcredit?
How big is the NICA Fund?
Who are the NICA Fund's investors?
What is the process to invest?
How much interest do investors earn?
What are the risks?
How does WCCN mitigate these risks?
Can I decide exactly who will receive a loan
from my investment?
What interest rates do WCCN and its partner
agencies charge?
Is microcredit the solution for poverty?
What is the NICA Fund?
The Nicaraguan Credit Alternatives Fund (NICA Fund) is a project
that promotes socially responsible investment in the US and grassroots
economic development in Nicaragua. The Fund was created and is administrated
by the Wisconsin Coordinating Council on Nicaragua (WCCN), a non-profit
organization based in Madison, Wisconsin. The NICA Fund channels
money from socially responsible investors in North America to Nicaraguan
microcredit and alternative finance organizations (our "partner
agencies"). Those partner agencies in turn make loans to disadvantaged
Nicaraguan farmers and entrepreneurs - especially women - who otherwise
would have no access to institutional credit.
Why does WCCN have a credit project in Nicaragua?
Although rich in culture and intellect, Nicaragua is impoverished
economically. Its GNP per capita is less than $2,000 and 44% of
Nicaraguans live in poverty. Under such circumstances, families
often rely on agriculture or resort to the informal sector to earn
some subsistence. Such strategies require capital to buy inputs
and supplies, but the disadvantaged have little or no access to
commercial banks.
Realizing this dilemma, Nicaragua’s state banking system emphasized
making low-cost credit available to the majority of the population
during the 1980s. At that time, 63% of long-term credit went to
small producers and co-ops.
This changed dramatically, however, with the privatization of the
banking system, which began in 1990. By 1993 the small and medium
scale producers (who were responsible for 60% of Nicaragua's agricultural
production) received only about 23% of long-term credit. At the
same time, growing unemployment and underemployment, fueled by structural
adjustment policies, has pushed more and more people into the informal
sector to create their own jobs. However, with limited resources
and no access to credit, it was often barely possible for people
to earn enough to support their families.
Realizing the gravity of this situation, WCCN has committed itself
to offering disadvantaged Nicaraguans with access to credit with
reasonable amounts of interest, so these persons can expand and
improve their economic activities and thus realize a better standard
of living.
How does the NICA Fund work?
WCCN does not lend directly to the farmers and entrepreneurs. Instead,
WCCN serves as the intermediary between North American investors
and Nicaraguan microcredit and alternative finance organizations
(our "partner agencies").
WCCN staff and volunteers enact this intermediary role. A Loan
Fund Manager (in Madison) oversees the NICA Fund's portfolio, maintains
direct contact with the investors, and ensures timely repayment
of the investors' capital and interest. A Loan Fund Representative
(in Nicaragua) maintains day to day contact with our partner agencies.
The NICA Fund's Oversight Committee - a group of experts in finance,
law, and economic development - meets monthly to monitor the NICA
Fund's financial situation and to guide lending decisions.
Additionally, every year WCCN promotes a study tour to Nicaragua
to connect some of our socially responsible investors with our Nicaraguan
partner agencies, farmers and entrepreneurs who benefit from
these loans.
For how long has WCCN been directing funds
to Nicaragua?
WCCN has been channeling microcredit to Nicaraguans since 1992.
We began with the Nicaraguan Community Development Loan Fund (NCDLF),
a collaborative effort with the Nicaraguan Community Development
Fund (Prestanic) in Nicaragua. From 1992-1998, the NCDLF recruited
about $6 million in loans from socially responsible investors in
North America and channeled them to Prestanic for microcredit. Then
in 1998 WCCN decided to diversify and expand, lending not only to
Prestanic but also to other worthy microcredit and alternative finance
agencies (our "partner agencies") in Nicaragua. So in
1998 WCCN started the NICA Fund.
What makes the NICA Fund different from
other approaches to socially responsible investing and microcredit?
Unlike many other approaches to socially responsible investing,
the NICA Fund gives you an opportunity to invest in grassroots community
development internationally.
Unlike other microcredit programs, your contribution to WCCN is
an investment, not a donation (Although WCCN does accept donations
to contribute to our equity fund). Furthermore, your money with
the NICA fund is lent out through several partner agencies rather
than through just one organization. By diversifying our portfolio
as such, we reduce some inherent risks of investing abroad and manage
to reach a broader range of needy borrowers throughout Nicaragua.
Furthermore, our partner agencies are based in Nicaragua, not in
the US. These agencies are keenly familiar with the local economy
and culture.
Finally, the NICA Fund is unique because it not only lends to individuals
(as do most microcredit programs) but also to organized groups of
marginalized persons who are actively seeking to improve their own
lives. This includes lending to cooperatives and small joint ventures.
How big is the NICA Fund?
The NICA Fund currently has more than $7.2 million from
its socially responsible investors putting the total Loan Fund size at $8.6 million.
Who are the NICA Fund's investors?
The NICA Fund's investors are people and organizations who share
these values. Unlike many economic development projects, this Fund
does not rely on a handful of very large contributors for its financial
support. Rather, the NICA Fund is supported by nearly 400 small
investors. About 85% of these investors are individuals from over
40 states in the US and Canada. Churches, local activist organizations
and small foundations make up the remaining 15% of investors. The
median investment is $5,000.
What is the process to invest?
If you are interested in investing, the first step is read our
Prospectus, which WCCN can send to you
by e-mail or traditional mail. In the back of the Prospectus, there is response form that
you can fill out and mail to WCCN. That form allows you to state
the amount, the term and the interest rate that you wish to invest.
Upon receiving that response form, WCCN will send you a Loan Agreement
for you to sign. That Loan Agreement notes the terms and conditions
that you stipulated in the response form. You sign and return one
copy of the Loan Agreement along with a check (made out to WCCN)
for your investment. The day that we receive the check, your investment
begins accruing interest. Also, WCCN will send you a Promissory
Note that confirms the maturity date for your investment.
WCCN will pay interest annually by mailing a check to you. Your
principal will be paid in the same manner when the investment matures.
Meanwhile, if you wish to receive financial reports to update you
on the NICA Fund's performance, just let us know and WCCN can send
you quarterly reports.
How much interest do investors earn?
The investor can choose how much interest s/he wants to receive
from the investment, from a range of 0% to 6% annual simple interest,
according to the length of time and amount of money invested.
|
LOAN AMOUNT
|
2 – 3 YEARS
|
4 – 5 YEARS
|
|
$1,000 - $7,999
|
3%
|
3.5%
|
|
$8,000 - $14,999
|
3.5%
|
4%
|
|
$15,000 - $29,999
|
4.5%
|
5%
|
|
$30,000 +
|
5.5%
|
6%
|
Interest is paid annually through a check sent by WCCN. Principal
is repaid at maturity in the same way.
What are the risks?
In ten years of this work, WCCN has maintained 100% repayment to
its investors, always on time. Still, there are risks. Political
instability, natural disasters and economic downturns could inhibit
people's ability to repay. At the same time, the marginalized populations
who benefit from NICA loans typically have no collateral to offer
in case of default.
Therefore, WCCN has instituted several safeguards in its lending
procedures to help ensure repayment in spite of such risks. (See
below.)
How does WCCN mitigate these risks?
WCCN mitigates risks by:
- Maintaining sufficient equity. The NICA Fund’s equity
is money that WCCN owes to no one; this money could be used in
case of emergency to repay investors. Therefore, WCCN strives
to maintain the Fund’s equity at a level equivalent to 15%
of its outstanding portfolio. For example, if the NICA Fund has
$1 million in equity, then WCCN allows itself to lend out $6.6 million
– no more.
- Maintaining a loan loss reserve. In addition to equity,
WCCN keeps a loan loss reserve (which is counted as a liability).
Whenever WCCN makes a loan, the US dollar equivalent of 3% of
that loan is set aside in a commercial bank. WCCN cannot touch
that reserve money unless there is an emergency or the loan is
repaid.
- Maintaining sufficient liquidity. Default is not the
only risk a lender faces. If many investments happen to mature
around the same date, WCCN might not have enough cash on hand
to repay everyone at the same time. Therefore, WCCN keeps 10%
of the fund in commercial bank accounts.
- Lending in US dollars. WCCN lends to its partner agencies
in US dollars and the partner agencies repay in US dollars. Since
the US dollar relatively stable, this practice circumvents problems
related to rapid inflation.
- Carefully selecting partner agencies. Before lending
to a partner agency, WCCN scrutinizes that organization thoroughly
to ensure that it is financially sound and trustworthy. The NICA
Fund’s in-country representative visits the agency in the
field and talks to the staff and the borrowers. Meanwhile, the
NICA Fund’s Oversight Committee (a group of experts in finance
and grassroots development) reviews financial statements to assess
the agencies’ financial and managerial integrity.
- Diligently monitoring partner agencies. The scrutiny
does not stop once a partner agency has been selected. The Oversight
Committee continues to review financial statements each quarter
and NICA’s in-country representative makes periodic field
visits to ensure that the partner agency continues to live up
to the NICA Fund’s high standards.
- Maintaining a diversified portfolio. We do not put all
of our eggs into one basket. Instead, the NICA Fund lends to 14
partner agencies, working in different regions of the country.
Imagine a scenario where one agency is working along the Atlantic
Coastal Region and a tropical storm devastates that area. The
hardship caused by the storm might cause that agency to default,
but the other 13 agencies would not be so affected by the storm
and still could repay on schedule.
We believe these safeguards help to make the NICA Fund a safe and
reliable investment opportunity. Still, no investment is completely
free of risk. Therefore, we strongly encourage everyone to read
the NICA Fund Prospectus carefully prior to investing.
Can I decide exactly who will receive
a loan from my investment?
No. WCCN prefers to honor the autonomy of Nicaragua, its people
and its institutions. So as part of our serious, professional and
respectful relationship with our partner agencies in Nicaragua,
we do not intervene in the decision process to grant loans to specific
individuals or groups. We only encourage our partner agencies, through
incentives, to prioritize services to the most needy, especially
women and small farmers.
What interest rates do WCCN and its
partner agencies charge?
WCCN charges its partner agencies 10% interest (on a declining
balance). In turn, MFI's charge their borrowers interest rates that average 36%.
Nicaragua is a country with a developing economy. Although the Nicaraguan economy is growing at a faster rate than that of any other Central American country, inflation remains at three times that of the U.S. 80% of the Nicaraguan population is considered “low-income”, and therefore unqualified to receive loans from conventional banks, resulting in high demand for credit in Nicaragua. This demand contributes to high market interest rates compared to those in the U.S. These market rates, however, correspond with rapid growth in the sectors of the economy where credit is used, such as small business, commerce, services and agriculture. Certainly the gains realized through access to credit are far greater than the price.
Microfinance institutions (MFI’s) are non-governmental, non-profit institutions, with the primary purpose of promoting economic development through serving those marginalized by the formal banking sector. The interest rates MFI’s charge their borrowers will vary according to loan purpose, averaging 36% annually. These rates reflect the higher cost of providing many very small loans, as opposed to providing very few large loans. And, like the formal banking industry, interest charges must provide for possible loan default. Also the earnings from interest on loans will allow MFI’s to provide free education and assistance, such as computer literacy and business management training.
Since the liberalization of the financial markets in the early nineties, interest rates have gradually decreased. There is downward pressure on interest rates as the total pool of capital increases, spurring competition among Nicaraguan microfinance institutions.
Further explanation from the United Nations, who declared 2005 the International Year of Microcredit:
If microfinance is about serving the poor, why does the provision of financial services need to be profitable?
Microfinance institutions need to be profitable in order to cover the costs of reaching out and meeting the demand of underserved segments of the population over a sustained period of time. Additionally, after a series of very small loans, a microentrepreneur often wants to expand her business; a microfinance institution must keep up with the demand for larger loan amounts so businesses can grow into small enterprises.
How can poor people afford such high interest rates?
Microcredit interest rates are set to provide viable, long-term financial services on a large scale, while subsidized interest rates generally benefit only a small number of borrowers for a short period. Studies conducted in India, Kenya and the Philippines found that the average annual return on investments by microbusinesses ranged from 117 to 847 per cent. These high returns are commonplace among microentrepreneurs, and while the interest rates seem high, they usually represent only a small portion of microentrepreneurs' total returns. Interest rates charged by informal moneylenders are overwhelmingly higher than those of MFIs.
Is microcredit the solution for poverty?
It is part of the solution, but it needs to be accompanied by
other social actions and initiatives. For that reason WCCN supports
Nicaraguan social movements that work for a fundamental transformation
of unfair social structures. For examples of such work, visit the
Women's Empowerment Project portion of this web site.
