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El Salvador Turns to Credit Unions for Business Sector Financing

18 August 2010

Government policy makers last week committed to developing economic policy and payments system support for credit unions and financial cooperatives in El Salvador, enabling them to help boost sagging loan support for the small and micro-business sector. The commitment was made in response to a joint visit by officials from the Federation of Savings and Credit Cooperatives of El Salvador (FEDECACES) and World Council of Credit Unions (WOCCU).

Prior government administrations in the past had encouraged El Salvador’s commercial banks and microfinance institutions to provide financing support to small and micro enterprises. However, during the recent financial crisis, commercial bank loans in general shrank by 5% and the funds were redirected away from the small businesses to support larger commercial enterprises. During the same period, credit union loans expanded 16%, making more money available to small businesses in need.

Héctor Córdova, FEDECACES CEO, and Brian Branch, WOCCU executive vice president, last week met with Salvadoran government officials to support the case for increased growth and outreach by credit unions to small and micro businesses. Córdova and Branch were executing lobbying steps discussed during the recent International Seminar on Best Practices and Credit Union Operations, an event jointly sponsored by and part of the ongoing relationship between the Iowa Credit Union League and Corporación Fondo de Estabilización y Garantía de Cooperativas de Ahorro y Crédito de Panamá, R.L. (COFEP), originally brought together in 2005 through WOCCU’s International Partnerships Program.

The April 2010 meeting, held in Panama City, Panama, attracted participants from throughout Latin America and the Caribbean. Lessons learned about market strategy and advocacy both came into play during last week’s visit, according to Córdova.
"We saw the crisis as an opportunity to help our members grow and to grow our credit unions," said Córdova. Currently, the 32 credit unions in the FEDECACES system serve 132,000 members. Nearly 20% of the credit union portfolio represents loans to small or micro businesses and agricultural producers. Most business loans are made to self-employed merchants or family-owned businesses.

According to Marta Evelyn de Riviera, vice president of El Salvador’s Central Bank, only 5% of the country’s financial sector is locally owned. During the global financial crisis, the country saw both restriction and withdrawal of services by the larger foreign-owned commercial banks. The banks’ withdrawal for small business paved the way for government policy support for increased credit union participation in financing micro and small businesses, according to Mario Cerna, El Salvador’s vice minister of economics.

"During the civil war of the 1980s, credit unions in El Salvador maintained their operations, often as the only local institutions to provide loans to small agricultural producers, self-employed merchants and family-owned businesses," said Branch. "During the recent financial crisis, credit unions once again stepped into the breach to provide financing to the common population who could no longer get financing from commercial banks. This level of local commitment to small businesses is what the government would like El Salvador’s credit unions to continue providing."

Current government policy seeks to stimulate greater growth of the financial cooperative sector, including credit unions, to ensure continuity of locally sustainable and committed financial services to local producers and businesses. Central Bank officials are in the final stages of completing their policy development and will meet with FEDECACES staff next week to gather specific credit union input.