MF laws-CA-05-01

Regulations that Affect
Microfinance Institutions
in Central America
May 2001
Compiled by Mary Morgan, Program Director at Katalysis Partnership

Introduction
Over the last twenty years, microcredit has evolved from loans for income generating
activities to financial products that include insurance, savings mobilization, and loans for
working capital, fixed assets, housing, education and consumption. Essentially a
sophisticated microfinance industry has emerged. Currently, in some countries
microfinance institutions have grown so fast that they now reach more clients than
commercial banks. This is occurring in Bolivia and Uganda. This is because
microenterprise is the principal means of employment in the least developed countries.
One building block of this era in the expansion of microfinance for the poor is regulated
microfinance institutions so as to tap into the capital flows of the formal financial
markets.
It is felt that if microfinance institutions are not regulated, they cannot protect the
savings of their clients or continue to grow to reach the millions who still do not have
access to credit due to inaccessibility to commercial loans for the much needed loan
capital. Yet if there is going to be regulations, they need to be prudent and there needs
to be sufficient bodies to enforce the regulations.
The Katalysis Partnership supports 11 Central American microfinance organizations
assisting them to be sustainable, high quality institutions. We provide strategic
technical assistance to develop and/or strengthen capacity within the institution;
resource mobilization to access loan capital; and a lateral learning environment that
maximizes efficiency of technology transfer.
The lateral learning is facilitated though our regional field office in Tegucigalpa and also
occurs at the quarterly Director’s meetings. In January 2001 the Partner Director’s
expressed concern about emerging regulations and laws which had just been passed in
Central America. In El Salvador the introduction of dollarization increased the default
rate because MFI's had not prepared their financial systems, promoters or clients in how
to convert the money. In Guatemala a law was introduced that would tax each loan
contract signed which would have a devastating affect on the industry. In Honduras and
Guatemala the microfinance industry is reeling from the ceiling on interest rates.
This document is a compilation of the laws that have been passed or are being
discussed in El Salvador, Guatemala, Honduras and Nicaragua as of May 2001. It is
not a definitive document, but a tool to support our lateral learning. The laws have been
reviewed, key articles that had an obvious affect on the MFI’s have been highlighted
and analyzed with the implications presented.
In May 2001, there was a Partner Director’s meeting convened to analyze the various
laws and the implications. Grouped by countries, the Directors developed a risk
analysis as well as lobbying strategies. You will find these tools in Section 2 of the
document. These are simple tools, but were developed in an attempt to prepare the
individual institutions with appropriate response strategies and then to facilitate the
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collective efforts at the national level where there are effective coalitions operating and
emerging. 1
Each country then presented to the Network their analysis of the existing and pending
laws. The discussion that ensued was rich as the Directors shared their experiences
with each other and contributed towards alerting each other to what was down the road
if a particular law was not already on the books in their particular country.
Katalysis is sharing this document and tools with the MFI industry in the hopes of
contributing towards preparing MFI’s for the impact of impending regulations as the
regulatory frameworks are as becoming reality. We hope that you find it useful.
Mary Morgan
Program Director
Katalyisís Partnership – May 2001
1331 N. Commerce Street
Stockton, CA USA 95202
Tel: (209) 943-6165
Fax (209) 943-7046
www.katalysis.org
1. National Coalitions:
El Salvador
ALPIMID (Alianza para el Desarrollo de la
Microempresa)
Director Ejecutivo: Cesar Ríos
Tel/Fax: (503) 225-2317
E-mail: alpimed@telesal.net
ASOMI (Asociación de Organizaciones de
Microfinanzas)
Calle Nueva I, #3733
Apartado Postal 1773
Colonia Escalon, San Salvador
El Salvador, C.A.
Director Ejecutivo: Luis Castillo
Tel/Fax: (503) 245-2611/298-2040
Fax: (503) 224-3310
E-mail: fusai_direjecutivo@clna.com
Guatemala
REDIMIF (Red de Instituciones de Microfinanzas de
Guatemala)
Presidente: Director de FAFIDES: Reynold Osbert
Walter Padilla
Tel: 502-367-1884/5/73
Fax: 502-367-1891
e-mail: fafides@gua.net
Honduras
Fundación Covelo
Director: Lic. Juan José Lagos
Tel: (504) 221-5189; 221-5191/94/77
E-mail: jjlagos@david.intertel.hn
Nicaragua
ASOMIF (Asociación Nicaragüense de Instituciones de
Microfinanzas)
Colonia Los Robles
Contiguo a Shell.Plaza El Sol
Costado Sur
Managua, Nicaragua
Director Ejecutivo: Iván Gutiérrez Aguirre
Tel/fax: (505) 278-8612/13
E-mail: ivang@ibw.com.ni

Contents
SECTION 1
Regulations Affecting Microfinance Institutions in Central America (May
2001)
1.1 El Salvador..…………………………………………………………………….............. 2
1.2 Guatemala..……………………………………………………………………............... 7
1.3 Honduras..………………………………………………………………………............. 11
1.4 Nicaragua.………………………………………………………………………............. 15
1.5 Summary of Formalizing Laws in Central America............................... 18
SECTION 2
Tools to Analyze and Influence the Laws
2.1 Risk Analysis……………………………………..……………………................. 21
2.2 Effective Lobbying 22
Matrix for Development of Effective Lobbying……………………........................ 26
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SECTION 1
Laws Affecting Microfinance
Institutions in Central America
May 2001

1.1 EL SALVADOR
Monetary Integration-Dollarization Law
Article 1: To fix the exchange rate at 8.75 colones per dollar
Article 3: The dollar will have unrestricted legal tender with unlimited exemption power
for payment of obligations.
Article 4: The Central Reserve Bank will exchange Colones for Dollars on demand by
the Banks.
Article 5: Colones issued up to 31/2/00 will have permanent legal tender, but the banks
must exchange these for dollars during any transaction.
The exchange of Dollars and Colones in cash will carry no commission or charge.
Article 9: All financial transactions such as bank deposits, loans, pensions, issuance of
securities or any other carried out by the financial system, as well as financial
accounting registers, will be expressed in Dollars.
The holders of savings accounts, credit instruments, regular accounts and any other
bank documents, insurance policies, negotiable securities or bonds and other securities
may request replacement of these documents and record of the derived rights of these,
by others where the values are expressed in dollars at the exchange rate established in
Article 1 of this law.
Article 10: The prices of goods and services may be expressed both in colones and in
dollars, at the exchange rate established in this law.
Article 11: All liabilities of the Central Reserve Bank of El Salvador will be absorbed by
the Treasury Ministry, which can exchange these for existent liabilities in its favor.
Article 13: Extension of the granted loan terms by the institutions of the financial
system, in colones, before this law came in force, will come about through a single
written communication from the bank to the client, without need for execution of new
documents. The terms of the mortgages and guarantees will be considered extended in
accordance with the terms expressed in the written communication. In both cases, the
debtor will have 30 days to state any disagreement on the notification to which this
article refers. Silence will be understood as an acceptance of the extension of the terms.
Article 14: During the first three months of this law being in force, the institutions of the
financial system will gradually adjust the interest rates of the loans contracted in colones
Regulations that Affect Microfinance Institutions in Central America
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prior to the coming into force of this law, in relation with the decrease of their costs of
operation and the interest rates for the new credits granted in dollars.
Article 15: During the first six months of this law being in force, the prices of the goods
and services must be expressed in both currencies, for which the Consumer Protection
Directorate will establish the necessary guidelines.
Article 21: Article 436 of the Commercial Code must be substituted by the following:
Article 436: The books must be kept in Spanish. Accounting will be kept in colones or
dollars. All accounting must be kept in the country, even that of agencies, affiliates,
subsidiaries or branches of foreign companies....
Implications
• There will be price speculation by “rounding off prices” which will fuel inflation..
• In rural areas and others, the calculation will become complicated.
• Circulation of counterfeit dollars will be possible due to the lack of familiarity
with these.
• Adjusting the computer software will generate a cost for MFIs.
• The law contains some yet unresolved operational problems, which will
represent financial costs to persons and entities.
• Subsidy of the Banco de Fomento Agropecuario (BFA), Banco Hipotecario
(BH) and Fondo Social de la Vivienda rates will require State funds.
• Transfer of the colones debt to dollars from Central Reserve Bank (BCR)
dollars to the Treasury Ministry (MH) will create a new and unresolved fiscal
load.
• The solution the fiscal deficit will be a tax increase.
• The BCR loses the ability manage the crisis of dollar shortage and makes the
State vulnerable to external factors.
• Possibly the IVA (Value Added Tax) will be increased due to the fiscal deficit.
• In order to cover new expenses, the government might implement some labor
flexibility and freeze salaries in order to create an incentive for foreign
investment. This could affect disposable income levels and be reflected in a
decrease in sales for micro entrepreneurs.
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Decree No. 849 - Non-Bank Financial Intermediaries Law
Article 1: The object of this law is to regulate the organization, operation and financial
intermediary activities that the non-bank financial intermediaries mentioned in this law
perform, and that they comply with their financial and social objectives and guarantee
more efficient and more reliable management of their depositors and their associates
resources.
Article 2: The non-bank financial intermediaries regulated by this law, are the following:
1. The Savings and Loan Cooperatives who in addition to attracting funds
from their partners also do so from the public;
a) Savings and Loan cooperatives when the total of their deposits and
shares are over six hundred million colones;
b) Savings and Loan Federations qualified by the Superintendence to
intermediate as stipulated in this law.
c) Savings and Loan corporations.
Article 7: The number of partners necessary in order to obtain authorization from the
Superintendence cannot be less than one hundred.
Article 12: Cooperatives may invest in shares of Salvadoran cooperatives and
companies dedicated to activities that supplement their financial services, prior to
Superintendence authorization.
Under no circumstance may the total investment in shares exceed fifteen percent
of the net assets.
The sum of the credits, endorsements, bonds and other guarantees which in any
way, directly or indirectly the company provides the institutions in which they participate,
cannot exceed ten percent of the net assets.
Article 16: The paid-in capital of a cooperative regulated by this law, may not be less
than five million colones.
Article 18: The paid-in capital of cooperatives is composed by shares underwritten and
paid by the partners, which may vary in accordance with the respective law. Said
shares represent the partners participation in the cooperative and gives them the right
to a voice and to vote in accordance with the corresponding laws.
Establishment of the Legal Reserve
Article 19: The cooperatives must establish a legal reserve, to which they must allot at
least twenty percent of their yearly profits until the accrual of at least fifty percent of their
paid-in capital.
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The sum of the corporate assets cannot be less than the paid-in capital, nor less than
six percent of its obligations or total liabilities with third parties.
Article 26: For the present law Net Asset Value or Net Worth will be understood as
the sum of the Primary Capital and the Complementary Capital minus the
resources invested in the operations as mentioned in Article 12 of this law, as well as
other capital participation in any other company. In order to determine the Net Asset
Value, the Complementary Capital will be accepted in an amount up to the sum of the
Primary Capital.
Primary Capital is determined by the sum of the paid-in capital, the legal reserve and
other capital reserves from profits.
Article 34: The following operations can be performed by cooperatives in national
or foreign currency:
1. Receive savings deposits and term deposits;
2. Issue debit cards;
4. Contract credits and contract obligations with banks and financial
institutions in the country or abroad;
5. Grant all types of loans;
8. Issue or manage credit cards, prior to Superintendence approval;
15. Other active or passive credit operations and other financial
operations that the Board may approve, but require prior authorization of
the Central Bank.
Article 42: Cooperatives will freely establish interest rates, commissions and
surcharges; nevertheless the interest variation policies must previously be made
known to the Central Bank and it can fix them solely in the cases foreseen in Article 29
of the Constitution or in situations of serious unbalance of the monetary and credit
market and for periods not longer than one hundred and eighty days applied to their
active and passive operations.
Article 106: All cooperatives regulated by this law must be incorporated in a
stabilization fund. Those cooperatives affiliated to a federation must be incorporated in
its federation’s stabilization fund and those not affiliated will freely choose the fund in
which to incorporate.
Article 107: The object of Stabilization Fund will be to provide financial assistance to
the cooperatives that may have problems that may take them to insolvency, or which
are insolvent.
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Implications:
• This law only applies to savings & loan cooperatives, so formalization of any credit
program or MFI will make it a Savings & Loan Cooperative
• The capital necessary to formalize is at least C10,000,000.00 in cash. Even if an
existing micro finance institution is sustainable, if they do not have the required
capital, it will not be able to register as a formalized institution.
• Obtaining the necessary capital to formalize may require the formation of federations
and associations of various MFI’s
• This law contains 86 pages with detailed criteria. It requires a strong management
with extensive microcredit knowledge.
• The intention of this law is to create a more formalized environment for microcredit
and will help separate the strong institutions from the weak ones. It is believed that
those microfinance organizations, which are small and weak, will disappear in the
next few years.
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1.2 GUATEMALA
Free negotiation of foreign currency law
Article 1: The ownership, disposal, contracting, remittance, transference, purchase,
sale, collection and payment with foreign currency is free and the profits, losses or risks
are by account of each individual or company, national or foreign, transacting these
operations.
It is equally free to own and manage deposits and foreign currency accounts, as well as
financial intermediary operations, in national banks as well as in foreign banks ....Bank
Superintendence.
The Government of Guatemala, decentralized institutions, autonomous and semi-
autonomous and in general entities and departments of the State, will transact their
purchases, sales, remittances, transferences, and other operations with foreign
currency, in the country as well as abroad, through the Bank of Guatemala. Purchase
and sale of foreign currency is exempt of the Value Added Tax, of the fiscal stamp tax
and of the special stamped paper for protocols.
Article 6: Any person, individual or legal, may freely and mutually agree to pay fees,
wages, salaries or commissions to anyone so entitled for work or services rendered.
Implications:
• Due to the fact that it is allowed to have bank accounts in dollars, MFIs can
safeguard its obligatory reserves in dollars.
• The free negotiation in foreign currency law allows MFIs to negotiate contracts
in dollars.
• Article 6 gives all employees the right to request their salaries in dollars;
nevertheless this requires an agreement between both parties. (Worker-MFI).
• MFI’s will require management information systems which can handle more
than the national currency of Quetzales.

Ministry of Finance
Proposal
Fiscal Pact Proposal Present legislation
(Including Decree 44-2000)
Accord between the Political
Group and the Fiscal Pact
1 All interest sent abroad is
subject to 10% income tax
(Income Tax = IT)
All taxed 10% except first order
banks, multilaterals or advances
on exports.
There is imprecise wording as to
if taxes sent abroad are subject to
taxation (44-2000)
A draft was accepted whereby
loans from banks abroad are
exempt. This has to be made
operational.
2 Interests on housing loans up
to US$30,000 exempt/
The subject was not considered. All exempt. The value of the
housing does no matter.
Not discussed yet.
3 Fiscal benefits by special
laws valid up to a max. of ten
years.
The subject was not considered Benefits valid up to a maximum of
ten years. (44-2000)
No accord reached yet.
4 Benefits of Duty Free Zones
and Maquilas are terminated.
This point must be analyzed
according to the competitiveness
of other countries.
Exempt from income tax but
obligated to pay the IEMA
5. The benefit of deductibility of
last year’s losses is
eliminated.
Losses can only be deduced the
next year.
Losses can only be deduced by
new companies during the first
five years ((44-2000)
Accepted as stated in decree 44-
2000.
6 Presumed taxable income on
special invoices:
Goods: 10%
Services: 20%
The subject was not considered Presumed taxable income on
special invoices:
Goods: 10%
Services: 20%
Accepted as stated in decree 44-
2000.
7 IT charge non-resident
transport firms 5% of gross
income.
The subject was not considered IT charges non-resident transport
firms 4% of gross income.
Not discussed yet.
8 Donations to associations,
non-profit organizations or
foundations are not
deductible.
Are deductible but up to 5% of the
gross income.
Donations that do not exceed
5% of the net income or
Q500,000 are deductible (44-
2000)
Agreed that it remain as in decree
44-2000
9 VAT paid by individuals is not
a VAT credit, but a deductible
expense.
VAT paid by individuals no longer
is a VAT credit, but a deductible
expense.
The VAT paid by individuals is a
direct credit to the IT
Not discussed yet.
10 The interest on loans is
only deductible by
institutions that are
supervised by the BI (Bank
Superintendence)
The interest on loans is only
deductible by institutions that
are supervised by the BI
All interest is deductible A draft was accepted that includes
interest that comes from banks
abroad and from investments in
the Stock Market.
Operational details pending.
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Ministry of Finance
Proposal
11 The deduction for
reinvestment of profits in
fixed assets and training is
rescinded.
Deductible due to reinvestment of
profits limited to 5% of the net
taxable income.
The deductible is: 5% of the net
taxable income due to
reinvestment of profits in fixed
assets and 5% in employee
training. (44-2000)
The text was accepted as stated in
the decree 44-2000
12 Personal IT: Taxable income
=over Q180,000 = 30%
Personal IT: Taxable income
=over Q180,000 = 31%
Personal IT: Taxable income
=over Q180,000 = 31%
the decree 44-2000
13 Company IT = 30% Company IT = 31% (44-2000) Company IT = 31% (44-2000) The text was accepted as stated in
the decree 44-2000
14 IT retention for fees paid
abroad = 30%
The subject was not considered IT retention for fees paid abroad =
31% (44-2000)
the decree 44-2000
15 Scale of retentions according
to Articles 64 and 72 if this
law = 4% of net taxable
income.
The subject was not considered • Retention according to Article
64 of this law = 4%
• Retention according to Article
72 of this law = 5%
Modification of Article 64 is
pending discussion. Agreement
exists to leave matters related to
the retention foreseen in Article 72
as they stand.
16 The following are subject to
stamp tax: a) dividends paid
in cash or in kind b) loans
between individuals.
The subject was not considered. Loans among individuals are
subject to stamp tax. (44-2000)
the decree 44-2000
17 When the stamp tax is
greater than Q3001, stamps
may not be used.
In agreement with the stamp tax
reforms, in matters pertaining to
method of payment.
When the stamp tax is greater
than Q3001, it can only be paid in
cash. (44-2000)
the decree 44-2000
18 VAT applies to contributions
of goods and services to
societies, associations and
foundations.
The subject was not considered. Contributions of real estate and
personal property are VAT
exempt.
Not yet discussed.
19 Dues paid to social
institutions and guilds subject
to VAT
The subject has not been
considered.
Dues paid to these institutions are
not subject to the VAT
Not yet discussed
20 All operations of cooperatives
subject to VAT.
The subject has not been
considered.
Operations of cooperatives and
other similar organizations with
their associates are exempt.
Not yet discussed
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10
Ministry of Finance
Proposal
21 For imports, the basis for VAT
includes duties and other
surcharges.
For imports, the basis for VAT
surcharges.
For imports, the basis for VAT
surcharges due to the importation
and entering the country (44-
2000)
Agreement to abide by terms in
decree 44-200 (pending a possible
unconstitutionality).
22 Fiscal credit is not applicable
to the purchase of fixed
assets except machinery and
equipment and transport of
cargo and passengers.
Fiscal credit not applicable in the
purchase of fixed assets which
are not directly related to
productive activities.
Fiscal credit applicable to the
purchase of fixed assets applied
to taxable activities and
operations.
Pending agreement.
23 Bank of Guatemala will return
50% to the exporters.
This subject has not been
considered
Bank of Guatemala to return 90%
of the exporters fiscal credit.
This has been discussed and
pending editing.
Implications
• If there is a 10% tax on taxable income, the operating costs are going to increase which will affect the sustainability of
microfinance institutions.
• If donations do not exceed 5% of the net return or a maximum of Q500,000, they are deductible costs. This could affect operating
costs.
• If a Guatemalan MFI is not formalized and supervised by the Bank Superintendence, your clients cannot deduct interests from
their loans in taxes. This could affect your position in the market as clients move to formalized institutions to get tax breaks. .
• MFI’s can deduct 5% of the return to reinvest into fixed assets and 5% into capacity building of employees. Therefore, capacity
building is considered an investment and not a cost in operations in the eyes of the law.
• The other points are going to affect the business owners and their businesses. With increased taxes and a decrease in what is
permitted in deducting from taxes, the capacity of business owners to pay loans is going to be affected. This ultimately will affect
the repayment rate of microfinance institutions.
Thanks to Edgar Búcaro of Genesis for his work and contribution to this table!

1.3 HONDURAS
Decree No. 229-2000
Article 1: The object of this law is to exclusively regulate the Private Financial
Development Organizations (PFDO's) dedicated to the financing of micro and small
enterprise, in order to guarantee the legality, transparency and safety of its operations
an to strengthen their feasibility and sustainability.
Article 8: To establish a PFDO its incorporation must be applied for.. for which the
following requirements must be fulfilled:
1. A first level PFDO: Must have net assets of at least L1,000,000 (One
million Lempiras)
2. A second level PFDO: Must have net assets of at least L10,000,000 (Ten
million Lempiras)
3 ...part of its minimum net asset value up to 80% of its own resources
contained in the credit portfolio must be assessed and qualified, in keeping
with the parameters established in the institutional inspection instructions for
microfinance institutions;
4 ...implementation and application of the best practices established for
the national and international microfinance sector; and
5 Provide a list of the founding associates and executives including their
resumes.
Article 9: The Executive Branch, through the State Secretariat in the Interior and
Justice Departments, will have the authority to cancel the incorporation of the
PFDO’s that break the law, in which case the respective resolution must assure their
is a plan for the settlement of its liabilities.
Article 12: To strengthen the asset value of an PFDO and face the contingencies of
financial management, enough asset reserves will be created from its gross
income.
Article 14: The net surplus of an PFDO will be determined after having covered its
operational and financial costs, having set up reserves for collection of doubtful loans
and after having strengthened the asset reserves. This surplus will become part of the
net asset value and may not be distributed.
Articles 16 - 33 MANAGEMENT AND REPRESENTATION
Article 26: The Directors’ responsibility will be joint and covers:
1) The authenticity of the surpluses received or of the losses suffered by the
PFDO;
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2) The existence of accounting books and the truthfulness of the annotations
therein; and
3) In general, to watch over the fulfillment of the obligations imposed by the
Law, Rules and Statutes.
Article 35: The PFDO’s established under this law, may merge with one or more other
PFDO’s and request the modification of their Charter and Statutes to the Executive
Branch through the Secretariat of State of the Interior and Justice Ministries.
Article 37: Once the authorization is obtained for the merger from the Secretariat of
State of the Interior and Justice Ministries, the merger will proceed including all the
property, rights and assets; as well as debts, obligations and liabilities of the
entities that merge. The rights, obligations and privileges of the customers of
both PFDO’s will remain intact.
Article 38: The PFDO’s that certify their legal representation, may carry out the
following operations:
1. To grant loans in local or foreign currency.
2. Obtain loans from public or private, national or international financial
institutions to comply with the organization’s objectives. A first level
PFDO may contract overseas loans up two times its net asset value.
Second level PFDO’s may contract overseas loans not more that five
times their net asset value.
3. To accept savings and fixed term deposits form their registered
borrowers.
4. To manage special funds which other persons or institutions, public or
private, national or foreign, provide for specific purposes to support
micro and small enterprise;
5. To contract financial leases with its borrowers to facilitate the
purchase of fixed assets needed by micro and small enterprise;
6. As a guarantee from its registered borrowers, to accept term
securities resulting from its operations and in relation to the
production and trading of goods and services
Article 45: PFDO’s are prohibited to do the following:
1. To grant loans with fiduciary guarantees to a registered borrower or to
each person of a group of borrowers, that exceeds 2% of the entity’s net
asset value.
2. To grant or to hold loans with a registered borrower or for each person of a
group of registered borrowers for more than 5% of the entity’s net asset
value.
3. To grant personal loans to its founders or associates, as well as to the
directors, managers or employees, or to guarantee these before other
institutions; and
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4. Grant loans to the spouses or relatives within fourth degree kinship
5. …and second of affinity, to the founders, associates, directors,
managers, and officers of the PFDO.
Article 47: The yearly interest rate on loans that the PFDO’s grant, may not be
greater than 3 percentage points over the maximum prevailing interest rate of the
national banking system.
Article 50: The PFDO’s that exist on the date of the issuance of the present law and
which due to their activities must comply with the provisions therein set forth, will have
24 months from the date the law comes into force, to regulate their operations
and adjust their charter and organization to meet the requirements which this law
establishes, within the mentioned period.
Article 57: The present law comes in force 20 days after its publication in the
Official Gazette. (It was published on February 3rd
, 2001.)
Implications:
• The minimum capital base to create a microfinance entity for a First Level Private
Financial Development Organization (PFDO) is L1million (one million Lempiras) and
for a Second Level entity L10million (ten million Lempiras). (Article 8). Thus, even if
a PFDO is sustainable, it may be able to become regulated due to an insufficient
capital base.
• Loans can be made in national or foreign currency which will require multi currency
MIS’s. (Article 38-1)
• This law does not create incentives for attracting capital, as it does not allow the
disbursement of dividends to the investors. This can limit voluntary services on the
Board.
• Although ethical norms are established to for the Board of Directors and
Administrators, the punishment for directors is very rigorous and leaves them liable.
This is another disincentive for participating at the executive level.
• Those MFI’s without the necessary capital to formalize will have the option of
merging with another PFDO in order to continue offering services to their clients.
(See articles 34-37)
• Savings may only be received from registered clients who have received credit. This
puts savings mobilization at risk without a diversified base of clients who deposit
savings. (Article 38-3)
• Savings must be maintained at a fixed rate. (Article 38-3)
• The PFDO may administer funds for special programs that support the small and
micro business. (Article 38-4) The funds may be used for non-financial services
such as marketing, training or to larger organizations that contract with the small and
micro business.
• The PFDO may acquire equipment and lease it to their clients, which would facilitate
de acquisition of fixed assets necessary for the small and micro business. (Article
38-5)
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• Granting personal credit to founders, associates, board, management, functionaries
and their businesses as well as family members is prohibited. (Article 45:3-4)
• The interest rate may not exceed the maximum interest rate in the national banking
system plus 3 additional points. (Article 47)
• There is a time limit of 24 months for Honduran PFDO’s to adjust to the
requirements laid out in this law (Article 50). This law came into affect on February
23, 2001.
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1.4 NICARAGUA
Law No. 374 on Reforms to Law No. 176: The Law that Regulates Loans
between Private Persons
Article 2: The maximum annual interest that may be agreed upon for loans between
private persons to whom this law refers, on the date of the loan and according to each
title, will be published by the Bank of Nicaragua in any written communications medium
with national coverage, during the last five days of each month, so that it is applied
during the entire coming month.
Excluded from each weighted interest calculation are interests applied to credit cards
and overdrafts.
Article 5: The reforms to this law will continue being applicable to all those MFI’s
whose main objective is to offer financial services to the public, as long as no regulatory
framework exists.
Implications:
• On April 30th
. 2001, The Central Bank of Nicaragua advised the general public
that the average weighted active interest rate of commercial banks in national
currency is 16.6% on outstanding balances, also applicable to loans with a
fixed value clause. The consequences of this situation are that the MFI’s that
have so far charged 36% a year either on the lump sum or the balance, are
forced to drastically reduce their credit offer to microbusiness entrepreneurs
who have no access to the commercial banks, or in some cases to disappear
due to the foreseeable non-sustainable financial situation.
• The reduction of the microcredit offer will only benefit the usurers, who we
experience an increase of demand for their services and will continue evading
the law by finding loopholes that protect them in case of legal action.
• It would be valuable to consider credit and debit cards as a technological
advance, and the same for MFI credit access, which would allow a higher
interest rate, as is happening in Bolivia at this time.
• For the MFI’s the creation of a regulatory framework represents an opportunity
that will allow them to achieve positive functioning of the credit offer, which will
satisfy their operational needs.
05-2001
15

Law No. 391 - The Suspension of Lawsuits and Withholding of Sentences for
Debts contracted by Coffee Producers in Nicaragua
Articles 1 and 2: All lawsuits furthered by MFI’s against coffee producers in the country
are to be withheld for 300 days. During this period no interest arrears will be
accumulated on the credits this sector may have with said entities. During this period,
the National Coffee Council must convene the producers, various creditors and any
other involved party, in order to propose a long term solution for the sector to the
government.
Implications:
• The MFI’s cannot charge interest in arrears to borrowers of the coffee
sector who received loans, and this establishes a precedent by which the
legal conditions for an effective development of financial services in the
country are impaired.
ASOMIF: Draft of a Special Microfinance Law
Article 14: The social capital of MFI’s cannot be less than thirteen million Córdobas
(C$ 13,000,000.00) at any time.
Article 16: To promote their solvency, the MFI’s will keep a minimum eight percent
(8%) Capital Adjustment, which is a result of dividing Net Assets by total Risk Assets.
Article 17: Regarding the previous article, total Amount of Risk Assets is to be
understood the weighted sum that the Bank Superintendence determines through
general norms regarding Net Asset accounts, after deducing the corresponding
reserves and depreciation.
Article 19: MFI’s must establish a Capital Reserve equivalent to not less than twenty
five percent (25%) of their net profits.
Article 25: MFI’s may carry out active operations such as granting credits and
discounts, accept and discount notes, offer guarantees, endorsements and bond which
are payment/investment guarantees, in national or foreign currency; they can also carry
out passive operations such as receiving savings and term deposits, contract loans in
the country or abroad with any institution, public or private, accept donations, etc.
05-2001
16

05-2001
17
Article 26: The MFI’s can carry out, prior authorization by the Bank Superintendence,
other operations such as issuing credit or debit cards for its savings accounts, issue
drafts, transferences, letters of credit for imports and exports, etc.
Article 28: The MFI’s will be subject to supervision, vigilance and auditing by the Bank
Superintendence.
Article 32 (II): In the credit documents used in transactions with their customers, the
MFI’s can freely contract interest rates in national or foreign currency.
Implications:
• This draft was developed by ASOMIF in order to protect the microfinance
sector in Nicaragua. ASOMIF is an association of microfinance institutions in
Nicaragua which is lobbying in Congress to pass this law.
• If it were to become law, it would be worthwhile to explore the formation of
coalitions and pooled capital to continue offering services to clients.

1.5 Summary of MFI Formalization Laws in Central America 05-2001
Nicaragua Honduras
Approved
El Salvador
Approved
Name of the
Law
Draft of the Special Law for Non-bank
Microfinance Institutions.
(Prepared by ASOMIF)
Regulating Law for Private Financial
Development Organizations
Dedicated to Financial Activities
Decree No. 229-2000
Non-bank Financial Intermediaries
Law
Decree No. 849
Net Asset Value • First Level: L1,000,000.00
Second Level: L10,000,000.00
• The net surplus of a PFDO will
become part of its net asset value
and may not be distributed.
• Net Assets or Net Asset value
will be understood as the sum
of the Primary and the
Complementary Capital less
the value of resources invested
in the operation.
• The total investment in shares
may not exceed 15% of the Net
Asset Value.
• The sum of credits, bonds,
endorsements, and other
guarantees may not exceed its
Net Asset Value.
Yearly interest
rate on loans
The maximum interest rate applicable to
loans between private individuals to whom
this law refers will be the highest interest
charged by registered commercial banks
plus a percentage not greater than 50% of
that rate.
Cannot be greater than the maximum
interest rate prevailing in the national
banking system plus three additional
percentage points.
The cooperatives may freely
establish interest rates,
commissions and surcharges.
Capital
reserves
An amount not less than twenty five percent
(25%) of its net profits.
At least twenty percent of its yearly
profits until it has reached a
minimum of fifty percent of its paid-
in capital.
05-2001
18

05-2001
19
1.5 Summary of Formalizing Laws in Central America 05-2001
Nicaragua Honduras
Approved
El Salvador
Approved
Paid-in capital At no time can it be less than the amount of
C$13,000,000.00
(Paid-in Capital = registered stock, non-
convertible bearer shares)
Cannot be less than five million
Colones.
(The paid-in capital is made up of
shares, subscribed and paid stock
by its associates)
Guarantees • A verification and analysis of the
borrowers financial situation, or
• A mortgage, collateral or signature
guarantee that provide alternate
sources for payment; or
• A jointly and severally liable guarantee
of a group of two or more persons, that
are well known and that have an
independent activity.
• In the loan contracts, the borrowers
obligation to establish a guarantee fund
of up to 25% of the loan can be
required.
Acceptance from its registered
borrowers, term securities originating
from their operations, related to the
production or trading of goods and
services.
Liquidity They must keep a minimum ratio of eight
percent (8%) of Capital Adjustment,
calculated by dividing the Net Asset Value
by the total Risk Assets.
The sum of the credits,
endorsements, bonds and other
securities cannot exceed ten
percent of the value of the net asset
value.
Credit portfolio 80% of its net asset value
Savings May receive fixed term and savings
deposits.
Receive fixed term and savings
deposits from its registered borrowers
Receive fixed term and savings
deposits.

SECTION 2
TOOLS TO ANALYZE AND INFLUENCE THE LAWS

2.1 RISK ANALYSIS
RISK
ANALYSIS
Situation/conditions that will
produce this risk
PROBABILITY
That it will come about
POTENTIAL IMPACT
On the institution or on the
businesspeople.
PREVENTION
What can be done to minimize
the negative impact?
This is called risk
management.
•
•
•
•
CONTINGENCY •
•
Prevention Contingency
Activity
Person responsible
Starting date
Completion date
Resources
05-2001
21

2.3 EFFECTIVE LOBBYING
For your institution to be well prepared for the regulatory framework, it is important to
have voice and voting rights, and to participate in the debate to influence the legislators
before the laws in question are enacted. By doing this you can assure that the laws will
protect your customers, but will not prohibit the expansion of your institution.
We have prepared a matrix to assist the development of an effective lobbying effort.
(See page 26.) Take the following matters into account when you develop your
lobbying strategy:
Overview:
1. Public policies in a country are directly linked to the field of politics. If you wish
to influence the politics in your country, it is necessary for you to understand
local and national politics. Identify, cultivate and keep in contact with at least a
few powerful political allies.
2. Many NGO’s avoid contact with the government. Instead of staying away from
the government, look for opportunities and ways of having constructive contact
with its officials. Insist on meeting with officials of the Central Bank,
development banks and the respective ministries.
3. Identify and propose credit products that your institution can promote, such as
insurance funds and secondary market mechanisms.
4. Don’t speak out prematurely in favor of a regulatory framework for the MFI’s.
Study it well.
5. Should regulation of the industry take place in your country, play an active role
to assure that the regulations be relevant to the microfinance industry (i.e.
admittance requirements, risk evaluation mechanisms).
6. In your conversations to persuade the regulatory authorities to adopt new
financing mechanisms and tools, present specific data of your country as well
as international information in order to properly influence the policies to be
adopted. (i.e. field investigations in matters regarding the demand of loans,
savings, etc.).
7. Establish the price of your products very carefully. There must be a margin
between the cost to your institution and what you are going to charge your
customers, so that your institution can attain sustainability. It might be
necessary for you to consider the convenience of charging interest or
05-2001
22

commission depending on the status of your portfolio. (If you intend to sell your
loans, it might be more convenient to charge commissions instead of, or in
addition to interest)
8. Be innovative - be ready to develop new products and modality (i.e. housing
loans, risk capital products, savings components). Don’t forget that new
products generally generate new costs.
9. Continue training your staff in your institution as well as in external institutions.
Make sure your staff is trained continuously. The staff of an NGO needs to
learn and strengthen its skills, including but not limited to financial skills.
10.Stay alive as an institution! It is easier to influence a policy debate if you are
present as an institution.
The Role of the National Government
1. Equal income and property does not simply happen through credit policies.
Credit policies must be supported by policies which will allow that the financed
activities be profitable. In other words the pricing policies must be structured
in a manner that will allow the MFI customers’ enterprises to be profitable.
Marketing, training and extension support services must be linked to the
productive activities in a well thought out plan.
2. Subsidies to new MFI’s could be necessary and should be invested in
sufficient quantity to promote self-sufficiency on the medium and long term.
The government should not expect that MFI’s continue subsidizing the cost of
the support services (mentioned in the previous point #1) as part of MFI’s
operations.
3. The main goal of the government’s credit policies should be the creation of
sustainable MFI’s. This can only be possible if the interest rates are
sufficiently high to cover the costs of offering credit services.
4. Instead of ordering the financial institutions to take care of the poor with credit
services, the governments should foster an environment in which said
services become a feasible business proposition. Policies directed at
condoning private debt, keeping interest rates low and encouraging the
people not to comply with their commitments are bad policies.
5. Governments can help MFI’s in the following manner:
05-2001
23

a. By investing directly in the MFI’s
b. By providing services such as insurance funds, selective guarantees and
acting as a secondary market or purchaser of the MFI’s loans.
c. By fostering the participation of MFI’s as intermediaries between the
commercial banks and the MFI’s customers.
d. By providing legislative support and if necessary, regulatory support for
the MFI’s.
The Role of Central Banks
1. Central banks should contract specialized staff for monitoring and if
necessary for supervising the MFI’s. This staff should understand the
structures, policies and risk evaluation procedures of the MFI’s.
2. Central banks play a primordial role in setting interest rates. When
establishing these interest rates, the central banks should consider: inflation
rate, informal sector interest rates, the necessary margin between interest
paid to savings accounts and those charged to loans, and premiums that may
be necessary for short term, low amount loans.
3. Central banks should gather and spread information about the important
aspects of the MFI’s operations which may be relevant to the policies:
a. The amount of savings mobilized (voluntary or involuntary) by the MFI’s
b. Portfolio behavior under different lending methodologies by the MFI’s (i.e.
group loans vs. individual loans)
c. Cost and benefits of various financial technological innovations and
insurance products.
d. Structure of payment terms, average loan amount and MFI customers.
e. Variation of the nominal and the real interest rate
f. When the funds that come from foreign donor agencies are channeled
through the central bank, the bank should permit the MFI’s to obtain an
operational margin sufficient to manage the loan.
g. Central banks can make arrangements to direct insurance programs for
deposits with the object of protecting the MFI customers’ savings.
h. Central banks can foster research on subjects interesting to MFI’s
including: inflation rate projections to analyze interest rates, the range of
possible financial services that may be necessary for specific market
segments, appropriate use of technology for MFI’s, design and evaluation
of savings programs. The central banks should also help the MFI’s to
develop their own capacity to research some of these subjects.
05-2001
24

MATRIX FOR THE DEVELOPMENT OF EFFECTIVE LOBBYING
THE PROBLEM FOR WHICH LOBBYING IS NECESSARY____________________________
1. What policy/law has been identified which will affect MFIs negatively? (Take from
your risk analysis)
2. Identify the individuals which are involved in the process of creating this policy
Key Players
Allies
Opponents
3. Define the level of the organization’s relationship with the regulating entity
High Medium Low None
4. Define the strategies to be developed with each of the involved parties in order to
achieve the objective.
5. How to make the problem known in public without being confrontational?
05-2001
25

05-2001
26
Person/s responsible:
Starting date:
Completion date:
Activity:
Resources Needed:

MF laws-CA-05-01

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