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Are Financieras Becoming A Thing Of The Past?
By ELISABETH ROMAN
December 9, 2004
For decades, Puerto Ricos small-loan companieswidely known as financierashave been providing quick access to personal loans with low monthly payments to a sector of the population that otherwise would be unable to obtain credit. Their widespread presence throughout the island has transformed financieras into Puerto Ricos community lenders, providing a valuable social service that has a broad economic impact.
Customers throughout Puerto Rico turn to financieras, often as a last resort, to help them purchase household appliances and furnishings, to obtain the down payment on a used car, to make improvements to their homes, to help out with family emergencies, to pay off debts, to contribute to their childrens education, and more.
Thanks to these small-loan companies, these customers are able to obtain the financial help they need, when they need it. As a result, the lending services provided by financieras bring with them a significant social responsibility and demonstrate these lenders commitment to serve an important segment of the population that is currently underserved by commercial banks, credit unions, cooperatives, and other financial institutions.
Financieras customers are considered high risk because of their low to middle annual income, type of employment, and schooling. Over 60% of financiera clients dont have a bank account and 87% are employed. Of those with jobs, 34% are in clerical positions, 59% earn $10,000 a year or less, 47% dont own a car, and 45% dont own a home, according to industry sources.
Because of these borrowers high-risk profile, commercial lenders arent too eager to provide them with credit, so financieras are the only option for these customers. But high risk brings with it high interest rates to compensate for the high amount of bad debts, which often represent a substantial amount of losses.
The reality is that the future of Puerto Ricos small-personal-loan industry is shaky at best, with financieras experiencing a 40% decline in total assets over the past five years, further evidencing the high risks involved and the insufficient rate of return in this business. Growing unemployment in Puerto Rico has also contributed to bringing the financieras level of bad debt to record levels.
These small-loan companies are facing greater competition as well from new players that are providing low interest rates and can offer customers a wider array of personal-loan products and alternatives. New competitors, such as Expresso of Westernbank, Money Express of FirstBank, and Popular Finance of Banco Popular, are better-equipped to protect their financieras from the growing number of bad loans.
Add to these factors a lending ceiling that is capped by the Puerto Rico Legislature at $5,000 and stiff regulations imposed on financieras by the commonwealth government, and its no surprise the number of small-loan companies in Puerto Rico has dropped by 88% over the past three decades.
Since 2001, the industry has sought, without success, to deregulate the business of financieras in order to bring them more in line with the economic realities of the 21st century. The Small Personal Loans Law has been in effect since June 28, 1965. Without deregulation, the outlook for Puerto Ricos financieras is grim. This is something the incoming Puerto Rico Legislature will have to examine as soon as possible in 2005.
Denying an already underserved segment of the population access to small personal loans might force these borrowers to informal lenders, known as prestamistas, who operate in many of the islands manufacturing plants, businesses and, yes, even in government offices, providing loans to their co-workers at excessively high interest rates.
This Caribbean Business article appears courtesy of Casiano Communications.