The Evolution of US-Brazil Economic Agreements

 In the 1980s and 1990s, the microfinance sector grew quickly in nearby countries like Bolivia and Peru. However, Brazil's microfinance sector stayed dormant for most of that time for a number of reasons. First, there was a strong view that the public sector was the key to making sure that poor people could get financial services, and many programs were created to help people, especially those living in rural areas, get these services. It was thought that as much as 54% of credit was "directed" toward certain industries as late as the middle of 2000, and it was still as high as 40% in March 2003. Second, microfinance was limited by the rules and regulations that were in place. So, microfinance was mostly provided by nongovernmental organizations that relied on donor funds to make loans. This meant that Brazil's microfinance sector was mostly pushed by charitable partnerships with foreign donor organizations. The ideals of microfinance lending were broken by interest rate caps based on the Usury Law. Third, there wasn't much of a "demonstration effect" in terms of microfinance programs that worked well on a big scale in different countries. 

The little experience I had with microfinance was mostly personal

The growth of microfinance in Brazil over the past few years is due to a change in these factors, which will be explored in more detail below. Along with the growing discussion about the role and benefits of microfinance on a global scale, which was shown at the International Microcredit Summit in early 1997, there was also discussion in Brazil about the possible benefits of microfinance through the Comunidade Solidária, a public body established in 1995 to support initiatives in Brazil's civil society. Microcredit became the main topic of political conversation for the Comunidade Solidária in 1997–98, and it did so again in 2001. A lot of the work that went into finding legal barriers to the growth of microcredit came from working groups that were set up for this purpose. Since these groups' suggestions were taken into account, the laws that apply to small businesses have changed a lot in the last five years. By regulation, new types of microcredit companies were set up that are not covered by the Usury Law. Before the changes, microfinance was mostly done by nonprofits. These groups were limited by Brazil's Usury Law, which said that interest rates could not be higher than 1% per month. This law didn't apply during times of high inflation in Brazil, but it does apply to microfinance loans, which are usually given for a short time, like a few weeks or months, at higher interest rates than loans in the formal and large-scale sectors. It was also hard for NGOs to get money from the government or foreign donors in the form of funds or credit lines. 

In 1999, two new legal companies were made that were not covered by the Usury Law but had a lot more freedom when it came to lending and funding

These were the SCMs and OSCIPs. Other than poverty, OSCIPs can have a number of different goals. The OSCIPs can be found in many areas, like research, teaching, and science. Not-for-profit groups, like NGOs, are what they are called. It's important to note that OSCIPs can make deals with the government to work together on activities and projects that benefit everyone. This means that they may be able to use government funds along with grant funds and owner or sponsor funds. It is not possible for OSCIPs to get deposits from the people. OSCIPs have to follow a few fairly minor rules that aren't related to risk, like giving some information to the Ministry of Justice, but they don't have to follow any tough rules. The second type that was made, SCMs, is a lot more like microcredit societies, which already exist in a lot of other countries.14 SCMs are official businesses that make money and are controlled by the Central Bank of Brazil. SCMs can get loans or lines of credit from both foreign and domestic banks thanks to rules that were made public in July 2001. These rules made it easier for SCMs to get money and let them use tools like fiduciary alienation to offer credit.15 But there are still limits on issuing loans or collecting deposits. After that, rules came out in July 2001 that kept many prudential standards in place, such as operating limits on capital, leverage, and risk. Minimum start-up capital, ongoing capital balance, and limits on risk concentration are all rules that SCMs have to follow. 

The rules that came out in July 2001

The rules that came out in July 2001 also let SCMs work through microcredit service points (Posto de Atendimento de Microcrédito) and require them to send information about their lending activities to the Central Bank's credit risk center (Central de Risco de Crédito). This could, in theory, help them get much better credit information on potential customers in the future (CMN Resolution 2874 of July 26, 2001). It's clear that these new types of institutions are a big step forward for microcredit in Brazil. Some existing NGOs, which are really microfinance institutions, are thinking about changing their legal structure so they can get money from outside sources. One way they might do this is by splitting existing organizations into two, with one providing non-financial services like training and consulting and the other handling all financial matters. It is also possible for an OSCIP to own an SCM. From about 6 in October 2001 to 36 by October 2002 (with 25 running and 11 in the start-up phase), the number of SCMs has grown very quickly.