Confianza in Peru Overcomes Adversity by Diversifying Loan Portfolio

This case study describes how Confianza, a small MFI in Peru, reached sustainability by altering its lending methodology and diversifying its portfolio. The paper discuses:

• The following three challenges that Confianza faced:
  • Portfolio concentration on women and restricted clientele;
  • Insufficient borrower information;
  • High cost of rural operations.
• Its responses to the challenges, which included:
  • Portfolio diversification from poor women to low-income households;
  • Stricter lending requirements;
  • Rigorous loan monitoring;
  • Production based agricultural lending;
  • Trimming of its service area;
  • Upgradation of branches;
  • Establishing branches in ecologically varied zones to reduce climatic risk.

The author details the process of Confianza's growth towards sustainability with donor and investor support, and the following lessons learned:

• A viable loan portfolio can be achieved by combining the agricultural finance approach of designing loan products with key microfinance tenets;
• A diversified loan portfolio reduces an MFI's vulnerability to agricultural risk;
• Agricultural lending can be profitable;
• The risk on agricultural loans can be lowered by:
  • Lending to households with other sources of income;
  • Matching disbursements and repayments to agricultural expenditure and income cycles.
• Gradual expansion is an effective rural finance strategy.

The paper concludes that this case study illustrates that agricultural lending can be sustainable even while starting with a negative loan portfolio. It also states that Confianza's success has reduced the proportion of highly impoverished people among its clients.