CUBA : A case for microfinance?
As the Cuban economy is reforming and permitting private businesses to emerge, there is increasing debate about the introduction of microfinance services in Cuba. In recent years, several research articles by Cuban economists have supported the idea of microenterprise and microcredit. More recently, the debate on microfinance in Cuba was captured at a conference on Cuba: The Year in Review and a Look to the Future, organized by the Americas Society and the CAF Development Bank of Latin America.
AboutMicrofinance recently had the opportunity to meet several Cuban economists in New York and Havana to discuss possibilities of microfinance in Cuba. The following is based on interviews with Prof. Juan Triana Cardovi and Prof. Ileana Diaz Fernanadez both at the University of Havana’s Center for the Study of the Cuban Economy. Additional resources were derived from Dr. Pavel Vidal Alejandro, formerly at the Center for the Study of the Cuban Economy in Havana and now professor of macroeconomics at the Pontificia Universidad Javeriana of Cali, Colombia.
The economic focus in Cuba for the past 50 years has been essentially based on a cooperative system with state-owned enterprises. During that period, 70% of financing had been directed to small and large state enterprises principally focused on the agricultural sector while private farmers received only 1.5% of total financing. But economic reforms introduced in 1990 permitted some entities to flourish as private and semi-private agricultural cooperatives.
Reforms introduced in 2003 further provided for the establishment of private enterprises in a variety of economic sectors as ‘sole proprietorships’. As of 2014, these enterprises accounted for 500 licensed self-employed businesses conducting 200 types of activities in the goods and services sector (transport, restaurants, computers, mobile services, hair dressing and child care). According to Prof. Triana Cordovi, these enterprises today account for the 2,500 privately owned restaurants (principally in Havana) along with 21,000 bed and breakfast establishments. Some 80% to 85% of the food sector is now in private hands, and private farmers own 30% of the land which produces 50% of food items. The Cuban private sector currently employs 1.5 million individuals out of a total workforce of 5.0 million; 32% are under the age of25 and 26% are women. According to Prof. Diaz Fernandez, the private sector contributes 3% to Cuba’s annual state budget.
With a growing microenterprise economy, Prof. Triana Cordovi believes that the time may be right for the introduction of microfinance as a “non-state” undertaking, especially in light of the government’s failed attempts to deliver microloans following the banking reforms of 2012. These reforms permitted three state banks (BANDES, BPA and Banco Metropolitano) to engage in microcredit. Prof. Diaz Fernandez, a recent visiting scholar at Columbia University, noted that the microcredits introduced by the government were intended to build microenterprises in Cuba. Loans started at 1,000 Cuban pesos (approximately US$1,000) for 3-month working capital at interest rates of 3.5%-4.25%, and loans for investments for up to 10 years were set at 8% to 10%. But few Cuban entrepreneurs took advantage of such loans despite attractive interest rates (when compared to loan rates in Latin America which can be up to 195%). According to Prof. Triana Cardovi less than 100 loans for small business were actually awarded in 2013.
Both Prof. Triana Cardovi and Prof. Diaz Fernandez attribute the low response for microloans offered by the state banks to a number of factors, including a limited credit culture in Cuba; lack of awareness of the existence of microloans; fear of submitting financial statements to banking officials; inadequate guarantees or collateral; the absence of specialized microfinance institutions; and credit guarantees that are linked to monetary distortion problems. While a credit culture is still nascent in Cuba, Prof. Triana Cordovi noted that savings accounts increased by 55% between 2007 and 2012.
Writing in 2012 on “Microfinance in Cuba”, Dr. Vidal Alejandro, noted that the credit policy introduced in 2011 was principally for private farmers and home repairs while 10% was set aside to address micro-businesses. The aim of the new credit policy, however, was to encourage the growth of the private sector by offering microloans and microfinance. Besides providing new financial resources, the new policy was meant to increase efficiency in the allocation of resources, reinforce credit mechanisms domestically, and decrease informal financial activities. Yet, the uptake by microentrepreneurs has been minimal.
In analyzing the challenges facing microfinance in Cuba, Vidal Alejandro acknowledged that Cuba faced institutional and structural weaknesses related to financial resources for private businesses and microfinance. For example, Cuban banks would need to create new credit scoring and information systems, different types of credit analysis to support microloans and microfinance services, as well as improving the technology and telecommunications infrastructure (to enable access to loans and financial services via online, ATMs). He outlined solutions that include establishing a microfinance bank that specializes in this sector, forming alliances with local organizations, NGOs, UN programs, etc. which would offer microfinance services, or perhaps allowing the creation of ‘mixed capital microloan institutions’.
In line with this thinking, Prof. Triana Cordovi in a 2015 publication proposed that the Cuban government create a new Microfinances Office that would encompass a productive value chain and contribute to Cuba’s economic development.
Cuba’s current and future financing of microenterprises
Until such time as a viable microfinance environment takes hold in Cuba, remittances are helping to fuel the economic boom in the private sector. Cuba is a recipient of some US$5.1 billion in remittances, of which approximately $2.6 billion is in cash transfers from emigrant community outside of Cuba and an additional $2.5 billion in goods. Unlike most countries in the world, Cubans use a majority of the remittances they receive to finance microenterprises rather than pay for everyday expenses. Studies have shown that remittances play an important role in helping to establish and support private businesses and drive consumer demand, thus impacting economic growth and development in many countries throughout the world.
Conditions seem ripe for microfinance according to Prof. Triana Cordovi who further pointed out that access to credit could benefit such microenterprises as: light industry for domestic consumption, transportation, construction, day care facilities, agricultural services and food production, auto repairs, waste management and recycling.
As illustrated here, a cadre of Cuban economists already considers microfinance an important ingredient in Cuba’s economic development. It therefore seems inevitable that some aspect of this type of microenterprise enhancement will be adopted in the future. The current state banks’ initiatives are apparently not panning out, and no other institutions in Cuba are permitted to offer microfinance services (unlike other countries in Latin America where state, non-government organizations, and non-regulated institutions are active participants in and promoters of microfinance). Neither non-governmental organizations (NGOs) nor non-regulated institutions are authorized to operate in Cuba. Given that private-oriented cooperatives have been driving economic growth, could such a system form the basis for delivery of microfinance products and services to meet the demands of micro-entrepreneurs in Cuba?