Nicaragua’s Financial Sector Struggles with Fraudulent Activities
The financial sector in Nicaragua has been plagued by fraudulent activities, including hidden microloan fees, forced savings, and high late payment charges. The country’s 2008 global financial crisis and the subsequent “no-payment” movement have led to a wave of abusive financial practices.
Consequences of Fraudulent Activities
According to reports, between 2009 and 2010, 19 microfinance institutions lost over $60 million in foreign financing and their credit portfolio in arrears skyrocketed to nearly 17 percent. Several micro lenders went out of business or had to be heavily recapitalized, affecting access to finance for low-income populations.
Addressing the Issues
In an effort to address these issues, the Financial Sector Reform and Strengthening Initiative (FIRST) assisted the Superintendency of Banks and Other Financial Institutions of Nicaragua (SIBOIF) in developing a national program to improve consumer protection.
Project Objectives
- Establish a system that would provide adequate consumer protection for financial services
- Provide greater access to finance
- Improve household confidence in financial services
- Increase citizens’ use of financial products
- Enhance fair competition among financial service providers
- Increase soundness and stability of the financial system
Key Activities
- Assessing the legal, regulatory, and institutional frameworks for consumer protection
- Building consensus among stakeholders
- Implementing priority measures to strengthen consumer protection
Results
New Consumer Protection Law and Regulations
As a result of the project, Nicaragua enacted a new consumer protection law in June 2013 and published related regulations in September 2013. The regulations include requirements for transparency in financial transactions, including: + A method for calculating total annual costs of credit products + A model for disclosing terms and conditions of active and passive financial products to consumers
Benefits
The likely benefits of the new regulations include:
- Improved household confidence in financial services
- Increased citizens’ use of financial products
- Enhanced fair competition among financial service providers
- Increased soundness and stability of the financial system
Project Funding and Partnerships
The FIRST Initiative funded the project at a cost of approximately $165,000. The main counterpart for the project was SIBOIF, with involvement from the National Commission for Microfinance (CONAMI) as well.
Future Plans
Moving forward, there is an opportunity to implement the transparency regulations and continue strengthening the role of SIBOIF in consumer financial protection. SIBOIF plans to create a consumer protection department and dedicate staff to the issue, while the World Bank team will follow up with SIBOIF and CONAMI to coordinate future support.
Beneficiaries
The beneficiaries of this project are all current and future users of financial services in Nicaragua. While it is too early to assess individual impact, countries that have implemented similar initiatives have seen a decrease in interest rates and higher levels of competition.