RemittancesGateway.org

U.S. cash flow aids Central American economies, lending

Tuesday, 29 December 2009 15:41

Source: Miami Herald
By: BLAKE SCHMIDT

Money from the United States -- and how some Central Americans prudently handle it -- is easing access to business loans.

A young German Molina enrolled in business administration classes near his hometown in the mountains of southern El Salvador, with hopes of starting his own business. Then the war came.

As his government fought leftist guerrillas, turning the countryside in which he was raised into a tropical battlefield, Molina fled to the United States, moved in with his brother and began working odd jobs.

 As the civil war showed signs of waning, he headed home intent upon fulfilling his dream. He saved up cash working as an illegal immigrant and received enough remittances sent by his brother, a painter in Washington D.C., to build a hotel in the lush mountains.

 ``Most people here don't take advantage of remittances, they use them as play money to go out on the town,'' Molina said, proudly pulling out his own business card. ``But in the United States the situation has changed. The money tree in the U.S. will one day dry up, and those who didn't take advantage of what they got will be the same as before.''

 Molina is one of millions of remittance receivers in Central America trying to capitalize on money wired back home by investing, as the flows shrink in the global economic slump.

 Based on his remittance history, Molina was able to get a $11,000 loan this year from Technoserve, a nonprofit business consultant for poor entrepreneurs in developing countries. With it, he is expanding his hotel, which includes plans for a tree-canopy tour and a swimming pool with a slide.

 Along with Haiti, Central American countries like Molina's are among the region's most dependent upon the export of manual labor, and will be hit hardest by falling remittances, according to recent research by the Inter-American Development Bank.

As immigrants feel the pinch of the economic slump, remittances to Latin America and the Caribbean this year are expected to drop 11 percent to $62 billion, according to the study.

 Remittances in Molina's El Salvador, which represent 12 percent of GDP, have dropped 10 percent so far this year compared to last.

 Immigrants are dipping into their savings and taking on extra hours or multiple jobs to maintain cash flows to families back home. Others are abandoning their hunt for the American Dream and have returned home, while some rely on so-called reverse remittances sent by relatives living abroad to continue residing in the United States.

 ``The main issue is how immigrants are going to come out of this crisis. Will they continue to remit as before?'' said Manuel Orozco, a remittance specialist at the Inter-American Dialogue.

 In places like Central America, microfinance institutions, credit unions and commercial banks have begun to enter a market that has largely been ignored by the world's financiers, providing financial services to migrants and their families based on remittance histories. Molina was one of the first remittance receivers to get a loan based on his remittance history under a Technoserve pilot program.

 ``Remittances are an instrument that don't fulfill their own potential,'' said Marco Iannone, Technoserve's deputy director for Latin America, ``People who receive them don't have access to financial services that incentivize them to use their money in productive ways.''

 Instead of sending $400 a month back to El Salvador, which Molina's brother had been doing for years, he now pays monthly payments on the loan that allowed his family members to expand their hotel in Morazan.

 Technoserve's push to get financial institutions to factor in remittance flows for credit scoring faced some skepticism from banks, Ionnone said. But the group's pilot program secured six loans for remittance receivers with favorable interest rates based on their remittance flows.

 The program is being pursued with increasing urgency as remittances drop, threatening cash flows that have helped many of this impoverished region's residents climb out of poverty. The drop in remittances will likely trigger an increase in extreme poverty in Central American countries as some immigrants, frustrated with a sluggish U.S. job market, head back home, Ionnone said.

 An estimated 300,000 remittance-receiving households across Central America will not receive remittances this year on the slump, and 40 percent of households will receive 10 percent less remittances, potentially ``retarding the process of upward mobility'' in a region where about half live in poverty, according to Orozco's research.

 Tom Jahnes, Western Union's director for Central America, is ``cautiously optimistic'' falling remittances to the region could grow again next year as it is expected to come out of an economic contraction. The Colorado-based company has 2,200 offices throughout Central America.

 ``We've seen the pullback,'' Jahnes, who is based in Miami, said in a phone interview, ``We hope those negative percentages will turn positive again.''

 He expects to see increased transfer activity in South Florida because President Barack Obama eased restrictions in September on Cuban-Americans' remittances to the island. They can now send remittances to ``close relatives,'' including aunts, uncles, cousins and second cousins. The U.S. Department of Treasury also eased limits on the total amount and frequency of remittances sent to Cuba.

 Luis Sandoval, a taxi driver in Granada, Nicaragua, fears if his mother-in-law in the United States stops sending cash back he'll be unable to pay his grandmother's meds and put three children through college with his $500 monthly income. She picked up an extra job to maintain the $2,000 she sends monthly to Nicaragua, the Western hemisphere's second-poorest country.

 ``The woman sleeps two hours a night now,'' said Sandoval, 25, driving on a potholed street.

 One of his friends' relatives stopped sending remittances back to Nicaragua this month, and another friend who worked construction in the United States returned home after he was laid off, he said.

 Ionnone hopes to expand credit in the region for people like Sandoval, who wants to start his own transportation company but has no start-up capital. In Nicaragua, where Connecticut-based Technoserve plans to introduce its remittance credit program, microfinanciers charge up to 50 percent interest to cover the high rate of defaults. Applicants can get better rates if remittances history is factored in, Ionnone said.

 Technoserve was founded by a Connecticut businessman in 1968 who was inspired after volunteering at a hospital in Africa. The group's Salvadoran pilot program helped remittance receivers draw up business plans and worked closely with Washington-based Microfinance International Corp to detail remittance histories of immigrants and their families, Ionnone said.

 ``The idea is to create a so-called transnational loan,'' Ionnone said. ``We can transfer the creditworthiness of a person in the U.S. to a person in a place like El Salvador.''

 Molina, who will start paying off his loan with 7 percent interest at the end of this year, hopes he can put his remittances to work for him.

 ``It's hard to grow your money,'' Molina said, ``When you're in need, you have to take risks and protect yourself with whatever falls in your lap.''