What will it take for banks to serve the Peruvian Amazon?
The Amazon has long been one of Peru’s most important resources comprising 94% of the country’s forests and 65% of Peru’s land mass. Despite the Amazon region comprising 11.6% of Peru’s population, it only receives only 3.7% of all financial system lending and holds only 1.9% of national deposits.
Abundant natural resources have not prevented the 3.8 million people living in the Peruvian Amazon from being significantly poorer and having less productive businesses than the national average. Land and biodiversity are under significant threat as the Peruvian Amazon suffers an estimated forest loss per year of 155,000–160,000 hectares. Access to financial institutions and credit in the region is significantly lower than the national average.
While conducting an assessment of the financial institutions’ (FIs) ecosystem in the Peruvian Amazon, CATALYZE found that only 39 financial institutions serve the region’s 3.8 million people. The majority of the FIs in the region are microfinance institutions with high capital and transaction costs. In addition, the interest rates that FIs in the Amazon offer are higher as compared to the rest of the country; this is especially true for consumer credit in the Amazon which is one of the largest types of credit utilized in the area. In a setting of high interest rates and various barriers to entry, the number of FIs in the region has increased by 77.3% since 2010, and FIs interviewed for the report have shown real interest in expanding into the Peruvian Amazon.
Interviews conducted with key FIs uncovered common barriers which limited financing in the Peruvian Amazon. Among the barriers mentioned, the most notable included: costs related to distance, poor infrastructure (roads and connectivity), significant risk (proximity to illicit activities, informality, reputational risk), insufficient technical assistance, limited knowledge of the region, and high opportunity cost vs other parts of Peru. FIs also provided CATALYZE with perceived factors to successfully increase investment in the Peruvian Amazon. These success factors include appropriate technical assistance for potential borrowers, de-risking mechanisms (e.g., first-loss capital, guarantees), community buy-in, strategic partnerships with a range of stakeholders, and secured buyer contracts.
To properly utilize the resources of the Peruvian Amazon, in a sustainable and inclusive manner, as well as increase investment in the region, CATALYZE has developed specific strategies in which these goals can be achieved. Among the strategies outlined in the report are offering FI stimulus incentives, supporting robust community engagement, delivering financial institution-specific technical assistance, brokering anchor buyer opportunities to unlock financing, assisting with transaction structuring and closure, promoting digital technology-enabled approaches, and creating a financially sustainable way for sustained investment past the life of CATALYZE Peru.
