A Break from the Oligopoly

By Sergio Botinha

The President of Brazil Jair Bolsonaro sanctioned recently the law that creates the figure of the Simple Credit Company (SEC), with the aim of making credit cheaper for individual micro entrepreneurs, micro and small businesses through operations such as loans, financing and securities discounts.

The bill was passed by the Senate in late March. The operation of this type of company, restricted to operating with its own resources, is exclusive to the municipality in which it is headquartered and bordering municipalities but there are no restrictions as to individual foreigners participating on or creating a SEC.

There is also no limitation of interest rates for these SECs. Brazil is traditionally a country with very high interest rates (averaging 39% yearly for small business loans), but before the SEC law, only strictly regulated banks could charge these rates (others would have to respect a 12% yearly threshold). So considering the lifting of the rates restriction and the size and demand of Brazilian market, currently the 8th economy of the world,  the SECs should be probably a very interesting business model for international and national investors.

The SECs  may be able to secure loans with receivables of their clients and also advantage from the newly created credit score system in the Country, a positive scoring system which was not allowed to  exist in Brazil until 2018.

According to information released by the Ministry of Economy, the creation of the SEC can inject R$ 20 billion per year in new resources for small businesses in Brazil. This represents, according to the portfolio, a 10% growth in the credit market for micro and small companies, which in 2018 reached the amount of R$ 208 billion. According to an estimate by Sebrae, the result should be achieved by the time the first thousand simple credit companies go live.

At the ceremony, former Minister Guilherme Afif Domingos stressed that the law takes a step  “important in the democratization of credit”, noting that citizens can “lend money in their own city”, benefiting those who will borrow with lower interest rates than those charged currently. He also highlighted that the measure brings greater competitiveness to the Brazilian credit market.

Rules

The text provides that the value of all loans, financing and discounts on securities granted may not exceed the value of the capital declared by the entity. The company cannot charge any fees, and the maximum interest earning cannot exceed the gross revenue limit for Small Business, currently at R$ 4.8 million per year.

All Company operations must be registered with entities authorized by the Central Bank or the Securities Commission, which is a reduced bureaucracy (since the registration is not with the Central bank).

For the first time ever, Brazilian regulators are breaking the long exercised big banks oligopoly for the lending market and its attractive profit rates.

If you need any assistance regarding the implementation of a SEC in Brazil, and into investing on to such business model here, with all assurances and a safe establishment, you should get in touch with seasoned consultants.

Our firm has given solid advice to foreign individuals and companies in Brazil for more than 20 years, striving into becoming trustworthy partners in this country.