MICROFINANCE IN BOLIVIA: HISTORY AND CURRENT SITUATION

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1 MICROFINANCE IN BOLIVIA: HISTORY AND CURRENT SITUATION 1. INTRODUCTION Microfinance in Bolivia has many experiences to share, both good and bad. It has had the opportunity to go through very interesting stages that very few similar systems have experienced. Although at the present time it is going through some difficulties, mainly due to a negative economic environment for the development of any economic activity, undoubtedly microfinance has been and continues to be a success in Bolivia, to such an extent that, at the world level, it has become an example for governments and institutions of many countries. What is the reason for its success? Among other factors, it can be mainly attributed to: The existence of several private institutions that have faced this task very seriously They are totally self-sustainable and operate in clean competition and under market conditions; There exist high levels of demand coverage, at least in the main urban centers and in the rural areas that offer better conditions for production, although reaching a higher coverage in rural areas is a pending task, which is hindered by the wide geographical extension of the country and a high demographic dispersion; A dynamic market with institutions permanently concerned about developing products and improve financial technologies used, as well as to increase the market segments assisted; and The existence of a regulatory framework that, in general, is adequate for the development for regulated microfinance institutions. We could continue enumerating other factors that have contributed to offer better economic opportunities to a segment of the population that traditionally has been relegated by the formal financial system, but we believe that these are enough to explain the success.

2 2. STAGES IN THE EVOLUTION OF MICROFINANCE IN BOLIVIA The current situation of microfinance in Bolivia is the result of a long process that can be divided in the following four stages: Stage I: Stage II: Stage III: Stage IV: The beginning of micro-credit with NGOs Formalization of microfinance institutions Entrance into the market of consumption credit institutions. The current crisis We will now start describing in a little more detail each one of these different stages: Stage I: The beginning of micro-credit with NGOs At the beginning of the 80s, the first initiatives to create non-profit organizations (NGOs) as a way to offer access to credit to those sectors with smaller economic possibilities arose. These institutions fulfilled a very important role in the incorporation to the financial system of micro-managers who had never had access to other sources of funds other than the informal ones (family, friends, moneylenders, etc.), their main objective being the achievement of a wide and deep coverage in the low income social sectors. Self-sustainability was not a very important aspect at the time, since the resources came from donations and subsidized funds. Therefore, NGOs were more credit institutions than financial intermediaries. Stage II: Formalization of microfinance institutions The creation of Bancosol in 1992 marks the beginning of the process of "formalization", understood as the constitution of regulated financial institutions dedicated to microfinance that originated from existing NGOs. This process was facilitated by the Government in 1995 when Supreme Decree No was issued. It regulates the creation and operation of 2

3 Private Financial Funds (FFP) as financial intermediaries specialized in providing services to micro and small borrowers. In July 1995, Caja Los Andes began its operations as the first FFP established in Bolivia on the basis of Pro-Credit Association. Later, other FFPs were created, some out of NGOs (FIE, Prodem, Ecofuturo) and others from entirely private business initiatives (Fassil, Fund of the Community and recently Fortaleza). Why did NGOs decide to "formalize"? Could it be that they have seen microfinance as a highly lucrative business and that its purpose is the achievement of high earnings for their shareholders? It does not seem to be the case, since regulated institutions maintain the institutional mission of the NGOs from which they originated, where the social objective of offering higher economic opportunities to the low income population is the one that prevails. This is still what the shareholders of microfinance institutions look for. In a great majority, they are non profit organizations and international organizations, still with a minority participation of private investors. What is particular is perhaps that now reaching this objective in a sustainable and permanent way is foremost, not as an impermanent achievement that depends on subsidies and dies when they are over. Opportunities offered by formalization turn mainly around a larger spectrum of possible financing sources (as much from institutional backers as through instruments of direct reception of the public's resources), a possibility resulting from reducing financial costs and having access to information at the risk unit of the Superintendence of Banks and Financial Institutions. If we placed the advantages and disadvantages of formalization on a scale, we are convinced that formalization has been a very good decision, since it brought many benefits for micro entrepreneurs. To support this statement we will use consolidated data of the four largest organizations that have been formalized (Bancosol, Caja Los Andes, Fie and Prodem) comparing the situation before their formalization with the current situation. 3

4 - There was an enormous increase in coverage, both in number of clients assisted and in volume of financed resources, which would not have been possible if they had no access to funds. That access allows being a supervised financial institution. The portfolio of the four organizations before formalization was about US $41, 8 million with clients, by December 2002 the portfolio reached to US $223,9 million providing assistance to more than clients. - Interest rates were significantly lower for clients as a result of the increased efficiency achieved by the institutions that took advantage of their economies of scale serving as intermediaries for a larger volume of resources. The rate of gross returns of the average portfolio of the four organizations before formalization was 37.2%, and by December 2002 this rate is of 24.3%. - Geographical coverage, both urban and rural, grew, with a much larger number of agencies, the four organizations before formalization had 75 agencies, while by September they had 139 agencies. - The scope and diversity of financial services offered to clients and the assisted market segments was considerably enlarged, and - Thousands of low income people have the possibility today to deposit their savings safely and profitably, by December 2002 they jointly have more than depositors. In conclusion, in Bolivia financial services stopped being a privilege for the few, in order to become an opportunity for development for the majority of the population. The following graph shows the evolution of the volume of the loan portfolio of Bolivia s microfinance institutions from 1992 to now, only private financial funds specialized in micro credit, Bancosol, also specialized in micro credit and the most important financial NGOs are included. Nonetheless, the real volume of the portfolio assigned to finance micro enterprise in Bolivia is much greater, since the formal traditional banking institutions that grant consumption credit are not included. Among them is a large number of loans that have been earmarked to finance activities of micro enterprise. Cooperatives and mutual institutions have not been included either. 4

5 PORTFOLIO EVOLUTION FOR MICRO FINANCE INSTITUTIONS (MILLIONS OF US DOLLARS) ENTIDADES NO REGULADAS ENTIDADES REGULADAS TOTAL Another aspect to highlight in the previous graph is the larger participation of the regulated microfinance sector that grows from year to year, a result of formalization of NGOs and their "transformation" into regulated financial institutions, as well as an increased rate of growth of the regulated institutions in comparison with those that are not formalized. To a large extent, thanks to this process of formalization that the Bolivian microfinance regulated system has been able to position itself as the most developed in the world. Stage III: Entrance into the market of consumption credit institutions Entrance into the market of exclusively profit oriented private institutions that are mainly dedicated to consumption credit, some of them as independent financial entities and others as specialized departments within traditional banks, deserves a special analysis. Mainly from 1996 to 1998, this situation caused an excessive supply of credit aimed at the same segment of the market that was shared by the two types of institutions that 5

6 had traditionally worked with credit for micro enterprises, as well as by institutions that began offering consumption credit initially to wage earners, but that later went on to offer credit to independent workers without a fixed wage (micro entrepreneurs). In those cases, since they had no appropriate methodologies, nor qualified personnel to evaluate payment and indebtedness capacity of micro enterprises, many times they made the mistake of granting an excessive amount of credit. These institutions also applied very aggressive policies to win markets, establishing incentive mechanisms for their staff that promoted growth of the portfolio without concern for its quality, getting as a result much higher levels of overdue loans than those presented by the traditional micro finance institutions entities. This boom of credit supply caused many people to fall into the temptation of obtaining credit in different financial institutions for amounts much larger than their real payment possibilities. This is where the well-known phenomenon of over indebtedness arose. In addition to this aspect that affected the client s capacity to pay, it has been noticed that in some cases the morality of payment and their financial wisdom have changed, mainly as a result of the large supply of credit earmarked for the same segment of the market. This way, if people notice that there are excessive supply and easy access to credit, interest in paying debts in time is lost, thinking that if a bad record is developed with one financial institution, there will always be another willing to lend money. Stage IV: The current crisis The macroeconomic crisis began to show in 1999 and it continues so far. This has been, without any doubt, the most difficult stage for the general performance of the economy and of the Bolivian financial system that micro credit institutions have had to live with since their beginnings in the second half of the eighties. This period is characterized by a significant decrease in the levels of sales in most micro and small companies, due mainly to a reduced capacity for internal consumption, as a byproduct of the negative effect of the economic situation in other countries, especially devaluations of national currencies in the countries of the region, border 6

7 restrictions in neighboring countries to the entrance of merchandises from Bolivia, the eradication of coca plantations, and the application of a new Customs Law. The over indebtedness situation in which many micro and small entrepreneurs found themselves, would not have had such serious consequences if their income levels had continued growing as it usually happened, or if at least they had stayed stable. However, as a result of the previously described situation, their capacity to generate income has been significantly diminished, which had as an unavoidable consequence an increase in the levels of delinquency in the portfolios of financial institutions. In addition, as a result of the crisis situation that many micro and small borrowers are undergoing and of policies for granting and collection of credit used by some financial institutions, small borrowers' associations were created in several departments of the country. Their activities consisted mainly of the adoption of measures to exert pressure on financial institutions and on the Government. In many cases, these associations were promoted or used by interested people for political and economic ends. The purpose of these associations was to achieve debt forgiveness or to obtain preferential conditions for paying them, that position could not be accepted in any way by financial institutions, since it could have probably brought about the end of microfinance in Bolivia. Also between 1999 and 2000, the most important institutions of consumption credit left the market, at least, financing of micro enterprises. 3. EFFECTS OF THE CRISIS ON MICROFINANCE INSTITUTIONS It is clear that the crisis has affected the Bolivian micro financing system, we will consider its main consequences next. For that purpose we will use consolidated data from the four largest regulated microfinance institutions in Bolivia. They are the BANCOSOL and the Private Financial Funds: LOS ANDES, FIE and PRODEM. 7

8 a) Since 1999, the number of clients' served by the microfinance system has decreased significantly as a result of the elimination from the portfolio of doubtful clients who had bad payment records or over indebtedness and of a deterioration in the quantity and quality of the demand of credit. It is important to keep in mind that in the period , the Bolivian financial system as a whole lost borrowers, a loss that represents a 32% fall EVOLUTION IN NUMBER OF CLIENTS b) The quality of the portfolio has deteriorated mainly in financial years 2000 and Delinquency indicators have increased 374 base points from 1999 to However, an improvement has been noticed in 2002, and as we will see later on, these delinquency indicators are significantly lower than those recorded in the banking system. The five largest traditional banks in Bolivia present a delinquency rate of more than 30 days, an average of 17%. The following graph shows the evolution of the loans with a 30-day delinquency. 8

9 9

10 EVOLUTION OF LOANS WITH A 30 DAY DELINQUENCY (IN %) 8,6 8,1 7,6 7,1 6,6 6,1 5,6 5,1 4, c) Profitability diminished considerably, mainly as a result of the increase of the costs of forecasts and it started recovering in As a point of reference we can mention that the five largest banks in Bolivia have an average profitability of 3%. EVOLUTION OF PROFITABILITY ON EQUITY (IN %) 2 6,0 2 4,0 2 2,0 2 0,0 1 8,0 1 6,0 1 4,0 1 2,0 1 0,0 8,0 6,0 4,

11 However, it is very important to analyze other data that show that micro finance institutions have been better able to face the crisis than traditional banking in the country: a) It is quite outstanding that the volume of intermediation of micro finance institutions grew significantly in this period, since it should be kept in mind that in the financial system as a whole from 1998 to 2002 the total portfolio decreased US $1.600 million and the public's deposits fell US $700 millions. EVOLUTION OF CREDIT PORTFOLIO AND DEPOSITS FROM THE PUBLIC (IN MILLONS OF US$) Depósitos del Público Cartera Bruta b) It is also important to mention that the four micro finance institutions we are considering in this presentation (Bancosol, Los Andes, FIE and Prodem) have a better quality of portfolio than the traditional banking institutions if we compare the delinquency index longer than 30 days and, in the other hand, they are more solvent if we compare levels of forecast coverage for uncollectible accounts in the banking system in general, which in all the cases is over 100%. 11

12 LOANS OVERDUE FOR MORE THAN 30 DAYS AS OF 12/31/02 BANKS AND FFPS (IN %) 48,0% 45,0% 42,0% 39,0% 36,0% 33,0% 30,0% 27,0% 24,0% 21,0% 18,0% 15,0% 12,0% 9,0% 6,0% 3,0% 46,8% 37,0% 32,6% 25,4% 21,6% 21,2% 16,2% 14,6% 13,7% 12,1%12,1% 11,8% 9,3% 9,2%8,3% 7,9% 6,0%5,3% 4,5% BNA FSL BCT BUN BCR BSC BIS BNB BGA FEF BME BEC BDB FCO BSO FFO FIE FPR CLA FORECAST / LOANS OVERDUE >30 DAYS AS OF 12/31/02 BANKS AND FFPS (IN %) 170,3% 170,0% 138,6% 160,0% 105,3% 150,0% 104,6% 140,0% 100,8% 130,0% 96,5% 89,1% 120,0% 84,0% 83,7% 110,0% 83,6% 100,0% 64,6% 90,0% 62,6%62,5% 80,0% 70,0% 60,0% 50,0% 40,0% 30,0% CLA FIE BSO FEF FPR FCO BDB BCT BSC FSL BME FFO BCR 61,1% 59,1% 58,9%57,3% 56,8% BEC BUN BIS BNA BNB BGA 40,4% 12

13 c) Another achievement of the system is that, in spite of the crisis that caused higher costs for portfolio placement and recovery and a decrease in credit officers productivity, an increase in economic efficiency was achieved, which is measured as the ratio between administrative expenses and the average balance of the credit portfolio in the period. EVOLUTION OF ADMINISTRATIVE EXPENSES / CREDIT PORTFOLIO (IN %) 18,0 17,0 16,0 15,0 14,0 13,0 12, d) As a result of competition and due to increased efficiency achieved by microfinance institutions gross return rates on their portfolio have become lower (financial revenues/average gross portfolio), which shows a decrease in average interest rates charged to clients. 13

14 EVOLUTION OF THE GROSS RETURN ON THE PORTFOLIO (IN %) 32,0 31,0 30,0 29,0 28,0 27,0 26,0 25,0 24, CHANGES IN MICRO FINANCIAL INSTITUTIONS TO FACE COMPETITION AND CRISIS Microfinance in Bolivia is a quite consolidated industry. It is clear that it has problems at present, which are mainly due to the macroeconomic crisis that the country is living through, and that has affected all sectors; however, as we have seen before it has shown more solidity than the traditional financial system. The most important micro finance institutions have reacted appropriately in this difficult context, and most of them will be able to successfully overcome this stage. The deterioration of the micro business market in Bolivia, that is to say a demand of a smaller quantity and quality as an effect of the crisis, has caused several changes in the micro finance institutions with reference to the traditional form of managing businesses. This allows them to face competition and crisis. Next we will see the most important changes that have happened at the level of the whole system. 14

15 a) Assisted market segments have been extended to: A larger rural population Wage earners, and Small and medium size enterprises b) There is more diversification of credit products: Different varieties of managerial credit (for example: revolving lines of credit, seasonal credit, preferred clients with differentiation under the conditions of the credit according to the client's background, several simultaneous loans, etc.) Unrestricted access or consumption credit Credit for housing and vehicles Credit granted with a pledge of gold Issue of guarantee instruments c) There is a larger supply of non credit financial products: National and international drafts and transfers Payments for public services and taxes Development of new types of activities in order to obtain deposits, with more competitive rates in comparison to traditional banking for products such as savings accounts and fixed term deposits. Sale of insurance. d) Adjustments in credit technologies have been introduced: There is a general tendency to change from credit granted to groups to credit granted to individuals More importance is given to an in-depth financial analysis of the client The strict scaling of the amount of loans has been set aside There is more differentiation in interest rates according to each loan s risk and costs. Follow-up mechanisms for delinquency and loan recovery have been adapted (for example: staff specialized in loan recovery, or a larger participation of the legal department). The verification of total indebtedness and the clients' credit background with the 15

16 system, by means of risk consultations with central information bureaus are considered more important. Internal auditing and credit risk units have been strengthened. e) Expansion and location of agencies: An expansion process in urban and rural areas has occurred, and it has occupied spaces left behind by the traditional financial system Agencies in areas of higher social strata and in traditional banking areas have been opened, for the purpose of enlarging the segments of the market that receive assistance, both for the reception of deposits and for credit and other services, without neglecting growth in popular areas. f) Changes in the profile of human resources: Microfinance institutions are looking for credit officers trained in economic sciences instead of training in social sciences that was required before, when group credit technologies were used More staff with previous banking experience has been introduced, mainly in managerial positions There is an increasing importance assigned to training of human resources Almost all institutions have introduced incentive plans based on results for different staff levels. g) There are changes in services rendered to clients More importance is given to the quality of services to the public Strengthening the institutional image is considered an aim Schedules for services to the public have been extended There are some technological advances (intelligent cards, on line interconnection of agencies). h) Marketing and publicity have become more important: 16

17 Although there is still a lot of importance assigned to direct publicity, mass media communication exists (radio, wall advertisements, television, sponsorship of events, etc.) Budgets for publicity and marketing have been increased Microfinance institutions have specialized staff and they rely on advice provided by communication, marketing, and publicity companies. In conclusion, the adverse economic situation undoubtedly affected microfinance institutions, but as it has been shown, the negative effect was much smaller than that the traditional financial system suffered. As it can be noted, Bolivian institutions have shown a significant improvement in diversification and quality of services offered to their clients, which has strengthened them and they have matured in many areas. That does not only benefit clients, but also the sustainability of these institutions that are much better prepared to face a competitive market. For all those reasons, it is clear that microfinance institutions have attained a larger leadership in the Bolivian market, both as financial intermediaries and in providing other services. General Manager Caja Los Andes FFP April,