Experience of Bolivia in microfinance

The Bolivian microfinance sector started sending distress signals in 1999. Delinquency had begun to rise, and there was discontent among microfinance clients. Small Debtors’ Associations were formed in various parts of the country. The leaders of these associations promised borrowers waiver of their debts – principal and interests. These associations organized increasingly violent demonstration and protest marches directed against financial entities, including MFIs, banks and consumer credit entities, and accused them of abusive and humiliating practices against borrowers. What went wrong?

The sector had undergone a period of rapid growth during the decade of the 90’s. Microfinance Institutions (MFIs) in terms of number of clients, size of their portfolio and level of outreach had grown at an accelerated pace, reaching a boom between 1997 and 1998. This period had been characterized by a commercial vision with regulation, profitability, and competition being the key elements. The choices available with microfinance clients had increased. On the one hand, some commercial banks included microcredit products in the services they offered, and on the other hand, consumer credit Private Financial Funds (PFFs) started providing credit services to micro entrepreneurs.

Microfinance providers, faced with several competitors with the entry of new stakeholders into the microfinance industry came under increasing pressure to grow and be even more profitable to meet the expectations of their shareholders. The pressure to disburse credits, to grow and be profitable, lead to inadequate evaluation of client’s repayment capacity and to an inappropriate risk evaluation. As a result, the gradual rating credit principle was adversely affected, decreasing control of the behavior of the client and his/her real repayment capacity. Furthermore, in some cases the amounts of the loans were increased in a percentage that was much higher than the client’s indebtedness capacity and the “zero tolerance” rule regarding arrears was abandoned. To maintain their market participation and fulfill their growth projections, many MFIs set forth unrealistic disbursement objectives, further increasing the pressure on credit officers. At that time, many of these institutions had greater access to sources of refinancing, which encouraged less caution in the disbursement of loans.

As a result the quality of assets generated in the microfinance sector steadily declined. Between 1995 and 2001, the level of arrears increased for all the players in the microfinance sector. The Banks and Financial Entities Superintendence (BFES) Financial Bulletin reported that banks and institutions serving the microfinance market had an average ROA of -0.4% in 2001-2002, as against 0.6% in 1995-96. Most alarmingly, the number of clients decreased by 18% between 1998 and 2001.

The image of the microfinance sector in Bolivia was also damaged by the protests and claims of debtors associations. The accusations against financial institutions, and the perception that interest rates were too high, led to a “satanization” of the sector, overlooking its contribution to the economic development of the country in recent years.