August 30, 2005

A Positive Note About Bolivia, Via South Africa

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So we don't get the crazy (incorrect, would be the best word) idea that everything that happens in Bolivia is BAD! or somehow it doesn't work, let me highlight an article from the South African online newspaper, Business Day. The author talks about the micro lending industry in Bolivia and how it has become one of the leading industries in terms of quality and growth.

Posted to the web on: 29 August 2005
Ideas we can borrow from Bolivia
Vuyo Njokweni
AMID the arguments on the most suitable regulatory framework for South African microlending, it is worth-

while taking a brief look at Bolivia, a country more associated with revolutionaries and drug peddlers.

In fact, Bolivia has a world-class microlending industry. Claudio Gonzalez Vega observed “one could not write the world history of microfinance without highlighting Bolivia”. Bolivia stands out as one of the pioneers of modern consumer finance. Its name is synonymous with successful consumer lending.

Bolivia’s track record in improving access to credit has been one of the most impressive in the world. Its bellwether institutions, BancoSol, Caja Los Andes and Pro-Mujer, evolved in a liberalised regulatory environment. Curiously, their success was one of the indirect influences for promulgation of the Exemption Notice to the Usury Act in SA in 1993, which was the catalyst for SA’s microlending industry.

Consumer lending in Bolivia began with the liberalisation of interest rates, the elimination of directed credit and the closing of the state banks in the 1980s. The deregulation of the industry in 1985 was a final break with the feudal banking system. Since the commercial sector was not well developed, the poor were dependent on loan sharks and moneylenders for credit. This created distortions in credit markets and innovations were few.

The improved regulatory environment set the stage for competition amongst microlenders, attracting many players who introduced new credit technologies and created a credit bubble. Consumers chose between a plethora of credit providers jostling for customers.

Aggressive lenders offered loans quickly and flexibly and secured repayment from the borrowers’ salary. However, with few formal employers around they soon applied this lending methodology to the self-employed or informally employed. These lenders encouraged missed payments so they could make profits. These practices led to shifts in the repayment culture.

Consumers’ attitude to debt contributed to the crisis. It became a status symbol to hold multiple loans. Delinquency rates were high. In effect, there were no rules for the game. The numbers were right but the fundamentals of lending were unsound.

As economic recession struck Latin America, borrowers who could not service their debts took to the streets, agitating for debt forgiveness and easier terms. This political pressure from organised groups forced the authorities to reintroduce interest rate restrictions.

As Elizabeth Rhyne, of microlending organisation Accion International, puts it, the “Bolivian experience suggests that the principal public-image issues for microfinance are high interest rates — the age-old concerns about moneylending”.

Bolivian authorities briefly suspended their tradition of liberalised interest rates by capping rates for a few months in 2002. Caps were removed when it was realised that rates declined in a competitive environment, and that the best option was to strengthen other regulatory aspects such as disclosure.

The quick removal of interest caps and the strengthening of regulation ensured a sound framework which stabilised the market and enabled competitive pressures to improve credit methodologies and eliminate inefficient players

South African and Bolivian microlending experiences have many commonalities. In both countries, aggressive expansion led to overindebtedness, mainly among salaried workers. In SA, the liberalisation of microlending coincided with the sociopolitical changes of 1994. Increased access to credit for the previously disadvantaged unleashed large latent demand. As market saturation approached, competition for clients, as in Bolivia, led to predatory lending practices and overindebtedness.

SA now faces the prospect of interest caps in consumer credit. Do we, like Bolivia, introduce these only to reverse them in short order? The Bolivian experience teaches us that interest restrictions depress the markets and thus lead to the limited supply of financial services. Low-income borrowers suffer the consequences in the process. Secondly, free competition within a sound regulatory framework is the most effective way of avoiding overindebtedness, promoting customer service and sustainable access to credit. Deepening and extending the supply network are the key success factors in the long term.

‖Njokweni is microfinance analyst for Pan-African Investment and Research Services.