Sa-Dhan Newsletter Volume 3 Issue 2

Microfinance Regulation

About 90 such NBFEs along-with 10 NGOs are engaged in

partners (as per SBFE provisions) for setting up a FFP.

providing credit, and around 675 branches of regulated and

Investors in the private sector often do not wish to come

unregulated mFIs are functioning in rural and urban areas.

together, especially with socially oriented NGOs, since they

may have conflicting interests or may not see immediate

Second Tier Financial Institutions:

profits. Hence, it has usually been international donors and

consultancy firms or "socially oriented" domestic corporates

In order to provide financial and technical assistance to the

who have promoted FFPs. While the FFPs are allowed to

mF sector including Banco Sol, second tier support

accept deposits (though only gradually), however, the easy

organizations have been set up, both in the private and the

flow of donor funds has not necessitated their generating

public sector, with stake from the GOB and support from

member savings (as expected from the original intent of

international donors.  Besides, there are two separate

setting up FFPs).

associations of mFIs, FINRURAL for the unregulated mFIs and

ASOFIN for the regulated mFIs, which serve as nodal points

MICRO-BANKING IN BOLIVIA:

for the mFIs in the country. They represent the sector in all

Of the total economically active population of Bolivia, about

the dialogues with the regulatory authority, government and

40% works in the informal sector, undertaking various MEs.

other associated institutions, and provide a forum for the

It is estimated that about 50% of this informal sector

member institutions to voice their concern and share their

population has been covered by mFIs, and this is regarded

experiences. However, they do not have any control on the

as a major achievement.  However, it appears that mFI

functioning of the member mFIs, nor do they have any

emphasis seems to be more on urban rather than rural

authority to proceed against any erring member institutions.

clusters. The regulated mFIs (including Banco Sol) have

These institutions are still evolving in their functions. A few

adopted their own policies in providing credit to different

training institutions are also present.

sectors of the economy and the repayment period of loans

issued by them. An analysis of the loan portfolios of mFIs

THE MICRO-FINANCE SECTOR IN BOLIVIA AND

revealed that about 50% of the loans were short-term loans,

HOW IT OPERATES

which enabled the FFPs to increase their liquidity, rotate the

Providing a facilitating legal environment for microfinance:

funds faster, as well as provided them with higher margins

in operating their funds. Regulated mFIs focus greatly on

NGO-mFIs in Bolivia were mainly being funded by donor/

staff training relating to post credit follow up, and recovery

government channels and faced constraints in expanding their

such as handling of default accounts, monitoring of defaults

services as they did not have (enough) equity, which could

and likely defaults, and steps to be taken for getting back the

be leveraged to garner loanable funds. In this context, and

defaulted amounts, without recourse to legal remedies and

with the intention to facilitate the provision of exclusive

how to monitor these efforts.  A major strength of the

microfinance services, the GOB passed legislation to enable

regulated mFIs is the transparency in their operations. The

the establishment of FFPs (Private Financial Funds) in 1995.

Internal Audit Department in any regulated mFI is required to

FFPs are the new generation mFIs, which provide an alternative

report directly to the Board and not through the general

to NGO-mFIs. It was believed that providing mFIs a legal

management, which makes its operations more transparent.

business status would encourage private sector participation.

Considerable amount of transparency is also maintained by

Regulation would also ensure that resources would be

the FFPs in dealing with the clients.

accessible through deposits (including those from the public)

and provision of other financial services. The FFPs were

A closer look at the increase of client outreach of mFIs in

expected to be promoted by: NGO-individuals-donor (mainly

general (and the four institutions studied closely: Banco Sol;

international) partnerships; partnership of various NGOs; or a

Caja Los Andes; Fie and PRODEM), revealed that the growth

private company.

in the last few years was negative.  Of the regulated mFIs

in the country, only one FFP could sustain its operations with

The government set up several safeguards for the establishment

client growth. On the loan portfolio overall repayment rates

of FFPs to ensure the sincerity of the promoters and prevent

of major mFIs decreased to around 86 % by mid 2001 from

the institution from being monopolized or misused.  The

about 97% in 1996; the FFPs reported accumulated losses to

earnestness of the promoters is doubly ensured through the

the tune of US $ 3 million; and only two of the seven FFPs

SBFE provisions, that necessitate the promoters to go through

showed positive results for the year ended 2001. The loan

several stages requiring large commitments of time and

portfolios of all the regulated mFIs except one FFP shrunk

money before an FFP can actually be set up. For example,

considerably; the over-dues increased and profitability of

according to the legislation for establishing an FFP, a minimum

mFIs declined. Paradoxically, the very success of the sector

capital equivalent to about US $1 M, is required. Additional

seems to be the reason for this fall in the quality of the loan

investments for setting up one FFP can range from US

portfolio. The growth of the mF movement and the resultant

$500,000 to US $700,000 (on planning and designing the

increase in demand saw new and inexperienced loan providers

new set up and completing other formalities). In addition,

almost three to five years are needed to complete all processes

come in, with inadequate human resources and operational

before business can actually commence.

systems, while the existing ones tried to cope with the

increasing demand without adequate diligence. When the

However private sector participation has not been as

economic crisis happened, people resorted to multiple

forthcoming as expected. One of the major commitments

borrowings to maintain their improved lifestyles.  On the

from the promoters requires a minimum of five suitable

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