Economy

"Our human destiny is inextricably linked to the actions of all other living things. Respecting this principle is the fundamental challenge in changing the nature of business."
- Paul Hawken, The Ecology of Commerce

 

A SUSTAINABLE ECONOMY
- = Sustainable Economy Initiatives = -

BancoSol, Bolivia

The BancoSol is a private, commercial bank which provides loans to low-income microentrepreneurs in Bolivia. It started life as an NGO, and incorporated as a fully-fledged bank in 1992 in order to meet the growing demand for microloans on a self-financing basis.

Origins and Development

In Bolivia, 4.3 million people (out of a population of 7.2 million) depend for their livelihood on the informal sector of the economy. Most are excluded from the mainstream banking system because of its high minimum deposit limits and literacy requirements, with the result that they are obliged to borrow from street money-lenders at extortionate rates, and to store their savings in livestock, inventory, or under the mattress. Meanwhile, annual inflation in Bolivian currency, bolivianos, runs between 10 and 20%. It is estimated that the country has between 500,000 and 750,000 microenterprises, altogether.

In 1984, ACCION International, a US based non-governmental organization (NGO) operating throughout Latin America decided to establish a micro-enterprise development program, to meet the unmet demand for credit. In 1986, PRODEM was created as a joint venture between ACCION and prominent members of the Bolivian business community, offering access to credit and training, using the solidarity group lending system. PRODEM grew rapidly, and by the end of 1991 it had four main offices, 7 branch offices and 116 employees, and was providing loans to more than 45,000 microbusinesses, equivalent to $US 28 million, with a default rate close to zero. As an NGO, however, PRODEM was limited in its capacity to expand on the basis of grant funding, and was legally restricted from offering a full banking service, and financing its loans in the normal way from client savings or loans from other financial institutions. The leadership therefore decided to create a bank, and set up a transition committee to develop local and international support, coordinate the transfer of assets and other details from PRODEM, and to obtain the necessary operating license. This took two years, and in February 1992 the Banco Solidario S.A. (BancoSol) started operations as the world's first private commercial bank catering specifically to microentrepreneurs. The bank has since continued to expand, and by December 1995 it had 33 branch offices, with 454 full-time employees serving 63,000 microenterprise clients. PRODEM now no longer offers training or loans to microentrepreneurs.

Aims and Objectives

The bank aims to provide credit and deposit facilities to microentrepreneurs in the poorest sectors of the Bolivian economy, broadening their employment opportunities, encouraging investment and increasing the level of income they can generate, while operating as a commercially viable operation, yielding a profit to its shareholders. The decision to use the mainstream for-profit banking structure stemmed from PRODEM's objective to go beyond grant-based financing, and to create a market-driven approach to long-term development which would be financially successful, depending on investors for success, not donors.

Structure

The bank is owned and controlled by the Shareholders' Assembly, consisting of 14 shareholders who combine the bank's twin objectives of profitability and social impact. The group consists of private sector Bolivian investors (who hold 52% of the equity) and non-Bolivians (who hold 48%). The regular operations of the bank are supervised by the Board of Directors, which includes some of the most respected businessmen in Bolivia, as well as past and present government officials. The bank is structured into six divisions, with four regional offices serving five regions, representing 87% of the micro-lending market in Bolivia.

Activities

Working from the branch offices, the field officers go out to selected neighbourhoods, and get to know potential clients. 65% of the field officers are women, often speaking the same dialect as the region they serve. Potential clients attend a promotional session to get to know the process of obtaining credit, and then form into a solidarity group of 4 - 8 microentrepreneurs, who apply for individual loans in a shared group application through their own administrator, nominated by the group. The average term for loans is 6-7 months, and they are co-guaranteed by the group, instead of by the normal marketable collateral, and backed by peer support and pressure. If one member of the group defaults, the remaining members must come up with the payment; if need be, a delinquent member can be expelled from the group, and lose further access to credit from BancoSol. The field officers meet with each solidarity group once a week, and are recognized as a regular presence in the communities where they work. Repayments are made on a weekly, wo-weekly and four-weekly basis, and are monitored closely by a computerized tracking system. If a group falls behind, the field officers will often visit within a day to discuss their problems. In a typical month, 70% of loan payments are made in advance or on time, and 30% are late. Only 2.3% of the bank's portfolio is in arrears after 30 days. The bank's clients are mostly market vendors who sell vegetables, fruit, prepared food and consumer goods, microproducers such as shoemakers, tailors and bakers, and service providers such as shoe repair and mechanics. BancoSol's very high success rate can be attributed to custom-designed information systems, a continued commitment to the total quality of the portfolio, and the careful selection, training and upgrading of the field officers. Each officer is responsible for around 390 clients, and about $220,000 in portfolio. Clients are also encouraged to save through a variety of interest-bearing accounts, and by the end of 1995, there were 47,173 savings accounts, with an average size of $120 US.

Finance

The bank's main shareholders are PRODEM, which converted a portion of its assets into equity when it transferred its loan portfolio to BancoSol, the Inter-American Development Bank, through its private sector development subsidiary, and a number of Bolivian and other international investors, including ACCION International and the Calmeadow Foundation. The bank's primary income to pay for its services comes from interest on the loans, which is charged at 4% per month for loans denominated in bolivianos, 2.5% for loans in US dollars. (Much of the Bolivian economy functions in US dollars, as a defense against hyperinflation.) These rates are needed to cover the high labour cost of managing a large number of small loans. There is criticism from many in the NGO community who believe that the poor should be provided with subsidized credit or grants, to help them with their microenterprises. BancoSol is specifically working to provide microlending on a self-financing basis to ensure profitability, thereby enabling the sector to expand and grow without the limits that come from grant-aided assistance. So far, the evidence is that poor people are both willing and able to borrow at commercial rates. The bank (unlike North American banks with their credit cards) makes a specific effort to collect repayments on time, and not allow delinquent loans to accumulate. From 1992 to 1995, only $10,000 was not recovered.

Problems

In the process of moving from being an NGO to incorporating as a fully accredited bank, BancoSol met many difficulties due to its high interest rates, small loans, non-traditional collateral and unconventional clientele. The transition committee anticipated the difficulties, and met them by selecting board members with reputation and experience that would enhance the credibility of the operation. The transition from being an NGO motivated mainly by social welfare to being a bank motivated also by profit created ideological tensions, which were addressed through a series of motivational seminars targetted specifically towards the field officers. Also, the bank pays salaries commensurate with those in the NGO sector, which are considerably lower than those paid in the traditional banks ($250 US per month for a new field officer, as compared to $450 per month), and faces constant pressure to increase its salaries. In 1995, after three year's of rapid growth, the bank reduced its rate of expansion and focussed instead on internal consolidation, improve its financial management and redesign its organizational structures.

Performance

Initial growth of the bank has far exceeded expectations, with the loan portfolio and total assets expanding at twice the projected rate. BancoSol's client-base grew from 26,000 in 1992 to 45,000 in 1993 and 63,000 in 1995. The bank has achieved viability both in terms of net income to total assets, and in terms of the ratio to total equity. There is clearly an effective demand for services, and a desire by microentrepreneurs to expand their enterprises. Bolivia's commitment to an open economy, including the freeing of foreign exchange controls, has been essential in giving foreign investors (including the NGOs which invested in BancoSol) the confidence to move capital into the country, and enables BancoSol to lend and borrow freely in US dollars, considerably reducing the problems of dealing with domestic inflation.

Future

After a year of consolidation in 1995, BancoSol's plans call for steady but reduced growth, as compared to its first three years. As well as seeking greater market penetration in existing regions, the bank plans to diversify its lending operations with loans for investment capital, housing and health care.

For further information contact :

Hermann Krutzfeldt
General Manager
Banco Solidario S.A.
Nicolas Acosta #289
La Paz, BOLIVIA

Tel : 591 2 392910
Fax : 591 2 391941

Written by Guy Dauncey for The Planning Exchange, Glasgow, Scotland.

guydauncey@earthfuture.com

Summary

The BancoSol was founded in 1992, to provide microloans to Bolivian microentrepreneurs on a for-profit, self-sustaining basis. The bank grew out of a microlending operation run by PRODEM, a non-governmental organization established by ACCION International in 1984, which decided to convert to a for-profit banking operation in order to meet the large demand for microloans, sustain its growth, and provide a full range of banking services to Bolivia's poor, who are otherwise excluded from the country's banking services. The bank uses the peer pressure of solidarity groups as a loan guarantee, similar to the Grameen Bank in Bangladesh, and maintains a staff of 454 full-time employees to serve its 63,000 microenterprise clients. The field officers maintain a very close relationship with the solidarity groups and the neighbourhoods they are based in, which helps the borrowers to achieve a very high repayment rate. 77% of BancoSol's clients are women, and most are market sellers and small producers who previously depended on street moneylenders, and had no secure place to store their savings. Alongside the Grameen Bank and the Bank Rakyat Indonesia, BancoSol is creating a revolution in banking practices which has the potential to transform the poverty of the world's 3 billion poorest people.