Bancosol and Microfinance in Bolivia
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N9-516-005 FEBRUARY 23, 2016 R A J I V L A L ANNELENA LOBB BancoSol and Microfinance in Bolivia Our mission is to provide opportunities for a better future to low-income sectors in Bolivia through access to financial services of the highest quality. That is why we have decided not to move upwards in the market. — Kurt Koenigsfest, CEO Kurt Koenigsfest, the CEO of Banco Solidario S.A. (BancoSol), reviewed a slide deck ahead of an upcoming presentation to the bank’s board of directors. BancoSol was a microfinance bank headquartered in La Paz, Bolivia, with an outstanding loan portfolio of about $1.17 billiona as of the end of 2015. BancoSol’s mission was to provide financial services and opportunity to individuals and companies in low-income sectors throughout Bolivia. In its first 16 years, BancoSol had disbursed more than $5.8 billion to more than 2,400,000 micro-enterprise projects. The bank was present in eight major cities (La Paz, Cochabamba, Santa Cruz, Oruro, Sucre, Tarija, Potosí y Trinidad) through a network of more than 100 branches.1 But a regulatory change had prompted a review of its strategy. Passed in 2013, Bolivia’s Nueva Ley Bancaria (NLB), or new banking law, required that by 2018 all banks extend 60% of their loans, by volume, to the productive sectorb at no more than 11.5% interest rates. (BancoSol’s average rates for such loans hovered around 18% as of 2015.) Banks had to meet a series of intermediate volume targets during each interim year. At the end of 2015, BancoSol had almost 39% of its loans in the productive sector. Roughly another 7% of its loan portfolio needed to shift each subsequent year to the productive sector, and away from sectors such as trade or services, to reach the 60% target on time. Meanwhile, BancoSol’s rates on productive sector loans were forced to fall to 11.5% at the end of 2015. While remaining loyal to its mission, the bank had to find ways to recoup that lost interest income and continue to grow. From 2009 through March 2015, ROEc had averaged 28.9%, but as the law’s provisions became effective, ROE would come under pressure. Koenigsfest thought that ROE should not fall below a floor of 15%, even if maximizing ROE was not his priority. a All figures in this case have been translated from the local currency, Bolivianos, to U.S. dollars. When this case was submitted for publication, one Boliviano was worth approximately $0.14135. b The productive sector was defined as encompassing industries that turned raw materials into intermediate goods, adding value to the goods; typically, productive sector industries involved a skill set or use of machinery, such as clothing manufacture, tourism, mining, and agriculture. c The company calculated ROE by using the following formula: net income/average equity. Professor Rajiv Lal and Case Researcher Annelena Lobb (Case Research & Writing Group) prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2016 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. 516-005 BancoSol and Microfinance in Bolivia Koenigsfest had been CEO of the bank since 2000. He had come to BancoSol during a crisis, and successfully repositioned the bank once already. He knew that the challenges ahead were significant. Achieving productive sector loan targets would involve changes at BancoSol that could encompass everything from the structure of branches to the skills and profiles of its loan officers. There was also the question of whether the bank should offer some larger loans, essentially engaging in commercial lending, even though this ran contrary to BancoSol’s mission as a microfinance institution. In addition, Koenigsfest did not want to fire anyone, which would create a serious morale problem. How would Koenigsfest achieve what seemed like a series of contrary goals—serving BancoSol’s mission as a microfinance bank, maintaining return on equity, avoiding layoffs, and complying with productive sector loan targets under the NLB? He returned to his slides and considered his options. Bolivia: A Microfinance Success Story Bolivia was a poor, landlocked country deep in the heart of South America (the only other country on the continent without sea access was Paraguay). Bolivia had a troubled political history; until 1982, it had experienced more coups than it had years of democracy.2 Bolivian society was ethnically complex, with a historically unequal distribution of income (see Exhibit 1). Indigenous people made up 62% of the population, and the main languages spoken in Bolivia were Spanish, Quechua, and Aymara.3 Quechuas and Aymaras made up 30% and 25% of the population, respectively, but many other indigenous populations were officially recognized, as were at least 36 indigenous languages.4 Bolivia’s urban elite was mostly of Spanish ancestry,5 yet some 60% of Bolivians lived below the poverty line, with the number reaching 75% in rural areas. Indigenous people, particularly outside cities, were much more likely to live in poverty.6 Most Bolivians scratched out a living through subsistence farming or mining, or worked as small traders or artisans.7 Bolivia also played a role in the illegal narcotics trade as a coca producer. Coca was the raw material used in cocaine.8 Bolivia featured dramatic, varied topography. Roughly one-third of Bolivia’s territory was spread over the highest mountains in the Andes range. Bolivia’s administrative capital, the city of La Paz, was located high in the Andes Mountains. The city sprawled across altitudes above 10,000 feet that left most unaccustomed visitors short of breath upon arrival.9 The main airport, in the adjacent city of El Alto, was at 13,323 feet, and was the highest international airport in the world. Bolivia’s arid mountainous areas offered a sharp contrast to its more-tropical lowland areas. During the late 20th century, Bolivia’s lowland, in particular the city of Santa Cruz, grew rapidly and began to develop comparable economic power to La Paz and other highland areas.10 Santa Cruz also had become a cocaine-trafficking hub.11 Against this backdrop, Bolivia had developed what was perhaps Latin America’s most successful microfinance industry. During the 1980s, 1990s, and 2000s, hundreds of thousands of poor people in Bolivia had gained access to credit and built businesses with the help of a microfinance industry that advanced quickly, particularly in urban areas, and flourished amid competition.12 By 2015, BancoSol was the largest player in the Bolivian microfinance industry. History of BancoSol BancoSol had first opened its doors in 1984 as a non-governmental organization (NGO), essentially a credit agency. It provided small working capital loans to groups of three or more people who gave mutual guarantees, or what the bank called “credit solidarity” among a group. BancoSol’s resources came from donations and subsidies; self-sustainability was not a priority during its earliest days. By 2 BancoSol and Microfinance in Bolivia 516-005 1991, the NGO had $4 million in loans, 17,000 clients, and a presence in four Bolivian cities, La Paz, Cochabamba, El Alto, and Santa Cruz. In 1992, BancoSol officially became a regulated financial institution, and Latin America’s first private microfinance bank.13 Much of the Bolivian population lived in poverty and formal unemployment was high. Banking services were available only to a small segment of the population. Most Bolivians were unable to qualify for loans and had few or no assets to use as collateral. BancoSol targeted Bolivia’s poor entrepreneurs, providing these clients with access to the types of lending services typically available only to the wealthy.14 By the end of 1992, BancoSol had assets of $11.8 million and a loan portfolio of $8.8 million. The bank had about 26,000 clients, with an average loan amount of $340. BancoSol continued to focus on group loans.15 The average BancoSol client had a poor impression of banks because of past negative experiences or exclusion. In efforts to build trust, BancoSol trained its bank officials to be approachable and plain-spoken, and eschewed the use of formal titles. They took pains to ensure that clients understood the repayment terms of any loan or other commitment, and that every transaction or exchange involving the bank communicated a message of solidarity and trust in the client.16 By 1995, a number of other NGOs had entered the Bolivian microcredit market, attempting to capitalize on the same client base. These NGOs were not regulated financial institutions; they operated outside formal supervision and could take greater risks. In 1998, lending in Bolivia began to expand even more aggressively. Both domestic and foreign banks had arrived in the marketplace, offering consumer loans to the microcredit market without adequate supervision or credit controls. “Competitive pressures finally brought some Bolivian banks to the doorstep of microcredit, a homegrown innovation they thought they could readily master,”17 one scholar wrote. By 1999, the market was becoming oversaturated, and the borrower-lender relationship was changing:18 The lending growth that propelled MFIs and consumer lenders created a bidding war, with competitors vying for clients by offering larger loans, faster service, and lower interest rates.