CONFIDENTIAL FOR RESTRICTED USE ONLY (NOT FOR USE BY THIRD PARTIES) Public Disclosure Authorized BOLIVIA FINANCIAL SECTOR NOTES Public Disclosure Authorized ASSESSING THE SECTOR’S POTENTIAL ROLE IN FOSTERING RURAL DEVELOPMENT AND GROWTH OF THE PRODUCTIVE SECTORS DECEMBER 2011 Public Disclosure Authorized THE WORLD BANK FINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY Public Disclosure Authorized LATIN AMERICA AND CARIBBEAN REGIONAL VICE PRESIDENCY i Table of Contents Executive Summary ...................................................................................................................................... 1 Chapter 1 Introduction ......................................................................................................................... 12 Chapter 2 Composition and depth of the financial system ................................................................... 15 2.1 A brief overview over the core players ....................................................................................... 15 2.2 Financial depth and level of financial inclusion – an international comparison ......................... 17 Chapter 3 Competition and financial soundness of the financial system ............................................. 25 3.1 Concentration and competition ................................................................................................... 25 3.2 Selected financial soundness indicators and potential vulnerabilities ........................................ 27 Chapter 4 The regulatory and supervisory framework for the financial sector .................................... 35 Chapter 5 Barriers to financial inclusion, in particular in rural areas .................................................. 41 5.1 Structural aspects ........................................................................................................................ 41 5.2 The available financial infrastructure.......................................................................................... 44 5.3 Demand side factors .................................................................................................................... 50 5.4 Moving ahead – Possible options for increasing financial inclusion, in particular in rural areas51 Chapter 6 Fostering credit to MSMEs ................................................................................................. 59 6.1 Access to credit – Actual situation and evolution over time ....................................................... 60 6.1.1 Demand for credit ................................................................................................................ 60 6.1.2 Supply of credit ................................................................................................................... 62 6.2 Barriers to credit growth ............................................................................................................. 65 6.2.1 Core characteristics of the enterprise sector in Bolivia and factors affecting its growth potential ............................................................................................................................... 65 6.2.2 Eligibility and affordability barriers .................................................................................... 70 6.3 Ongoing and planned government programs .............................................................................. 81 6.4 Moving ahead - options to increase the supply of loans to MSMEs ........................................... 84 List of Charts Chart 1: Deposits and credit to the private sector (as % of GDP) – an international comparison .............. 18 Chart 2: Deposits – international comparison of growth rates and number of accounts............................. 19 Chart 3: Credit, deposits and GDP (in billion Bs.) ..................................................................................... 20 Chart 4: Credit – international comparison of growth rates and number of loans ...................................... 20 Chart 5: Branch penetration rates – an international comparison ............................................................... 22 Chart 6: ATM and POS – an international comparison .............................................................................. 23 Chart 7: 3 largest banks’ assets to total assets of formal system ................................................................ 25 Chart 8: Capital adequacy – an international comparison and evolution (2005-2010, banks only) ........... 28 Chart 9: Return on equity in 2010 ............................................................................................................... 28 Chart 10: Operating expenses to total assets – an international and domestic comparison ........................ 29 Chart 11: Liquid assets to total assets – an international and domestic comparison of liquidity of the formal system .............................................................................................................................................. 31 i Chart 12: Foreign exchange exposure of balance sheet – by type of financial entity and international comparison .................................................................................................................................................. 33 Chart 13: Non-performing loans and provisioning levels by type of institutions and international comparison .................................................................................................................................................. 34 Chart 14: Overview over long-term indicators that can impede financial access in a country ................... 43 Chart 15: Sources of funding of enterprises ................................................................................................ 60 Chart 16: Gross fixed capital formation of the private sector (as % of GDP). ........................................... 61 Chart 17: Evolution of credit by loan size .................................................................................................. 62 Chart 18: Credit growth by type of entity and by department .................................................................... 63 Chart 19: Credit by type of loan and sector. ............................................................................................... 64 Chart 20: Firms required to pledge collateral in a percentage of firms that applied for credit ................... 70 Chart 21: An overview over the credit bureau infrastructure in Bolivia ..................................................... 74 Chart 22: Effective spreads in local currency ............................................................................................. 80 Chart 23: Interest rate – an international comparison ................................................................................. 81 List of Tables Table 1: Composition of Bolivia's financial system (November 2010, excluding insurance, pensions capital market and the second tier public bank) .......................................................................................... 16 Table 2: Survey results for formal enterprise’s access to credit from formal financial institutions ........... 21 Table 3: Evolution of branches in the formal financial system by department ........................................... 22 Table 4: Evolution of payment system infrastructure in Bolivia (2004-2009) ........................................... 23 Table 5: Market shares (for credit) of financial entities by department ...................................................... 26 Table 6: Market segmentation .................................................................................................................... 27 Table 7: Municipalities in Bolivia by inhabitants ....................................................................................... 42 Table 8: Evolution of service points in the formal financial system ........................................................... 46 Table 9: Evolution of ATMs by type of financial entity ............................................................................. 48 Table 10: Evolution of non-performing loans (NPLs) by sector ................................................................ 65 Table 11: Formal enterprises by type .......................................................................................................... 66 Table 12: Core results of a survey on levels of information in enterprises in six sectors of the economy (in percent) ....................................................................................................................................................... 68 Table 13: Share of collateral in loan portfolio (November 2010) ............................................................... 71 List of Text Boxes ii Text Box 1: Recent experiences with bank runs in Bolivia ........................................................................ 32 Text Box 2: Banco Union ........................................................................................................................... 52 Text Box 3: Reform measures in India to increase financial inclusion ...................................................... 56 Text Box 4: Access to financial services within value chains .................................................................... 69 Text Box 5: Example of reforms to use of movable assets as collateral