Microfinance provides new gateway

A growing number of social and banking experts believe that microfinance – small value loans to the world’s poorest citizens – is the best way to help people lift themselves out of the poverty trap, writes Shirley Redpath. But few would expect that providing microfinance could be the basis of a successful publicly owned business


Yet the leading microfinance bank in Bolivia, BancoSol, has just been named Best Banking Group, Bolivia by the awards panel of this magazine, CEO Kurt Koenigsfest has been elected President of the Bolivian banking association, which includes both commercial and microfinance institutions. “This is the first time we have the CEO of a microfinance bank taking over the position and it is sending an important message to the market, the government and politicians in general,” he comments.  “It shows the magnitude and scale that microfinance has in Bolivia and the region.”

Despite the recent global financial crisis that has affected both rich and poor around the world Koenigsfest’s business is doing rather well, with growth in both loan portfolio and public deposits of over 20 percent,  and he points to some unique characteristics of the Bolivian economy by way of explanation.  “In the 1980s and 90s whatever happened in the US and European economies would really hurt our region,” he explains, “but not this time. We were better prepared – even Mexico and Brazil, the largest economies in the region, didn’t really feel it.”

Bolivia itself is a very small economy, with GDP of around $20bn, in which a very large informal economy accounts for 35 percent of annual GDP and a whopping 80 percent of employment. Many people in Bolivia have small businesses that trade within their local areas, so the country has only limited exposure to the international markets that so badly affected the economies of exporting nations.

Fifty percent of BancoSol’s 135,000 borrowers are women working as market vendors, seamstresses, bakers or candy makers. Their economic activity is so low that they do not qualify for banking services at the commercial banks, but given access to small amounts of working capital with which to buy stock they can earn an income for their families. At BancoSol, the smallest loan is $50, and many will be repaid within the month.

Microfinance customers may pay eye-wateringly high interest rates for their loans, but the mechanics of microfinance are substantially different from those of commercial lending.  Rather than sitting in offices, loan officers must be out in the field where they have to have the skills to extract financial information from informal conversation with their clients. That information then goes through the same credit analysis as an application for a $500,000 loan, but the costs must be absorbed by a far smaller capital transaction.

“A lot of people question the interest rates we have to charge,” says Koenigsfest, “but you have to understand the mechanics of microfinance and the mechanics of the rotation of money.”  He is proud of the relatively low rates his bank is able to work with in Bolivia – at 18 percent for working capital and 14 percent for housing loans, they are some of the lowest in the region. “In Peru, micro lending is at 40 percent and in Mexico it can be as much as 80 percent!” he notes.

BancoSol was first established in 1986 as a non-profit microlending entity called PRODEM by international microfinance agency, ACCION, along with a group of Bolivian business leaders. By 1988 the organisation was struggling to raise enough lending capital to keep up with demand, and in 1992 it was re-established as BancoSol, the first private commercial bank in the world dedicated exclusively to microenterprise.

The bank’s shareholders include management, ACCION and other industry participants like ACP, a foundation that controls MiBanco, the largest microfinance bank in Peru. All the investors share the double bottom line approach that looks at both social and financial results.  In the microlending sphere, this means that the bank tries to make sure that its clients are better off today than when they first received the credit, in that they have more working capital and access to basic services like electricity, water and education.

PRODEM’s earliest lending was through solidarity loans, a form of group lending.  Individuals who required working capital but lacked assets on which to secure a loan would form a group which would guarantee the repayment of every individual member. The group itself did the credit analysis and evaluation to make sure each member was able to meet repayments on his or her loan, which was generally for a value of $200 – $300.

If any member of the group did default, the other members would be obliged to make up the difference and repay the loan out of their own pockets. Today, with the increase in competition and availability of individual loans, solidarity lending comprises only 3 percent of the bank’s portfolio.

The bank has concentrated its work in the poorer urban areas of the country, with 73 branches located in the less affluent areas of Bolivia’s major and secondary cities, but an ambitious program of investment in technology is enabling BancoSol to increase its reach and serve its customers more efficiently. With between ninety and ninety-five percent of customers having access to cell phones, the bank designed a product that enables them to make transactions by phone. Customers can get balances and statements, and make payments on their loan by SMS. BancoSol was the first institution, not only in the microfinance sector but in the banking world in general to offer this service in the region.

Other innovations include ATM machines that cater for the specific needs of the poorer population. “Our machines are very simple to use and offer different language capabilities,” says Koenigsfest. “Often people from rural areas only know their local dialect. Without knowing the Spanish language they would be unable to access even microfinance services when they come to the cities.” Netbooks have been given to loan officers to facilitate more rapid loan processing by enabling them to submit applications direct from the field.  And finally, studies showing that the sons and daughters of many older clients are keen to use the internet rather than take the time to visit their banks have encouraged BancoSol to invest in an internet banking service as well.

One of the few areas of the business that suffered from the financial crisis was remittances.  In 2008, the bank was receiving $350m in remittance payments sent home to families by Bolivians living and working abroad: last year, that figure was $150m.  Through special savings programmes run by the bank, the families of those immigrants working in the USA, Argentina and Spain were encouraged use this money to build longer term security by investing in the purchase or improvement of their homes.

Immigrants living in Spain were hardest hit in the crisis as the Spanish economy came near to collapse and jobs for foreign workers became scarce. Many returned to Bolivia, but having developed the habit of saving their money while living abroad, a large percentage have started micro enterprises with their savings and are now able to repay their housing loans from new income they are generating locally.

New products are being introduced from some surprising quarters. The Bolivian-based operations of insurance giant, Zurich Financial Services, has formed an alliance with BancoSol to offer micro insurance to its clients. The initial offering was micro life insurance that cost a fraction of standard commercial life insurance, but the insured amount of $5,000 meant that the poorest people could meet some of the costs surrounding the death of a relative. This has recently been augmented with micro health insurance that covers the basic medical needs of poorer families, such as visits to the doctor and basic prescriptions. “For Zurich, this program is part of their social responsibility commitment,” comments Koenigsfest. “For us it is business.”

And all this business is adding up to an impressive performance. In 2010 BancoSol turned in a profit of $12m, and was the number one bank in the country based on the CAMEL ratings. CAMEL, which stands for Capital, Assets, Management, Equity and Liquidity, is used by analysts to measure the performance of financial institutions.  To ensure its relevance to current market conditions, the weight given to each ratio in the overall rating is adjusted depending on the economic environment in which the institutions are operating. The CAMEL rating has the added virtue of equalising all banks and financial institutions despite their size, ensuring that larger banks don’t look as though they are performing better just because of their scale.

“This methodology puts everybody on the same level,” says Koenigsfest. “And not only did BancoSol come out first in the country in 2010, it is actually the fifth year that we have achieved that position in a market that includes not just microfinance organisations, but all commercial banks as well.”