Study of Desertion of Microfinance Clients – Bolivia
The “Global Microscope” published annually by the prestigious magazine The Economist, with the support, among others, of the World Bank, IDB Invest and the Bill and Melinda Gates Foundation, tries to measure the environmental conditions in each country with respect to financial inclusion . Every year, said publication produces a “ranking” based on the evaluation it makes of the different countries. The Global Microscope measures changes in the environment, favorable or unfavorable, with respect to inclusive finance. According to the ranking prepared by the Intelligence Unit of The Economist, in 2013 Bolivia occupied the number 2 position in the ranking (only outdone by Peru). However and more recently, in the edition of the Global Microscope 2019 * Bolivia had dropped to position number 18.
What happened in Bolivia? What made the difference? Why did a country that considered itself a benchmark and model of appropriate policies that facilitate financial inclusion came to occupy this position? Many argue that this is due to changes in Bolivian legislation and, specifically, to caps on active interest rates, as the main reason for the deterioration of the environment.
The search for answers to these questions, the desire to understand what implications they produced for the most vulnerable in Bolivia, and what were the changes that caused a fall in the country’s position in that ranking, prompted the Calmeadow Foundation to commission a study that would allow understand and measure the impact of caps on active interest rates on financial inclusion in Bolivia.
After preparing the respective terms of reference and as a result of a careful selection process for the consulting firm, the Ciesmori firm was selected to carry out the project. As part of the process of this investigation, more than 1,000 surveys were applied to former clients of financial institutions affiliated to ASOFIN and a total of 12 focus groups were carried out in El Alto, La Paz, Cochabamba and Santa Cruz. This document summarizes the main results and findings of this investigation.
Bolivia has not been the only country that has implemented caps on active interest rates, and just like what happened in markets that have adopted similar measures, the result of the process has been rather of financial exclusion, totally contrary to the desire for Act. Indeed, and based on the data provided by the investigation, it was observed that a significant number of individuals who had access to loans from the formal financial system (regardless of the financial institution or institutions they used to work with), have been excluded from this.
Based on the experience of other markets in which similar measures have been applied, active interest rates that do not cover operating costs, discourage (and sometimes make it impossible) for formal financial entities to offer very small loans. Such credits, which are precisely those demanded by the most vulnerable populations, generate very high operational costs that financial intermediaries fail to cover with the meager income generated. Thus, little by little, the exclusion of some and the gradual migration of financial institutions to population sectors that require financing for larger amounts begin to be observed.
Consequently, such measures, probably conceived with the idea of helping those most in need, lead to the opposite result. Indeed, individuals who are no longer able to obtain credit from formal financial intermediaries are usually forced to resort to the informal system where lenders frequently charge exorbitant fees. Such rates are not only positioned above the caps set by legislation, but are also well above the rates previously offered by the formal financial system.
We trust that this document will be useful in understanding the unintended implications of public policies, which, although probably well-intentioned, can have a negative impact on financial inclusion. CALMEADOW thanks all those who supported and collaborated in the preparation of this document.
Written by: Ciesmori. March 2020.