Governments in microfinance: good or bad?

26 February 2010 at 09:12 2 comments

By Adam Kemmis Betty, KF10 Bolivia

Since Evo Morales and the Movement Towards Socialism came to power in 2006, Bolivian microfinance institutions (MFIs) have worried that the government will intervene in the industry, to the detriment of private sector providers. Indeed such concerns have become a common theme across the region, with increased government involvement in microfinance in Venezuela, Ecuador and Colombia. In Citigroup´s most recent Microfinance Banana Skins survey, Latin American respondents cited political interference as one of the top three risks facing MFIs.

The urban poor of El Alto demonstrating their support for the Morales government. Will its approach to microfinance serve them well?

So what´s all the fuss about? MFIs are particularly concerned about two potential forms of government intervention. The first is a cap on interest rates, which, given the high administrative costs of servicing lots of small loans, would threaten MFIs´ financial sustainability. The second is direct provision of microfinance services at subsidized rates, with which MFIs wouldn´t be able to compete without making a loss.

Why should we care if private sector MFIs go out of business, if the poor are getting a better deal on their loans? First, in order to subsidize credit with state funds, the government would have to spend less on something else; perhaps that money would be better invested in health or education. The second problem is that government funding for the program might not last. At the moment Bolivia is flush with cash from a natural gas export boom but in tighter times the loans might dry up, leaving the borrowers without access to credit. Finally, a government monopoly would likely stifle the innovation that has characterized – and improved – the microfinance industry over the past two decades.

Let´s take a step back from the doom and gloom and consider what the Morales administration has done in practice, after four years in office. In fact, government intervention has been small-scale and targeted to tackle specific shortcomings of the industry, with little negative impact on private sector MFIs. Although the government has requested that the industry work to lower its interest rates (down from an average of 20% to below 10%), it has not imposed rate caps. With the establishment of the Banco del Desarrollo Productivo in 2007, the government has become a provider of microcredit (albeit indirectly – the bank finances partner institutions that administer the loans). However, these credits are targeted exclusively at the productive sector, which has largely been neglected by MFIs due to the complexities of risk management and long payment cycles, with the aim of developing value-added export industries – widely acknowledged to be Bolivia´s primary development challenge.

Although uncertainties remain over the direction that the government will take next, the pragmatism of the Morales administration has effectively thrown the ball back into the MFIs´ court. How can MFIs further reduce the cost of borrowing? How can they reach the productive sectors that have traditionally been neglected? Hopefully the political pressure will spur, rather than stifle innovation, but the jury´s still out. Your thoughts are welcome.

Adam is a Kiva Fellow at Pro Mujer Bolivia. To make a loan to a Pro Mujer borrower, click here. To join the Pro Mujer lending team, click here.

Entry filed under: Bolivia, KF10 (Kiva Fellows 10th Class), Pro Mujer Bolivia. Tags: , , , , , , , .

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  • 1. Refinance  |  11 March 2010 at 09:08

    Ah! This is great! Thank you for putting to rest severalsome
    confusion I had heard on this recently.

  • 2. evacwu  |  27 February 2010 at 02:05

    Interesting post Adam 🙂 Your question as to how MFIs can further reduce the cost of borrowing reminds me of our comments exchange on my previous blog post. When I first started volunteering with HSPFI in the Philippines and learned that there were a lot of competing MFIs in the area, I definitely thought that the competition would drive down interest/costs and improve product offerings for clients. But the more I asked clients about their experiences with other MFIs, the more I felt like competition wasn’t the (only) answer. Granted those borrowers knew that I was with HSPFI so their responses could’ve been biased, but so many people told me about their experiences with other MFIs that charged much higher interest rates, collected daily payments, had no transparency, etc. that I felt like competition by itself was not the answer.

    I’m not saying that competition has no effect at all on MFIs, but from anecdotes I felt like it didn’t have as much effect as I might’ve thought. And chatting to my boyfriend about this recently, he pointed out that where we live now, you can find dozens of Chinese grocery stores, all within a close radius of each other and all selling very similar things. Just because there is “competition” doesn’t always guarantee innovation.

    So how to reduce an MFI’s costs? Seeing as the overhead is so high because the work currently done is so incredibly manual and paper-based, I’ve been thinking that technology might help in this respect. Mobile banking, for example – almost everyone has a cell phone in the Philippines, and Filipinos love to text. If an MFI could electronically transfer money into clients’ accounts, and if clients could transfer repayments to MFIs with a cellphone text, that could be huge. Granted this would only work with good clients that have been responsible with their repayments, but even if you could only move a portion of your clients onto a mobile banking solution that should still help MFIs reduce overhead costs.

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