Tuesday, March 30, 2010

Microcredit in Bolivia: What Impact on the Lives of the Poor?

Readers:

In 2006, the Nobel Prize for Peace was awarded to the Grameen Bank of Bangladesh, putting a global spotlight on the enterprise of providing microcredit for the poor. The Grameen system of putting small bits of capital in the hands of fruit sellers, seamstresses and other especially small businesses has been repeated al over the world in developing countries, including here in Bolivia. What that actually means for the lives of the people who receive this credit is a debated point.

In this Blog we have invited our colleague from the UK, Adam Kemmis Betty, to offer an inside look at microfinance in Bolivia. Adam is a researcher and microfinance specialist based currently in La Paz. His work carries him all across Bolivia, meeting the recipients of microfinance and analysing its impact.

[A special note: Sources of ours in both Bolivia and Venezuela are reporting bits and pieces of a very strange story and we are trying to assemble the facts as soon as we can. Please keep posted to the Blog and we'll do our best to have the story up in a few days.]

Jim Shultz


Microcredit in Bolivia: What Impact on the Lives of the Poor?

Written by Adam Kemmis Betty

Meet Rosa, who sells fruit in the markets of El Alto. She travels every fortnight to Alto Beni to buy fruit – mainly bananas – from her vendors, and is able to sell at a price that covers her travel costs and leaves her with a small profit. For many years, Rosa has also been a customer at one of Bolivia’s many microfinance institutions (MFIs). In many ways Rosa is a typical customer: microfinance borrowers mainly live in urban or semi-urban areas and work in the informal economy, buying and selling in Bolivia’s sprawling markets or perhaps producing goods in a home workshop. Like many customers, Rosa doesn’t just have a loan with her MFI, but also a savings account (the MFI requires that she makes deposits along with each loan payment) and a life insurance policy.

Rosa once tried to get a loan from a larger bank, but she didn’t have the necessary paperwork. She couldn’t provide proof of income and she didn’t possess anything that the bank would accept as collateral. At her MFI, she is a member of a lending group that is bound together by a group guarantee. This means that if one borrower doesn’t pay, it falls on the others in the group to cover the difference. The idea is that social pressure created within the group ensures that everyone will pay if they are able. By using this method MFIs are able to offer credit to those without paperwork and guarantees.

But Rosa recalls that there have been occasions when one member of the group wasn’t able to pay, putting additional financial strain on the other members. For this reason, Rosa is thinking about taking out an individual loan- now that she has an established credit history. MFIs in Bolivia are increasingly offering individual loans to customers such as Rosa, where the collateral might be a market post, a cow or even a tree.

To be certain, non-profit microfinance loans do not come cheap in Bolivia. Although she is a customer of a non-profit MFI, Rosa’s annualized interest rate is over 30 percent, a figure that makes even credit card rates in the US or UK look like a bargain. Indeed, it is often the poorest clients, taking out the smallest loans, who are paying the highest rates of interest.

Why so high? The main reason is that the administrative costs of servicing so many small loans are much higher than for traditional banks making fewer, larger loans. This is particularly true if the institution has clients in remote locations that need to be visited, taking up loan officers’ time. Interest rates also cover the risk that borrowers may not pay back their loans, as well as the cost of borrowing for the institution itself: most MFIs aim to be fully sustainable.

Although improving efficiency and bringing down costs is something the industry needs to keep working at, the Bolivian microfinance market still has some of the lowest rates in Latin America. And while the rates charged are high relative to the traditional banking sector, they tend to be low compared to other informal sources of credit available to the poor, who may charge 10% a day.

Is Rosa actually better off for her MFI loan, given the price she’s paying? Has the loan helped her exit poverty? Rosa’s business has grown gradually over the years – she’s been able to buy larger quantities of fruit with the capital from her MFI – and her income has grown as a result. But the impact has hardly been dramatic: Rosa still sells fruit at the same stall, lives in the same house and is still poor. Indeed, a recent review by the World Bank’s Consultative Group to Help the Poor points out that we don’t really know the impact that microfinance has in terms of poverty alleviation at the aggregate level. The methodology of studies to assess the social impact of microfinance has always been a source of contention, and the few randomized controlled trials have produced inconclusive results.

The real value of microfinance might be more subtle. A groundbreaking study published in 2009, which put together detailed financial diaries for over 250 families, shows that for someone such as Rosa, whose income and expenses are not only low but also seasonal and unpredictable, day-to-day cash flow management can be very complex.

Rosa, like most people in her economic position, needs to carefully manage her finances to ensure that she has enough to pay for everyday necessities, her journeys to the tropics, and to cover larger one-time expenses. Both savings and loans are important financial tools for poor households to have the money they need in hand when they need it, given the bumpiness of when they have income. This is one of the key values of MFI credit as opposed to informal sources.

In the end, is microcredit a magic wand that ends poverty? Not based on the current evidence, to be sure. But as in most markets, the real test of a product's value is whether there is a demand for it. Despite the high costs, the impoverished themselves clearly see a value in microfinance, as evidenced by strong demand and high repayment rates.

Twenty years of microfinance in Bolivia has not eradicated poverty, not by a long shot. But it has provided a large number of the country's poor with access to more reliable, and cheaper credit then they would have been able to obtain otherwise. And as a result many people have managed to lift themselves at least a little higher on the economic ladder as a result.

14 Comments:

Anonymous Anonymous said...

Few might know it, but Bolivia leads the world in the field of micro-finance. I believe that this is by far a better a tool to fight poverty than any of the "bonos" offered by Evo. Hopefully there soon will be a study that proves not only this, but that Evo Bonos actually institutionalize poverty.

On the Bolivian-Venezuelan bit...I think I know what it is, but I'll let Jim break the news.

9:59 AM  
Anonymous Anonymous said...

To have money is the result of economic achievement, not its precondition.
Economic development and its consequent massive poverty reduction did not depend on microcredit being made more accessible for income production or asset acquisition by the poor. Instead, it was the process of development that created jobs, which in turn made the working poor an attractive target for financial services for savings first and then consumption. Bolivia ain't there yet.

11:11 AM  
Anonymous Anonymous said...

While it's pretty clear that many people are better off now after having taken out microloans, there's no evidence that they're better off than they would be given the other options available to them. Furthermore, a real concern with microcredit is that some people end up worse off than before they started borrowing money, because there is a limited check (even from the socially-minded NGO banks) on if someone is getting over-indebted. Microfinance is new and shiny and exciting, but it does seem like a lot of effort is spent on one of the few development strategies clearly makes some poor people even poorer.

11:25 AM  
Anonymous Anonymous said...

Interesting timing with this post and a well thought out political maneuver. The government is making their annual investigations into the non-profit groups operating in Bolivia with foreign aid. Be careful Jim!!!

6:44 PM  
Anonymous Anonymous said...

Jaime Escalante, one of the most famous Bolivians around the world due to this revolutionary teaching methods and immortalized in the movie "Stand and Deliver" died. Although he was very admired in the U.S. for proving that even poor Latino students involved in gangs could succeed in AP calculus, his death remains largely unnoticed and unmentioned by the Bolivian government.

How easily Bolivia forgets its real heroes.

8:23 AM  
Anonymous Anonymous said...

Somebody give that a-hole bus driver a microloan to repaint his ride....you know the one...with Che AND Osama bin Laden on the back...what a freakin' confudido coca-loser...what is his point anyway? Bolivia would be better off if it were run like Cuba or Saudia Arabia?

(actually his point is clear...he hates the U.S. of A....but isnt there a better way to say it than propping up crappy killers...and Che wasnt even killing americans...for the most part only Cubans and few Africans i suppose)

JD

11:14 AM  
Anonymous Anonymous said...

Was Jaime Escalante a member of MAS? If not he can go to hell.

12:00 PM  
Anonymous Anonymous said...

Evo has won three national democratic elections in a row. Many Bolivian children are seeing that they can reach to high positions based on merit and not based on the whiteness of the skin. If the rants of the paranoid opposition seem perplexing to an outsider, it's because for the most part it is an ingrained racist attitude and they have to be called for what they are. Bolivia did not go through a period of political correctness or social justice until now. All an outsider needs to do is go to a restaurant where "white" people meet and half of their conversation is about "Shithead Evo" while the cooks,waiters,vendors quietly work, pretend not to listen but go to the polls to support MAS.

1:19 PM  
Anonymous Anonymous said...

Copy and paste?
Boring.

2:33 PM  
Anonymous Anonymous said...

Who is Evo? the leader of the coca farmers, who farm coca to produce cocaine... that is your great leader, idiot.

2:59 PM  
Anonymous Anonymous said...

Morales won presidential elections again in December 2009 by 63%. Obama only received 53%. Name calling shows the quality of the opposition and most people can't believe that these were the "ruling class" for so long. If Morales did nothing else, he will be remembered favorably by MOST Bolivians. He gives hope to the majority of Bolivians. Hey bud, in case you missed it...63%. I hope it's not very difficult to understand some facts. I believe in your ability to grasp information.

4:25 PM  
Anonymous Anonymous said...

Once this space was a forum for interesting debate, from all sides. Now it has just become a place where fools go back and forth with declarations of:

"Evo is an idiot"

"No you are an idiot."

And somewhere in their foolishness they think they are contributing something.

6:39 PM  
Blogger William Hayes said...

"Twenty years of microfinance in Bolivia has not eradicated poverty, not by a long shot. But it has provided a large number of the country's poor with access to more reliable, and cheaper credit then they would have been able to obtain otherwise. And as a result many people have managed to lift themselves at least a little higher on the economic ladder as a result."

Yes, a modest result: good, but not the total solution, is it?

Eric Thurman, author of A Billion Bootstraps,has acknowledged that microcredit doesn't work for the poorest of the poor and that it doesn't lift the poor out of poverty, but only moves them up a notch relative to other poor who have no access to credit.

So, since we're not going to get a whole loaf from anyone or any one idea or approach to the problem, why can't people who support one approach be less hostile and more welcoming to those who support another approach?

4:41 PM  
Blogger Monus said...

If Microcredit worked in lifting people out of poverty, Bolivia would be a rich country, an economist friend once told me. Generally the article brings some new light on this topic. In Bolivia, where almost 70% of the workforce works in the informal economy, I believe Microcredit works in bringing people closer to a formal economy. More people are getting individual loans and becoming bank customers. They are trusting more the financial system which is regulated in the end by the state. Bolivia's state is really weak in being recognized by the larger population in practical terms such as paying property or income taxes. How does this matter? According to basic economics in developed economies Savings eventually become Investment, which can make possible new industries that create new jobs.

4:17 PM  

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