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