Repayment Crises: Lessons Learned from Bolivia

> Posted by Elisabeth Rhyne
CGAP has just come out with an important new Focus Note analyzing recent microfinance repayment crises in Nicaragua, Morocco, Bosnia, and Pakistan—“Growth and Vulnerabilities in Microfinance.” Reading it set me thinking back to the Bolivian repayment crisis of 1999-2000 and to the lessons that came out of it.
The Bolivian crisis had all the same hallmarks as recent crises.  New entrants, in this case consumer lenders, came in with very aggressive growth strategies, as second movers behind the more established MFIs.  They tolerated and even welcomed multiple borrowing.  Borrower difficulties were triggered by a recession, which in turn triggered a virulent—and politically motivated—debt protest movement. At one point protestors piled all the computers of MFI branches into the street and set fire to them.  At the height of the crisis, the outlook for Bolivian microfinance was bad. But today, Bolivian microfinance is thriving, and that includes all of the leading microfinance institutions who experienced the crisis.
A number of key short- and longer-term actions made it possible for Bolivian microfinance to survive, recover, and move to a more stable footing.
In the short term, the Bolivian MFIs instigated intensive dialogue with government so that responses to the debt protestors could be worked out together. They then announced that they would work with every single client who the protestors named to resolve their repayment problems. This helped defuse the protests.  In fact, the big numbers melted away as it turned out there were only a few seriously troubled borrowers in the debt protest movement. The banking regulators issued out a new rule limiting debt service for consumer loans to 25 percent of a person’s salary.  This shattered the business models of most of the consumer lenders, who fled Bolivia or quietly closed operations, losing millions on the way.
Longer term, MFIs ended up writing off many loans and taking a big hit to profitability for a couple of years.  They survived by drawing on their past strong financial, especially the financial cushions they had in terms of prudent provisioning and leveraging.  NGOs working in rural areas were hit less hard than regulated urban lenders who occupied the same market space as the consumer lenders.
Since the crisis, and partly as a result, the MFIs in Bolivia strengthened their associations, which became strong and competent organizations, able to work with government and monitor the status of their members.  Government, associations, and MFIs worked together to improve the coverage and timeliness of credit bureaus.  And MFIs strengthened their own operations, in improved repayment capacity analysis and by seeking to offer clients greater value—a fuller range of services.
Each repayment crisis has its own specifics, but the lessons from Bolivia give some indication of the paths the microfinance industry can take to resolve and rebuild—and possibly even prevent the next crisis.


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CGAP has just come out with an important new Focus Note analyzing recent microfinance repayment crises in Nicaragua, Morocco, Bosnia, and Pakistan—“Growth and Vulnerabilities in Microfinance[KM1] .”  Reading it set me thinking back to the Bolivian repayment crisis of 1999-2000 and to the lessons that came out of it.

The Bolivian crisis had all the same hallmarks as recent crises.  New entrants, in this case consumer lenders, came in with very aggressive growth strategies, as second movers behind the more established MFIs.  They tolerated and even welcomed multiple borrowing.  Borrower difficulties were triggered by a recession, which in turn triggered a virulent—and politically motivated—debt protest movement. At one point protestors piled all the computers of MFI branches into the street and set fire to them.  At the height of the crisis, the outlook for Bolivian microfinance was bad. But today, Bolivian microfinance is thriving, and that includes all of the leading microfinance institutions who experienced the crisis.

A number of key short- and longer-term actions made it possible for Bolivian microfinance to survive, recover, and move to a more stable footing.

In the short term, the Bolivian MFIs instigated intensive dialogue with government so that responses to the debt protestors could be worked out together. They then announced that they would work with every single client who the protestors named to resolve their repayment problems. This helped defuse the protests.  In fact, the big numbers melted away as it turned out there were only a few seriously troubled borrowers in the debt protest movement. The banking regulators issued out a new rule limiting debt service for consumer loans to 25 percent of a person’s salary.  This shattered the business models of most of the consumer lenders, who fled Bolivia or quietly closed operations, losing millions on the way.

MFIs[KM2] ended up writing off many loans and taking a big hit to profitability for a couple of years.  They survived by drawing on their past strong financial, especially the financial cushions they had in terms of prudent provisioning and leveraging.  NGOs working in rural areas were hit less hard than regulated urban lenders who occupied the same market space as the consumer lenders.

Since the crisis, and partly as a result, the MFIs in Bolivia strengthened their associations, which became strong and competent organizations, able to work with government and monitor the status of their members.  Government, associations, and MFIs worked together to improve the coverage and timeliness of credit bureaus.  And MFIs strengthened their own operations, in improved repayment capacity analysis and by seeking to offer clients greater value—a fuller range of services.

Each repayment crisis has its own specifics, but the lessons from Bolivia give some indication of the paths the microfinance industry can take to resolve and rebuild—and possibly even prevent the next crisis.


[KM1]URL to link: http://www.cgap.org/p/site/c/template.rc/1.9.42393/

[KM2]Is this the longer term?

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