SUSTAINABLE BANKING with the POOR Case Studies in Microfinance BOLIVIA ---------- Assessing the Performance of Banco Solidaro Peter Fidler C SECTORAL & ,,.. R._s!"\, •or-r:: ' • - CENiEf; f:fB 1 6 2000 WORLD BANK . August 1998 The World Bank Sustainable Banking with the Poor (SBP) is a collaborative effort of the Gender and Poverty Team and Rural Finance at the World Bank, funded by the World Bank, the Royal Ministry of Foreign Affairs of Norway, the Swiss Agency for Development and Cooperation* (SOC), and the Ford Foundation. The study aims at improving the ability of donors, governments and practitioners to design and implement policies and programs to build sustainable financial institutions that effectively reach the poor. The SBP task managers are Lynn Bennett and Jacob Yaron; the technical manager is Carlos Cuevas, and the associate manager is Cecile Fruman. The administrative assistant is Laura Gomez. The World Bank SBP, J4-241, 1818 H Street, N.W. Washington, D.C. 20433 Phone (202) 458-0277 Fax (202) 477-2978 . ,Internet: CCuevas@WORLDBANK.ORG or LGomez@WORLDBANK.ORG i:: i \ WEB PAGE: http://www-esd.worldbank.org/html/esd/agr/sbp .,. ~Note; l_n the back cover box, Swiss Development Corporation, should read Swiss Agency for Development and Cooperation (SDC) . This report was prepared by Peter Fidler (SBP Consultant). Valuable comments were contributed by Carlos Cuevas (SBP). A background report is available upon request. TABLE OF CONTENTS INTRODUCTION ........................................................................................................................... 1 THE MACROECONOMIC AND POLICY ENVIRONMENT ..................................................... 1 PRODEM AND THE HISTORY OF BAN"COSOL ...................................................................... .3 POST CONVERSION CHALLENGES .......................................................................................... 6 . BAN"COSOL AS A PROVIDER OF MICRO-FINAN"CE .............................................................. 7 DISCUSSION: KEYS TO SUCCESS AN"D CHALLENGES FOR THE FUTURE .................... 20 SUSTAINABLE BANKING WITH THE POOR LIST OF ACRONYMS BancoSol BancoSolidario COBANCO Comite Promotor del Banco papra la Microempresa GDP Gross Domestic Product GNP Gross National Product NCD Negotiable Certificates of Deposit NGO Non-governmental Organization PRODEM Fundaci6n para la Promoci6n y el Desarrollo de la Microempresa ROA Return on Assets ROE Return on Equity SDI Subsidy Dependence Index USAID United States Agency for International Development Exchange Rates US dollar Bolivianos 1992 1 4.09 1993 1 4.47 1994 1 4.69 1995 1 ·4.93 SUSTAINABLE BANKING WITH THE POOR ii IBRD 29799 Country Profile Economic and Social Context Inflation GNP per capita (1995) $800 1993 8.5% Population (1995) 7.4 million 1994 7.9% Population density 7.1 inhab./km 2 1995 10.2% SUSTAINABLE BANKING WITH THE POOR iii CASE STUDIES IN MICROFINANCE ASSESSING THE PERFORMANCE OF BANCO SOLIDARIO, S.A. AS A PROVIDER OF MICRO-FINANCE INTRODUCTION BancoSol's unique experience in converting from an NGO to a commercial bank serving a significant number of poor clients in Bolivia provides many important lessons to those interested in the financial viability and sustainability of microfinance institutions around the world. Its development and history has been well documented. This study is not based upon primary research or field observations, but rather is a desk review based on secondary sources. The analysis outlines the macroeconomic and policy environment in Bolivia, and the·history of BancoSol, emphasizing the conversion process from an NGO into a formal commercial bank. The bulk of the study is devoted to the performance ofBancoSol as a provider of micro-finance. Special attention is placed on the organizational structure of the institution, the lending and savings portfolios, operating characteristics of the institution, and the efficiency, productivity, and sustainability of the institution. Finally, a discussion of the keys to success and future challenges is outlined in an attempt to highlight some of the important lessons that BancoSol has to offer the rnicrofinance community. THE MACROECONOMIC AND POLICY ENVIRONMENT INTRODUCTION TO THE OPERATING ENVIRONMENT Before any meaningful analysis ofthe performance ofBancoSolidario, B.A. (BancoSol) can take place, it is first necessary to take stock of the macroeconomic, regulatory, and policy environments in which it operates, since such factors can serve as a powerful enabling or disabling forces in the growth and sustainability of a micro-finance institution. BancoSol is located in Bolivia, a sparsely populated mountainous country with isolated pockets of inhabitants and numerous ethnic groups. In 1994 the population reached 7 .2 million with a growth rate of 2.4 percent per annum. The Gross National Product (GNP) per capita for 1994 totaled $770, a figure that is approximately one-third the regional average 1 (Table 1). Not only is the GNP per capita low, but the distribution of income in Bolivia is quite disparate as the Gini coefficient for Bolivia (.42), is one of the highest in Latin America. The average annual inflation rate between 1980 and 1993 registered at 187 percent, serving to erode the real value of a micro-finance 1 World Bank, 1996, p. 188. SUSTAINABLE BANKING WITH THE POOR institution's loan portfolio. Lately, inflation rates have remained relatively low, averaging 10 percent between 1993 and 1995. Table 1. Country Macroeconomic and Social Indicators Bolivia Latin America (non-weighted) Gross National Product per capita (1994) $770 $2,327 Avg. annual growth 1980-1993 -0.7% 0.0% Avg. inflation rate 1980-1993 187% 99% (median is 25%) Population density 7fkml 63/km1 . Population growth rate per annum 1990-1994 2.4% 2.1% Source: World Bani<, 1996. are indications, however, that the operating environment in Bolivia is improving. There - Growth rates in the 1990s have registered at an impressive 3.8 percent. 2 Gross Domestic Investment while negative at 10 percent in the 1980s, registered positive at 5.8 percent from 1990 to 1994. Moreover, inflation has come under relative control, and by 1995 the annual increase in the consumer price index was down to 10percent.3 The improved macro-economic environment is largely a result of the austere stabilization program adopted in 1985. While it has corrected some of the structural imbalances in the Bolivian economy, the stabilization program has hit the poor disproportionately hard, many of whom have joined the growing urban informal sector in La Paz. One estimate from 1993 suggests that 5.2 million Bolivians rely on the informal sector for sustenance.4 The same source suggests that 60 percent of the economically active urban population and 90 percent of rural residents are employed in: informal sector activities, and that the sector generates around 30 percent of Bolivia's GDP. 5 FINANCIAL SECTOR Historically the financial system in Bolivia has been characterized by an inability to reach the small borrower. While this tendency reflects the natural tendency of financial institutions all over the world, restricted access to credit among small-scale entrepreneurs is particularly acute in Bolivia where depositors are conditioned to place their money in overseas accounts rather than at controlled (and in real terms, negative) local interest rates. The consequent shortage of savings that characterized the pre-1985 Bolivian financial sector bred conservatism among Bolivian lenders and a reluctance to embark on high-risk micro-lending. A USAID report on the Bolivian financial sector in the late 1980s reported that, "Savings disappeared; all banking transactions moved on to the street comers and the formal financial sector ceased to exist. The credit union system dropped from 300 credit unions to around 30."6 As the peso boliviano took a nose-dive 2 Ibid, p. 188, 208. 3 International Monetary Fund, 1995, p. 65. 4 PRODEM, 1993. 5 Ibid. 6 Mosley, 1993, p. 2. SUSTAINABLE BANKING WITH THE POOR 2 from 6,000 to 1.5 million to the dollar, severe constraints were placed on the ability of Bolivian borrowers to repay their debts. In 1992, the main state-finance banks were closed under pressure from the World Bank and Inter-American Development Bank as their percentage of non- performing loans exploded. When PRODEM set up operations in 1987, the environment was ripe for such a micro- credit program. Widespread mistrust of the formal banking system, massive urban migration, and a burgeoning microenterprise sector all contributed to the demand for PRODEM's financial product. PRODEM AND THE HISTORY OF BANCOSOL In February of 1992, Banco Solidario, S.A. (BancoSol), was created in Bolivia as the first private commercial bank in the Western Hemisphere specifically tailored to providing financial services to micro-entrepreneurs. BancoSol lends exclusively to low-income people while simultaneously remaining financially self-sufficient. Toward this goal, the institution vows by two fundamental principles: (i) "people are worth what they can do·, not what they have"; and (ii) "BancoSol will progress to the extent that its clients progress." The initial steps leading to the birth of Banco Sol grew directly out of the success of PRODEM (Fundacion para la Promocion y Desarrollo de la MicroEmpresa), a non-profit micro-lending program. THE EARLY SEED In 1984, ACCION International, a U.S-based NGO operating throughout Latin America recruited a group of influential Bolivian businessmen to provide seed capital and leadership for the establishment of a micro-lending institution. 7 As ACCION International agreed to supply technical assistance in the start-up of such a poverty-alleviating institution, the movement quickly gathered momentum. 8 After securing capital from USAID, the Bolivian Fondo Social de Emergencia, and Calmeadow Foundation, in 1986 the Fundacion para la Promocion y el Desarrollo de la Microempresa (PRODEM) was founded as an urban-based credit and training program in La Paz. PRODEM's initial goal was to broaden employment opportunities and increase the level of income in the informal sector through the provision of small-scale finance. PRODEM' s credit program quickly adopted the solidarity group lending methodology as the most efficient means to achieve this goal, and started providing working capital loans averaging around US$100. PRODEM also adopted a training program whereby the institution offered brief seminars to its 7 Femanco Romero, the chief shareholder in Barico Hipotercario, played an influential role in raising private sector capital from the Banco Dipoecario Group, the Banco Boliviano Americano Group, the Compania Minera del Sur Group, and the BISA. 8 The initial organizational structure, lending methodology and goals were based on the findings of a feasibility study conducted by ACCION International in 1985. The feasibility study was funded by USAID. SUSTAINABLE BANKING WITH THE POOR 3 clients designed to introduce informal operators to the concept of credit and how it can be used to leverage returns in business. In addition, PRODEM soon expanded its training component to offer courses in basic marketing, business administration and accounting. PRODEM exhibited impressive levels of growth in its early years of operation. In 1988, the institution opened a second branch office in El Alto, a working poor township located on the outskirts of La Paz. By the end of 1988, PRODEM had financed loans to more than 13,300 microenterprises. The next year, the institution decided to open its second regional headquarters in Santa Cruz, so as to be able to expand into different regions in Bolivia, and by the close of 1991 PRODEM had opened four headquarters and seven branch offices throughout the country. Moreover, in only five years the institution had provided loans equivalent to more than US$27 million, and had developed an outstanding portfolio of over US$4.56 million. LIMITATIONS OF THE NGO STATUS In December of 1988, upon conducting a strategic analysis of PRODEM, it was discovered that while the institution scored high marks for adopting a commercial orientation in the provision of its credit services~ it was only servicing a small percentage of the Bolivian micro-credit market. Both USAID and PRODEM estimated that despite the impressive growth in PRODEM's portfolio, 98 percent of the potential demand for micro-finance was still being unserviced. 9 Expansion was necessary, not only to satisfy a larger percentage of the micro-credit market, but also so that PRODEM contd realize the financial rewards that accompany scale in a commercially-oriented institution. As an NGO, PRODEM had access to limited amounts of donor sources of funding, and virtually no access to commercial resources. Moreover, capturing savings was out of the question as NGOs in Bolivia operate outside the regulatory framework of the banking sector. These deficiencies gave rise to a desire to become a commercial bank so that the institution could approach money markets directly on commercial terms. In early 1992, in an effort to meet the growing demand for micro-credit in a financially viable fashion, PRODEM took the unprecedented leap into the formal financial sector and converted into a formal commercial bank. THE CONVERSION PROCESS The first step in the conversion process was to form a steering committee to: (i) analyze the feasibility of the proposed bank; (ii) promote the bank among financial institutions and potential investors; (iii) develop an organizational model for the new institution; and (iv) serve as a liaison with the authorities and comply with existing regulations as set by the Superintendent of Banks including the issuing of stock and the presentation of investment documents. Toward this 9 Glosser, 1993, p. 7. SUSTAINABLE BANKING WITH THE POOR 4 end, PRODEM established the Comite Promotor de! Banco para la Microempresa (COBANCO) to assist in the transition process. Since the conversion from a credit-granting NGO to a formal financial institution was unprecedented, PRODEM did not have any models or success stories to follow. While a good deal of technical assistance was available from a wide variety of sources, a number of obstacles were encountered along the way. The primary obstacles, as identified by Mosley, were the following: 10 Minimum Capitalization Requirements: The first and most obvious challenge was PRODEM's lack of capital. The government's capitalization requirements had recently been raised in response to the post-stabilization banking sector crisis, and PRODEM would need to reach a capitalization threshold of $3 .2 million, a 700 percent increase from its capitalization level at the end of 1988. Public and Private Attitudes: The second challenge was to organize a public relations campaign to combat the popular perception in Bolivia that a commercial micro-lending institution could not possibly assist the poor. Politicians and members of the NGO community were deeply opposed to the notion that the poor could benefit from market interest rates (which were to rise to 60 percent upon BancoSol's incorporation) and claimed that such rates bordered on exploitation and usury. 11 Develop a Savings Product: BancoSol also had to figure out how to develop a savings program that provided both a realistic forecast ofBancoSol's need and capacity for deposits, and one that provided a proper incentive structure for poor clients to place their savings with the bank. This was an especially difficult task given the financial history in Bolivia of bank scandals and fraud which left depositors with little reason to entrust the formal financial sector. Micro-entrepreneurs were much more inclined to store the value of ~eir currency in assets such as livestock, inventory or consumer products, rather than in interest bearing savings accounts. The story ofCOBANCO and the conversion of PRODEM into BancoSol has been well- documented, and therefore will not be repeated here. 12 An arrangement was made by COBANCO for the transfer of funds from PRODEM to BancoSol in exchange for ownership shares in the bank. PRODEM initially transferred its loan portfolio and real assets to BancoSol, in exchange for 28. 7 percent equity. As a result, BancoSol would be able to begin its operations with a large start-up subsidy (nearly half of its paid-in equity capital to be used as its lending 10 Mosley, 1993, p. 11-13. 11 Bolivian NGOs such as the Fondo de lnversiones Economicas (FIE) and other church sponsored micro-finance organizations were setting the example by lending at subsidized interest rates that hovered between 12 and 18 percent. 12 See for example, Drake and Otero, 1992, p. 88-98 and Glosser, 1993. SUSTAINABLE BANKING WITH THE POOR 5 - -- - - - - - - - - - - - - , - - - - -- -- --. --· . .. . portfolio) and a pre-existing client-base of almost 15,000, 13 After BancoSol assumed liability for a USAID loan to PRODEM worth US$850,000, and a similar arrangement was worked out for a loan from the Bolivian Social Emergency Fund, PRODEM used its portfolio to actually purchase over 41 percent of the bank's stock. Private Bolivian businesses bought 30 percent of the equity shares while international donors and NGOS bought the remaining shares. Along with designing and developing the new commercial bank, COBANCO also needed to decide the future of PRODEM. Should the NGO cease to exist as an operating entity and simply transfer all of its assets and institutional resources to the newly created bank? Or would it continue to function in an advisory-type of capacity? Ultimately it was decided that PRODEM would continue to operate alongside BancoSol, as a distinct legal entity. PRODEM's focus would revolve around developing rural credit programs in Bolivia's in new markets, researching new types of financial products for the bank, and testing new lending technologies and target groups. PRODEM would therefore function as a support organization for BancoSol. It would also continue to operate the offices of BancoSol that were not yet profitable and would open new offices in other cities. Once the offices reached levels offmancial viability, they then could be sold to BancoSol. Finally, PRODEM would assist BancoSol in the technical assistance and support functions that the bank did not want to assume costs for. In many ways PRODEM found the perfect complementary role. It was able to remain a dynamic organization, vital to the success of BancoSol, while simultaneously serving as a residual entity, and a convenient means for the bank to externalize costs associated with training, staff development and research. POST CONVERSION CHALLENGES While managing the conversion process was tricky, the challenges of operating the first full-scale commercial financial institution devoted to lending to the poor proved even greater. Upon switching to a licensed bank, BancoSol switched from donor funding to more expensive commercial loans and deposits. The advantage of such an arrangement was a more stable and constant supply of capital to finance expansion. The obvious drawback, however, was a rise in the average cost of funds. The average cost of funds rose from 4percent per year at the time of transformation to 12 percent by mid-1995. 14 Secondly, the rapid post-conversion branch expansion meant that the bank could service more clients in a wider area, but the accelerated creation of new branches and hiring of new loan officers also meant that productivity would take a hit. The ratio of total costs to average number ofloans outstanding increased from $149 in 1992 to $242 in 1994. Moreover, the ratio of operational costs to the average number ofloans outstanding increased from $103 to $135,' illustrating that after conversion (as a result of rapid expansion) it cost more to disburse loans. 15 13 Glosser, 1993, p. 418. 14 CGAP Focus Note No. 6. IS Ibid. SUSTAINABLE BANKING WITH THE POOR 6 Ultimately, BancoSol compensated for rising costs by increasing the revenue-generating capacity of each loan. The loan sizes and terms to maturity were increased, rather than increasing interest rates. BancoSol was able to do this without losing its core customer base and without sacrificing its repayment rate as loyal PRODEM customers returned for third and fourth loans. The ratio of the average portfolio outstanding to total cost rose from 1.67 in 1992 to 2.24 in 1995. The increase in loan size fully compensated for the rise in costs per loan and allowed BancoSol to remain financially viable. 16 A recent study by the Ohio State University17 examined the dynamics of growth for BancoSol. The authors concluded that while loan sizes have increased to offset increasing costs of funds, Banco Sol has not shifted its mission of assistance to the poor. By reducing operating expenses as a proportion of productive assets, BancoSol's portfolio efficiency has increased. By managing growth efficiently, BancoSol h,as been able to expand its outreach, increase sustainability, and reduce average operating costs while avoiding some of the pitfalls associated with rapid growth such as a deterioration in portfolio quality, an inability to screen and monitor loans efficiently, organizational inefficiencies, and an abandonment of the mission statement. BANCOSOL AS A PROVIDER OF MICRO-FINANCE GOVERNANCE AND ORGANIZATIONAL STRUCTURE BancoSol is registered under Bolivian banking regulations as a full-scale commercial bank. It operates as a corporation under Bolivian law, and its articles and laws reflect the comprehensive requirements of both the banking regulations and corporate laws of Bolivia. While its commercial status requires that BancoSol adhere to the fundamental objective of profitability, BancoSol has retained PRODEM's method of making loans and its social objective of serving the poor. As a financial institution, BancoSol operates as a three-tiered body and maintains a relatively decentralized decision-making structure. The bank's head office in La Paz is responsible for the overall policy and administration of the bank, and carries sole responsibility for funding the bank. In addition to the head office, as of the end of 1994 there were four regional offices in La Paz, Santa Cruz, Cochabamba, and Oruro, and 22 retail units. The retail units or shop-front establishments are directly responsible for client services and the day-to-day provision of loans and mobilization of deposits. The four regional branches coordinate and oversee the retail units· in their jurisdiction and provide regular financial reports to headquarters. • All units of the bank operate as distinct individual cost centers. The head office and regional branches are required to break even, with the burden of profitability primarily resting on the individual retail units. Such a set-up would seem to make sense as the regional and 16 Ibid. 17 Gonzalez-Vega, C., et. al. 1996. SUSTAINABLE BANKING WITH THE POOR 7 administrative offices which invest more in human capital and administrative technology and are less actively engaged in direct client service, have a higher overhead and bring in less loan capital than the individual retail units. The retail units are required to cover their administrative costs as well as their individual shares of national and regional office administrative costs, allocated across the units pro rata to loans. The head office lends funds to the regional branches, which in tum lend them to agencies for on-lending to the ultimate beneficiaries. The internal interest rate at the end of 1994 was around 10 percent on funds. Cash management for day-to-day operations is the joint responsibility of the individual retail units and the regional branches. The retail units retain a minimum amount of funds on hand at all times, only enough to cover the short-term operations of the retail unit, as surpluses are largely returned to regional branches. Once a retail unit generates about 800 group loans, and the potential demand for loans in the area is judged adequate to support expansion, a new retail unit may be created within the region. The highest decision-making body ofBancoSol is the Shareholders' Assembly, which is comprised of the bank's seventeen shareholders. Amongst the Shareholders' Assembly are local commercial banks, private Bolivian businesses and individuals, international donors and NGOs, as well as development agencies. The Shareholder's As~embly reviews the status ofBancoSol's :finances once a year at the bank's annual meetings. The Assembly's approval is also required for any changes in the bank's statutes, dissolving or prolonging the life of the institution, any changes in its capital and sales of more than 10 percent of the total value of the bank's fixed assets. The rest ofBancoSol's activities, however, have been placed under the guidance of a Board of 10 Directors, who are appointed by the Shareholders' Assembly. Each region has a regional supervisor and each branch office has a branch office manager. As oflate 1994, BancoSol employed 394 staff, of which it is estimated that loan officers comprise between 55 and 60 percent. The institution has increased its total number of staff to keep pace with the explosion in borrowing and saving activity that has taken place since its conversion. In less than two years from the end of 1992 to late 1994, the number of BancoSol staff grew by 320 percent. Unlike other micro-finance institutions around the world, most credit officers come to BancoSol with a bachelors degree. While credit officers at other Bolivian commercial banks tend to have degrees in business related fields, most BancoSol loan officers have their degrees in the social sciences. Indicative of the gender composition of the institution's clientele, around 65 percent of BancoSol' s loan officers are women. SusrAINABLE BANK.ING WITH THE POOR 8 CLIENT PROFILE BancoSol's impressive gro_wth from a credit-granting, externally subsidized NGO into a financially sustainable formal financial institution has largely been achieved without abandoning the institution's intended beneficiaries -- poor and disenfranchised micro-entrepreneurs. The vast majority of BancoSol clients had never before received credit, nor had they requested a loan of any sort. Of the minority ofBancoSol clients that were able to access a loan, in most cases the only source of available credit was friends and family members. Loans are granted to Bolivian • micro-entrepreneurs who operate their enterprises on a small-scale, use technology in production and sales that is rudimentary, and do not have access to formal loans or other banking services. Clients tend to be engaged in the following lines of production, processing, or marketing: ·(i) shoe · manufacturing; (ii) clothing manufacturing; (iii) knitted and woven textiles; (iv) candle making and artisanal toys; (v) carpentry; and (vi) food preparation. After converting into a commercial bank, BancoSol increased the proportion of its loan portfolio dedicated to trade and services from 49 percent in 1989, to 69 percent in 1992. A majority ofBancoSol's clients (around 72 percent) are women, and most are located in urban or peri-urban areas (95 percent). I OUTREACH The scale of outreach for BancoSol is impressive compared to other microfinance efforts I around the world. From 1992 to 1997, the number ofBancoSol clients tripled from 25,000 to I . 75,000. BancoSol's outreach is deeper than many of the micro-finance NGOs that rely on external donor subsidization. Table 2 compares outreach indicators ofBancoSol with some I prominent micro-finance institutions world-wide. Table 2. Outreach Indicators of Selected Micro-Finance Institutions ~ Country Institutional Avg. Avg. loan size as percent percent J type percent of loan size women rural j; GDP/capita clients clients I Grameen Bank Bangladesh Bank $149 68% 94% 100% BRI Indonesia Bank $494 81% 24% 80% ADEMI Dominican Rep. NGO $1,082 88% 40% 20% Alexandria Business Assoc. Egypt NGO $764 116% 11% 0% BancoSol Bolivia .Bank $579 74% 72% 5% Source: World Bank, (unpublished), Sustainable Banking with the Poor Database of Micro-Finance Institutions and Christen, r· Rhyne, and Vogel, 1994, Appendix B. I When comparing BancoSol with other microfinance institutions in Bolivia, several interesting trends emerge18 . Seventy two percent of BancoSol clients are female while less than I half (48 percent) of clients are women on average in the other institutions. In addition, BancoSol's average loan size is half the average loan size for the other micro-finance institutions.· In five years of operation as an NGO, PRODEM's average loan size grew from $92 in 1987 to 18 1995 data from 10 Bolivian microfinance institutions from The World Bank, Sustainable Banking with the Poor, (unpublished), Database of Micro-Finance Institutions. SUSTAINABLE BANKING WITH THE POOR 9 $275 by the end of 1991 , but continued to orient its micro-loans toward the economically active poor. After converting into BancoSol in 1992, the institution has attempted to maintain the same target group as the average loan size of $579 in 1995 has remained well under the average GDP per capita in Bolivia. The average loan size of BancoSol is even more dramatic when compared to the average loan sizes of the major commercial banks, which in 1990 exceeded $36,500. 19 LENDING Eligibility: Unlike other micro-finance institutions, BancoSol does not impose a maximum income requirement on its borrowers. The conditions of eligibility for a loan are not particularly stringent. Firstly, BancoSol will only make loans to businesses that have been in existence for at least one year. Secondly, the proprietor of the business has to be over the age of 18. Thirdly, the proprietor must not be able to access credit from any other formal financial channels .. Finally, the proprietor must be willing to join a solidarity group of four to eight members over the age of 21, unrelated, and located within walking distance of one another. Methodology: BancoSol lends to individuals, but on the basis of group guarantees. Technically, under Bolivian banking regulations, such loans are considered to be loans made under "personal guarantee." Loans are administered by BancoSol to the solidarity group's individual members. The solidarity group approach acts as a self-selection device in order to ensure that the poorer elements of Bolivian society are in fact served by Banco Sol. Such a lending approach also serves to externalize some of the transaction costs associated with lending to the poor, as group members provide additional pressure on one another to repay their loans. Application and Disbursement Process: All prospective clients seeking to obtain a loan from BancoSol must first form a solidarity group with neighbors and/or members oftheir community. Upon forming a group, each member must fill out a basic personal information form. After doing so, each group member must then interview with a BancoSol loan officer who determines the loan amount required and the capacity of the individual io service the debt. After each member of the group has complied with this process and is approved as a client, the group information is consolidated in another form, and then submitted with a recommendation by the loan officer to the branch manager for approval. Following approval, a credit committee, composed of all branch loan officers, considers, and if it agrees, endorses the Branch Manager's approval. Repayment schedules are determined at this stage. Before loans are disbursed, each member of the group is required to attend an orientation session at the issuing branch. The purpose of the session is to clearly explain the legal obligations as group guarantors for the loan. Groups are also informed of the bank's deposit facilities and advised of the advantages of saving. This introductory session is the only formal training session that BancoSol provides to its borrowers. 19 Mosley, 1993. SUSTAINABLE BANKING WITII THE POOR 10 Terms: The minimum initial group loan size is US $300, which is then split amongst the five or more members of the solidarity group. The maximum group loan size is US $20,000, but . the maximum loan one individual member of the group can access is US $5,000. The average loan size as of December 1995 was US $579. 20 Loan periods vary according to the needs of each client group and their prior repayment history. The initial loan term is set at just two months, but subsequent loans can have terms that extend up to one year. The average loan term is currently six to seven months. Repayments are arranged on a weekly, bi-monthly, or monthly schedule, and the collection and repayment responsibility rests with a nominated group leader. Repayments are • closely monitored and field officers visit borrowers who are delinquent at their place of work in the event that the borrower cannot afford to give up time to travel to Banco Sol' s retail unit office to repay their loan. Clients are frequently reminded that diligent repayment can result in subsequent access to larger loans. Second round loans may be increased by 50 to 100 percent of the initial loan size, and third round loans may be increased by an additional 80 percent.. BancoSol clients are given the option to borrow in either Bolivianos or US dollars. While new borrowers are required to take out their loans in Bolivianos, many repeat borrowers prefer to take out US dollar loans. 21 At the end of 1994, nominal interest rates on loans denominated in Bolivianos stood at 4 percent per month, while nominal interest rates ori US dollar denominated loans registered at 2.5 per month. The interest is calculated on reducing balances. In addition to the nominal interest rate, BancoSol charges 2.5 percent and 1.0 percent commission (processing fee) on each Boliviano and US dollar loan, respectively. Prior to 1994 there was also a compulsory deposit of 5 percent of the principal of the loan which had to be paid up-front by the borrower.. The compulsory deposit (which acted as an insurance guarantee) was only reimbursed once the client repaid the loan in full. •As a result, the effective interest rate on BancoSol loans was higher before 1994 than it is today. 22 Table 3 compares some of the characteristics ofBancoSol's loans with those of other Bolivian micro-finance programs. BancoSol stands out as offering very small loans for relatively short terms. While the annual nominal interest rate is slightly higher than other programs, its arrears rate is lower than the average for other institutions. 20 The average loan balance has increased since the writing of this report. The average loan balance in 1996 was $661 and in 1997 it increased to $828. 21 In 1994, over 60percent of all loans were denominated in US dollars. Agafonoff and Wilkins, 1994, p. 8. 22 Christen, Rhyne, and Vogel calculate the 1993 effective interest rate at 55 percent. SUSTAINABLE BANKING WITH THE POOR 11 Table 3. Characteristics of BancoSol's Loan Portfolio vs. Other Bolivian Micro-Finance Institutions BancoSol Avg. for other micro- Median for other micro- finance programs in Bolivia finance institutions in Bolivia Average loan size $579 $1,225 $625 Average loan term 6.5 months 26months IO months Annual nominal interest rate 48%23 44% 24% f. Arrears rate 3% 11% 8% Source: Unpublished World Bank database from Paxton, J. "A Worldwide Inventory ofMicrofinance Institutions", The World Bank, Sustainable Banking with the Poor, 1997. Loan Portfolio: At the end of December 1997, BancoSol's loan portfolio stood at US $63.1 million, compared with US $8.8 million at the end of December 1992 (Table 4). The number of borrowers had also exhibited tremendous growth, reaching over 76,000 at the end of 1997.24 As of December 1995, the institution had provided micro-loans to a cumulative total of 432,892 clients. Table 4. Profile of BancoSol's Loan Portfolio 1992 1993 1994 1995 1996 1997 No. ofclients 25,600 44,800 61,400 63,038 71,745 76,216 Client growth rate 79% 75% 37% 3% 13.8% 6.2% Loan portfolio (million) $8.8 $24.7 $32:5 $36.5 $47.5 $63.1 Portfolio growth rate 91% 181% 32%. 12% 30.1% 32.8% Avg. loan size $344 $551 $529 $579 $661 $828 Source: Ban.coSol, 1994. Banco Sol's client retention rate is quite high suggesting a high level of client satisfaction with the credit services provided. There were 11,140 pre-1992 clients on BancoSol's books at the end of December 1992. Given that the total number of loan clients in 1991 was only 14,300, this would suggest that 78 percent of all clients remained active borrowers in 1992. The retention rate increased the following year registering at 85 percent for 1993.25 The high retention rate helps to account for the increase in the average loan sizes. As clients demonstrate an ability to repay their loans, they are eligible for subsequent loans of larger sizes. During 1992, the average initial loan size was US $238, but by the end of 1993 these same clients (87 percent of whom had returned to BancoSol for follow-up loans), were borrowing from the institution at an average loan size of US $649. 26 ... I In addition to measuring the level of client satisfaction by the retention rate, another good indicator is the repayment rate. BancoSol manages an impressive loan portfolio and its arrears lt 23 Since the other micro-finance institutions in the sample provide their loan data in Bolivianos, the Boliviano denominated nominal interest rate is given here for the sake of comparison. 24 BancoSol, 1998. 25 Agafonoffand Wilkins, 1994, p. 9. 26 Ibid. SUSTAINABLE BANKING WITH THE POOR 12 rate is currently at 3 .1 percent. While the arrears rate jumped to 5 .1 percent in 1994, this is primarily due to the significant increase in the portfolio and scale of lending that occurred at the end of 1993. BancoSol's repayment rate is not simply a reflection of client satisfaction with the financial service but is also a function of close monitoring by BancoSol loan officers. Loan officers meet with each solidarity group on a weekly basis and each officer is recognized and accepted as a regular presence in the community with which he or she works. All loan repayments are collected on Mondays, and BancoSol's computerized reporting system identifies late payments by Monday evening. Groups that miss payments are visited on Tuesday by their loan officer, who identifies the delinquency and determines when payment will be made. Loan officers remind their clients that BancoSol charges a 3 percent penalty on loans delinquent up to 60 days, and a 5 percent penalty on loans past-du~ thereafter. In a typical month approximately 12 to 15 percent of all loan payments are made in advance, and as Table 5 illustrates arrears rates are quite low. In 1994, 72.5 percent ofBancoSol's arrears were less than 30 days past-due, and over 50 percent were overdue by five days or less. 27 Table 5. Measuring BancoSol's Delinquency and Provisioning 1992 1993 1994 1995 Loans past-due _ $281,600 $716,300 $1,657,500 $1,132,000 Past-due loans as % of outstanding. loan portfolio 3.2% 2.9% 5.1% 3.1% Provisions taken $44,000 $247,000 $975,000 $850,000 Provisions taken as % of outstanding. loan portfolio 0.5% 1.0% 3.0% 2.3% Source: BancoSol, 1,992, 1993, 1994, 1995. DEPOSITS Savings Terms and Conditions: Perhaps the fundamental reason for converting PRODEM into a bank was to take advantage of the ability of a commercial bank to attract low- cost funds from the public. Moreover, BancoSol recognized that the demand for secure savings among poor entrepreneurs, in many instances, surpassed the demand for credit, and consequently BancoSol regaras deposit mobilization as central to its mission. BancoSol is the only bank in Bolivia that does not have a minimum deposit requirement to open an account. It offers a number of different passbook deposit facilities to its clients including: • Cuenta Libre denominated in Bolivianos - accessjble on demand, earning 15 percent interest on a minimum balance of Bs 500. • Cuenta Libre denominated in US dollars - accessible on demand, earning 6 percent interest on a minimum balance ofUS$100. 27 Ibid, Attachment B. SUSTAINABLE BANKING WITH THE POOR 13 • CuentaCapital denominated in Bolivianos - accessible bi-monthly, earning 14 percent on balances under Bs500 and 18 percent on balances over Bs500. • Cuenta Capital denominated in US dollars - accessible bi-monthly, earning 4 percent on balances below US $100 and 8 percent on balances over US $100. BancoSol also offers negotiable certificates of deposit (NCDs). The NCDs are available in US dollars only, for minimum amounts of US $200. They earn interest rates of 9.5 to 11.5 percent depending on the term of the CD, with CDs over US $10,000 attracting even higher rates on request. BancoSol offers marginally higher rates on their NCDs than the other commercial banks and as a result, their NCD clients tend to represent a more up-scale market than their regular lending and savings portfolio. Savings Portfolio: According to audited balance sheets at the end of 1995, client deposits totaled $30.5 million (Table 6). Of this total, only $3.6 million (12 percent) are held in passbook savings. The vast majority of BancoSol' s savings ($26.8 million or 88 percent of all deposits) take the form oflong-term NCDs. Of the passbook savings, 72 percent are denominated in US dollars, and of the long-term deposits approximately 82 percent are denominated in US dollars. • Table 6. Profile of BancoSol's Savings Portfolio 1993 1994 1995 Total Savings portfolio $15.8 million $29.9 million $30.5 million Term savings (NCDs) $12.6 million $26.4 million $26.8 million Passbook savings $3.2 million $3.4 million $3 .6 million US dollar denominated savings $11.8 million $21.9 million $24.8 million Boliviano denominated savings (US$)• $3.9 million $7.8 million $5.6 million Source: BancoSol, 1993, 1994, 1995. The average deposit size for the passbook savings varies dependent upon whether or not the savings are denominated in US dollars or Bolivianos. The average deposit size in the Boliviano denominated accounts at the end of 1994 was only US $19. By way of contrast, the average loan size of the US dollar accounts was nearly 12 times this figure at US $225. 28 As noted above, the longer-term NCDs serve cHents on a higher level of the economic spectrum as the minimum deposit size is US $200 and deposits in NCDs commonly register as high as US $10,000. When the value ofBancoSol's savings portfolio is measured, it is apparent that a large percentage represents the NCDs of formal sector investors. At the same time, the number of small-scale informal savers in the portfolio vastly outnumbers the large, formal sector NCD investors. Similar to the pattern exhibited in its loan portfolio, BancoSol's savings portfolio grew substantially in 1993 and 1994, but growth decelerated in 1995. In 1992, clients' deposits stood at only US $1,865,280, comprising mainly the forced savings ofBancoSol borrowers. In 1993 28 Ibid, p. 9. SUSTAINABLE BANKING WITH THE POOR 14 the savings portfolio increased by over 8 times, jumping to US $15.8 million. The savings portfolio grew significantly in 1994 as well, increasing by nearly 90 percent. Interestingly, the increase in 1994 was primarily due to an explosion of interest in the NCDs on the part ofhigher- scale, formal sector investors. The savings portfolio barely grew in 1995, and the portfolio of Boliviano-denominated savings even declined by US $2.2 million. The impressive growth in clients' deposits suggests that BancoSol is starting to fulfill a very strong untapped demand for savings facilities. Moreover, the competitive NCDs offered by the bank have given the institution a stable stream of relatively low-cost loan capital to finance its micro-loan portfolio. Deputy General Manager, Hermann Krutzfeldt remarked that when BancoSol originally started offering deposit facilities the banking industry did not fear competition from the new bank, as they believed it was tapping a market in which commercial banks were not interested given the costs of administering small deposits. Given the apparent popularity from formal sector clients of the bank's negotiable certificates of deposits, however, the industry might reconsider this position. Interestingly, Table 7 illustrates that the gap between the savings anq loan portfolios appears to be closing. In 1993 and 1994 the savings portfolio grew at a much faster rate than the loan portfolio, while both portfolios grew at a slower pace in 1995. It is apparent that since 1992, an increasingly large percentage ofBancoSol's loan portfolio is being financed by locally mobilized deposits. Table 7. Measuring Growth in BancoSol 1992 1993 1994 1995 Savings portfolio $1.9 million $15.8 million $29.9 million $30.5 million Loan portfolio $8.8 million $24. 7 million $32.5 million $36.5 million Savings to loan ratio 0.22 to 1 0.64 to 1 0.92 to 1 0.84 to 1 Source: BancoSol, 1993, 1994, and 1995, and Glosser, 1994. FINANCIAL . PERFORMANCE . Assets: In its first two and one-half years BancoSol's growth was extraordinary. Total assets increased from US $11.8 million at the end· of 1992 to US $34.3 million at the end of 1993 and US $44.1 million by the middle of 1994. In this period the bank quadrupled in size from an already significant base. Since mid-1994 asset growth has been at a much slower pace. In fact when the institution's total assets are measured in US dollars, the figure actually shrinks fromUS $45.8 million at the end of 1994 to US $45..5 million at the end of 1995; The growth in total assets from 1992 to 1994 was primarily due to the increase in the loan . portfolio, as Table 8 illustrates that in each of the bank's four years of operation the loan portfolio comprised at least 71 percent of total assets. In 1995, BancoSol substantially increased the percentage of total assets held in the loan portfolio from 71 percent to 80 percent, and SUSTAINABLE BANKING WITH THE POOR 15 decreased the percentage of assets held in short-term investments from 14.1 percent to 1.4 percent. Table 8. BancoSol Asset Structure 1992 - 1995 1992 1993 1994 1995 Annual asset growth 82% 180% 34% - 1% Total assets (million) $11.9 $34.3 $45.8 $45.5 Loan portfolio as a percent of total assets 75% 72% 71% 80% Short-term investments as a percent of total assets 6% 7% 14% 1% Cash and bank deposits as a percent of total assets 0% 10% 4% 6% • Fixed assets as a percent of total assets 18% 8% 8% 8% Source: BancoSol, 1992, 1993, 1994, 1995. As the asset base has grown, other inefficiencies have been corrected. While 18 percent of the bank's assets were fixed assets in 1992, since 1993 the proportion has settled around 8 percent. While still relatively high compared to the industry average of 4 percent,29 it should be noted that BancoSol invests much less in dollar amounts in its fixed assets than other banks, and that the high proportion is merely a reflection of the bank's relatively small asset base. Liabilities: The liability structure consists of client deposits, inter-bank loans and loans from development organizations, as well as other accounts payable. Since 1992, BancoSol has done a good job at replacing its expensive forms of debt with less costly alternatives. While loans from banks and other financial institutions comprised 49 percent of all debt in 1992, by 1995 this figure had shrunk to 18 percent (Table 9). Conversely, each year deposits have comprised an increasing proportion ofBancoSol's liabilities. While deposits only represented 46 percent of the bank's debt structure in 1992, by 1995 this figure had jumped to 79 percent. Table 9. BancoSol's Liability Structure 1992-1995 1992 1993 1994 1995 Annual growth in liabilities 250% 319% 36% -3% Total liabilities (million) $6.9 $28.9 $39.3 $38.3 Loans from banks and financial 49% 43% 21% 18% institution as a percent of total liabilities Deposits as a percent of total 46% 55% 76 79% liabilities Source: BancoSol, 1992, 1993, 1994, 1995. Equity: As a result of PRODEM's sizable initial investment, BancoSol's equity in 1992 represented 41 percent of its total assets (Table 10). Upon its inception, BancoSol was very well . capitalized, but was not efficiently using its equity investment to leverage debt. In the past few years, BancoSol has corrected this ratio somewhat as in 1994 the bank's equity represented only 14 percent of its total assets. 29 Ibid. SUSTAINABLE BANKING WITH THE POOR 16 Table 10. BancoSol's Equity Structure 1992-1995 1992 1993 1994 1995 Annual growth in equity 8% 10$ 20% 9% Total stockholder's equity (million) $4.9 $5.4 $6.5 $7.1 Equity as a percent of total assets 41% 16% 14% 16% Source: BancoSol, 1992, 1993, 1994, 1995. Profitability: BancoSol's founders intended for the bank to be operated profitably, in order to ensure sustainability as a financial institution. Moreover, as a majority shareholder, PRODEM has a vested interest in BancoSol's profitability as dividends from BancoSol's operations are used to support PRODEM's welfare-oriented programs. Table 11 illustrates that BancoSol became profitable in its second year of operation. An upward trend was exhibited in the bank's first three years of operation, with a minor dip coming in 1995. The net operating income available in 1995 was 44 percent less than that amassed in 1994. Nevertheless, in each full year of operation since its inception, the financial self-sufficiency ratio has been between 103 and 107 percent. • Table 11. Measuring BancoSol's Operational and Financial Self-Sufficiency 1992 1993 1994 1995 Financial Income $2,152,116 $7,568,596 $15,150,068 $12,161,846 Operating expenses $1,856,347 $4,018,613 $6,562,889 $7,396,458 Operational self-sufficiency 116% 188% 231% 164% Financial expenses $720,634 $3;298,616 $7,633,124 $4,036,773 Financial self-sufficiency 84% 103% .107% 106% Net operating income ($397,617) $231,522 $864,548 $600,307 In addition to measuring the financial and operational self-sufficiency of the institution, it is also important to measure the ratio of net income to total assets and the ratio of net income to total equity. In 1995 BancoSol's return on assets registered at 1.3 percent while its equity yielded a return of 8.5 percent (Table 12). According to the bank's General Manager, in 1994 BancoSol ranked as the third or fourth most profitable bank in Bolivia.30 Table 12. BancoSol's ROA, ROE, and SDI 1992-1995 1992 1993 1994 1995 Return on assets -3.7% 0.7% 1.9% 1.3% Return on equity -8.5% 4.3% 13.3% 8.5% Subsidy Dependence Index 35.3% 4.5% -1.8% 1.3% The final profitability measurement required is an application of the Subsidy Dependence Index (SDI). 31 The SDI is a ratio that measures the percentage increase in the average on-lending interest rate required to compensate for the elimination of subsidies to the financial institution in a given year. In the case of Banco Sol, a positive trend is clearly exhibited in the banks first few 30 Agafonoffand Wilkins, 1994, p. 13. 31 See Yaron, 1992. SUSTAINABLE BANKING WITH THE POOR 17 years of operation, as by June 1994 the institution had already achieved financial self-sufficiency in terms of the SDI formulation. It is often alleged that BancoSol is subsidized by its shareholders and development- oriented organizations. Its detractors contend that BancoSol is subsidized: (i) through the provision of loans at below commercial rates; (ii) through the provision of free technical assistance; and (iii) by shar~holders willing to accept negligible returns due to tµe social mission of the institution. When the bank was converted from PRODEM into BancoSol, there initially were some low interest loans from which BancoSol benefited. As of 1994, however, there was only one source of possibly concessional funding -- a USAID PL480 loan of US $1 million, lent at an interest rate of 8 percent. This loan represents less than 3 percent of the bank's total liabilities, and the current proportion of subsidized loan capital is even smaller. Similarly, subsidization through technical assistance has been negligible. USAID provided initial technical assistance to the value of about $15,000 towards thesfesign, formation, and implementation ofBancoSol's deposit facilities, and Calmeadow provided an undetermined amount for the development of the bank's asset transfer policy. In 1994, however, BancoSol's Board of Directors implemented a policy stating that the bank will pay for such technical services in the future. Finally, regarding the issue of negligible returns to shareholders, it should be noted that PRODEM (and other smaller shareholders) have no intention of allowing their capital to be undervalued, and expect future dividends to be substantial and distributed. It is not unusual for shareholders in a new venture to refrain from taking earnings out of a developing corporation. Management advised from the outset that dividends would only begin to be distributed in earnest after the bank's fifth year of operation. EFFICIENCY AND PRODUCTIVITY In determining institutional efficiency, it is important to measure administrative expenses incurred during operation against total income, the average outstanding loan portfolio, and the average total assets. The first indicator is a simple income-expense ratio as it reveals how much the institution spends to earn a dollar in financial income. The second indicator is an efficiency indicator which measures how much it costs BancoSol to lend a dollar. The third indicator simply measures expenses as a proportion of the institution's total assets (performing +fixed). f Table 13. Measuring BancoSol's Administrative Efficiency 1992 1993 1994 1995 ., Total administrative expenses $1,599,470 $3,544,059 $5,852,958 $7,484,297 Ad.min. expenses as a % of total financial income 74.3% 47.0% 38.9% 65.1% Ad.min. expenses as a % of avg. loan portfolio 22.1% 21.2% 20.5% 21.7% Ad.min. expenses as a % of avg. total assets 15.9% 15.4% 14.6% 16.4% SUSTAINABLE BANKING WITH THE POOR 18 In the case of BancoSol, Table 13 illustrates that the administrative expenses as a percentage of total financial income ratio jumped to 65 percent in 1995, after registering 39 percent and 47 percent the two previous years. Interestingly, the table indicates that neither the cost per dollar lent ratio, nor the ratio of administrative expenses to average total assets fluctuated significantly from 1992 to 1995. It is apparent, therefore, that the decline in administrative efficiency (as measured by the ratio of administrative expenses to total income) in 1995 is not due to a sharp rise in administrative expenses, (the increase from 1994 to 1995 in such expenses was smaller than the increases from 1992 to 1993 and from 1993 to 1994). Instead, the decline is due to the fact that the financial income collected in 1995 (US $10.9 million) was 39 percent lower than the figure amassed in 1994 (US $15.2 million). 32 A large percentage of BancoSol' s administrative expenses go toward paying staff salaries. In 1993 salaries comprised 60 percent of all operating expenses. 33 As a result, 41 percent of all financial income was devoted to staff salaries in 1993, and 12.5 cents per every dollar lent went to salaries as well. The average starting salary among BancoSol loan officers in 1995 was US $3,120~ which is 4.1 times the Bolivian GDP per capita. At the same time, credit officers at Banco Sol earn less than 50 percent of what credit officers at commercial banks earn, and BancoSol's salary structure is much more on par with NGOs and other organizations in the development field. Table 14. Measuring BancoSol's Staff Productivity 1992 1993 1994 1995 Number of outstanding loans / total staff 131 139 156 147 Number of outstanding ioans / field staff . 356 357 Value of outstanding loans/ total staff $44,898 $73,952 $82,487 $84,884 •Value of outstanding loans / field staff $122,222 $188,953 As Table 14 illustrates, BancoSol's staff members have reached a relatively high level of productivity. In 1994 the average staff member carried a loan burden of 156 loans worth over US $82,000, while the average burden per loan officer was 357 loans and almost US $189,000. Interestingly, the number of loans per staff member has not increased substantially since BancoSol converted into a formal financial institution. However, the value of outstanding loans per staff member has nearly doubled in the four year period, indicating that BancoSol is indeed increasing its average loan size as its clients· mature. 32 At the same time the financial expenses in 1994, (US $7 .6 million) were 89 percent higher than was the case in 1995 (US $4.0 million). Financial expenses represented 8.2 percent of the outstanding loan portfolio in 1992, 13.4 percent in 1993, and 23.5 percent in 1994, before dropping to 11.1 percent in 1995. 33 Christen, Rhyne, and Vogel, 1994, Appendix B. SUSTAINABLE BANKING WITH THE POOR 19 DISCUSSION: KEYS TO SUCCESS AND CHALLENGES FOR THE FUTURE By all accounts BancoSol has been extremely successful in its first four years of operation. This section will attempt to outline some of the factors behind BancoSol's success and will briefly highlight some important issues for the institution to confront in the future. KEYS TO SUCCESS Strong Demand for Microfinance Perhaps the single most important pre-requisite for the growth and sustainability of a micro-finance institution is the client demand for such services. By offering financial products that are attractive to lower income clientele, BancoSol has been able to grow rapidly, dwarfing other microfinance efforts in the country. While initially politicians, practitioners, and private sector investors were skeptical as to whether the poor could actually benefit from above market rate financial services, the growth of BancoSol has sent a clear message that it is access to credit, rather than the cost, that serves as a binding constraint for micro-entrepreneurs. Banco Sol's impressive portfolio growth rates in 1992, 1993, and 1994 point to the fact that micro- entrepreneurs are willing and eager to borrow at high costs when the financial product is tailored to their needs. Relationship with PRODEM The second factor that helped BancoSol down the road to profitability was that the bank had received a head start by acquiring a ready-made, established operation from PRODEM. Not only did the bank inherit a sizable loan portfolio, but also was able to benefit from five years of know-how, experience, and technical assistance. PRODEM had already developed a lending methodology· and target group, had already installed systems for repayment, financial accounting, reporting, and information management, and had already suffered through the initial financial growing pains associated with expansion. BancoSol would not have been able to achieve the same level of financial sustainability had it not inherited its nucleus from PRODEM, and its investors would have had to wait a great deal longer for any returns to materialize. Attention to Financial Viability r Another reason for the bank's success has been the uncompromising commercial approach adopted. BancoSol does not provide the poorest of the poor with short-term relief aid, but rather provides working capital to those micro-entrepreneurs who demonstrate a capacity to absorb debt and an ability to expand their businesses. It packages its loans within proper repayment incentives (i.e. the hope of a larger subsequent loan) and externalizes the costs of monitoring the loans by using solidarity groups to apply social pressure on the individual borrowers. Finally, the large spread between interest paid to depositors and interest earned from SUSTAINABLE BANKING WITH THE POOR 20 borrowers does not finance costly technical assistance or training -of its borrowers, but instead goes right back into covering the operational and financial costs of micro-finance. Focus on Savings Mobilization The fourth reason for the bank's success has been its ability to provide a number of savings products which meet the needs of their informal clientele, while simultaneously attracting additional larger sums of deposits through the issuance of NCDs. In just four years of operation, the savings portfolio has growth to the point that it currently comprises around 85 percent of the loan portfolio. While passbook savings are an important service for informal operators in search of greater financial discipline, the NCDs provide BancoSol with additional low-cost loan capital to scale up its mic:i;o-lending portfolio. Banking Professionalism Finally, BancoSol has been successful because of its sound and professional approach to • micro-credit delivery. BancoSol is very efficient at the loan officer level in terms of both recruiting new clients and in following-up with those clients having repayment problems. The institution has implemented systems that report arrears the evening they occur, which enables loan officers to be pro-active in tracking possible delinquent loans. Moreover, a high standard of professionalism pervades the institution from the managerial level down to the clerks. Staff are highly motivated, visionary, and idealistic, and deeply committed to serving the poor through access to commercial financial services. CHALLENGES FOR THE FUTURE While BancoSol has been highly successful in scaling up its micro-finance activity and serving Bolivian's underclass through increased access to financial services, there are a number of important issues which the institution would be wise to confront in the coming months. •Regulatory Environment The first issue relates to the restrictive financial sector regulatory environment in which BancoSol operates. In Bolivia, the Superintendent of Banks has set the target ratio of capital to risk-weighted assets at eight percent, in compliance with the Basel Committee's standards for the regulation of a financial system. The primary means of reducing risk in a portfolio is through the use of collateral -- as loans that are secured by home mortgages tend to have lower loss records. BancoSol, however, does not require traditional forms of collateral. Recognizing the composition of its client base, the institution does not ask its clients to offer traditional guarantees. Instead BancoSol uses the solidarity group guarantee and sequential lending mechanisms to ensure low default rates. While repayment rates are impressive on the institution level, the Superintendent of Banks still considers such loans to be secured only by personal guarantees. Since the regulations SUSTAINABLE BANKING WITH THE POOR 21 limit the amoW1t of personal guaranteed loans at twice the value of the institution's equity capital, leverage is difficult to obtain. By prioritizing collateral considerations over repayment patterns in valuing the quality of a loan portfolio, the regulatory authorities in Bolivia have made it difficult for BancoSol to lower its capital to risk-weighted assets ratio and have restricted the institution's capacity for further growth. 34 Target Population The second issue for BancoSol to confront in the future is one that it has more direct control over. ·one of the only eligibility criteria for a BancoSol loan is that the client be unable to access financial services from any other formal financial institution. In Bolivia not only is the informal sector Wlder-served by the Bolivian financial system, but the middle-class of the economy is frequently denied access as well. Over the past few years, while the bank has been able to successfully maintain its orientation as a financial institution for the poor, more economically sophisticated proprietors have comprised an increasing percentage ofBancoSol's client-base. Not only are BancoSol clients graduating to higher levels of business activity, but it appears as though the bank is starting to attract new clients from the informal business sector who are not "poor" but who are Wiable to obtain financial accommodation from traditional banks. Whether or not BancoSol opts to service a more heterogeneous clientele is one of the future challenges of the institution. BancoSol understood from the outset that building a financial institution upon the pillars of servicing the poor on the one hand, and earning a profit on the other would provide a constant source of friction. It is clear, however, that the bank does not necessarily have to chose between these two goals. Rather than splitting the bank into two institutions -- one with the responsibility of servicing the poor and the other taking on the middle level commercial banking activity which is also W1der-served in Bolivia -- BancoSol may departmentalize the existing bank. Once a specialized unit with different procedures and capacities tailored to handling larger loans is established, the bank can continue operating with both of these goals in mind. While the majority of clients would continue to be poor, informal operators, the specialized unit could take some pressure off the rest of the bank in helping it achieve the necessary profitability levels. Managing Growth Up to this point, BancoSol has managed its growth remarkably, benefiting from improved outreach, sustainability and portfolio efficiency. However, several dangers of growth exist.35 First, arrears and losses can become more prevalent as the risk composition of the portfolio changes. In addition, monitoring and evaluation costs may rise as a relatively unknown clientele comprises most of the portfolio. Another challenge arises from the changing corporate culture that necessarily accompanies a rapidly growing institution. Finally, the possibility of drifting 34 Krutzfeldt, 1995, p. 3. 35 Gonzalez-Vega,. C. et. al. 1996. SUSTAINABLE BANKING WITII TIIE POOR 22 away from the objective of serving low income clients may occur. Each of these problems associated with growth can affect the future path of BancoSol. In its relatively short history, BancoSol has achieved success both in its outreach and its an sustainability: a feat few microfinance institutions can claim. Through innovative approach to privatization, it has survived the conversion from an NGO to a commercial bank. One of the most impressive achievements ofBancoSol has been its banking professionalism, with much attention given to product diversification, rigorous accounting, and financial viability. Its dedication to serving the poor in a sustainable fashion is a positive indicator of the futur~ of the institution. SUSTAINABLE BANKING WITH TIIE POOR 23 BIBLIOGRAPHY Agafonoff, Alex and D. Wilkins. 1994. "Developing Financial Instruments to Support Poverty- Oriented Financial Institutions A Case Study: Banco Solidario S.A." World Bank, Washington, D.C. Banco Solidario, S.A. 1992, 1993, 1994 and 1995. "BancoSol Annual Report." La Paz, Bolivia. Campero, Cecilia. 1995. "Banco Solidario S.A.: Microenterprise Financing on a Commercial Scale in Bolivia." BancoSol, La Paz, Bolivia. Christen, Robert, E. Rhyne and R. Vogel. 1994. "Maximizing the Outreach ofMicroenterprise Finance; The Emerging Les_ sons of Successful Programs." IMCC, Washington, D.C. Drake, Deborah and M. Otero. 1992. "Alchemists for the Poor: NGOs as Financial Institutions." ACCION International, Boston. Glosser, Amy. 1994. "The Creation ofBancoSol in Bolivia." (in) The New World of Microenterprise Finance. (ed.) Otero, M. and E. Rhyne. West Hartford, Conn.: Kumarian Press, Inc. Gonzalez-Vega, C. et. al 1996. "BancoSol: The Challenge of Growth for Microfmance Organizations" Economics and Sociology Occasional Paper No. 2332, Columbus, Ohio. Krutzfeldt, Hermann. 1996. "The Experience ofBancoSol." (in) "An Introduction to Key Issues in Micro-fmance: Supervision and Regulation Financing Sources Expansion ofMicro- finance Institutions." The Micro-Finance Network, Washington, D.C. Loubiere, Jacques.· 1995. "Supervision and Regulation of Micro-finance Institutions: The Bolivian Experience." ACCION International, Washington, D.C. Mosley, Paul. 1993. "Metamorphosis from NGO to Commercial Banlc The Case ofBancoSol in Bolivia." Working Paper no. 4, University of Reading, Reading. Paxton, Julia. 1997. "A Worldwide Inventory ofMicrofinance Institutions" The World Bank, Sustainability Banking with the Poor, Washington, D.C. World Bank. 1996. World Development Report 1996. Oxford University Press: Washington, D.C. Yaron, Jacob. 1992. "Assessing Development Finance Institutions: A Public Interest Analysis." World Bank Discussion Paper no. 174, Washington, D.C. SUSTAINABLE BANKING WITH THE POOR 24 ANNEX I Summary Table of Outreach and Performance Indicators Percentage of female clients Deposits outstanding in US$ $30.5 million Average outstanding deposit denominated in US$ $225 Average outstanding US$ deposit as percentage of GNP per capita 29percent Average outstanding deposits denominated in Bolivianos (in US$) $19 Average outstanding Boliviano deposit as percent of GNP per capita 2.5percent Loan portfolio outstanding in US$ $36.5 million Average growth of outstanding portfolio over last three years 25percent Average outstanding loan size in US$ $579 Average outstanding loan size as percentage of GNP per capita 75percent Range of loan distribution (maximum - minimum) $50 - $5,000 Average loan term 6.5 months Nominal interest rate on loans 48percent Volume of deposits/ volume of loans outstanding 0.84 Loan loss provision ratio (percentage of ALP) 2.3percent Operational self-sufficiency 164percent Financial self-sufficiency 106percent Subsidy Dependence Index 1.3percent Adjusted Return on assets, ROA · 1.3percent Adjusted Return on equity, ROE 8.5percent Number of outstanding loans per staff 156 '\, Number of outstanding loans per loan officer 357 Outstanding volume of loans per staff $82,000 Outstanding volume of loans per loan officer $189,000 SUSTAINABLE BANKING WITH THE POOR 25 Defmitions: Percentage of arrears: amount of delinquent principal payments as a percent of outstanding principal portfolio Operating costs: personnel expenses, other administrative expenses, including depreciation of fixed assets. Operating costs exclude financing costs and loan loss provisions. Operating income: interest and fee income from loans and from other finance-related services (same as financial income above). Operational self-sufficiency = Operating income / sum of operating costs and loan loss provisions. Financial self-sufficiency: operating income / (operating costs + loan loss provisions + financing costs + inflation adjustment+ subsidized cost of funds adjustment+ in-kind donation adjustment) SDI: See Yaron, J., "Assessing Development Finance Institutions, A Public Interest Analysis" Policy Research Working Paper No. 174, World Bank, 1992. SDI calculated using the equation: (A(m-c)+[E*m)-p]+k) / (LP*i). • ROA = Operating profit/ average total assets for the period. ROE = Operating profit / average equity for the period. SUSTAINABLE BANKING WITH THE POOR 26 Appendix SUSTAINABLE BANKING WITH THE POOR - LIST OF CASE STUDIES I. BENIN - Federation des caisses d'epargne et de credit agricole mutuel(in French). Cecile Fruman. Avril 1997. 2. BENIN, FECECAM. Cecile Fruman. June 1997. 3. Bolivia: Assessing the Performance of Banco Solidaro. Peter Fidler. August 1998. 4. Burkina Faso: Le Projet de promotion du petit credit rural - PPPCR Julia Paxton. August 1997. 5. Costa Rica: FINCA Village Banking. Julia Paxton, March 1998. 6. Egypt, Alexandria Business Association. Tom Dichter. December 1997. 7. Guatemala CARE Village Banks Project Julia Paxton. October 1997. 8. Guatemala CARE -Proyecto de Banco Comulales(in Spanish). Julia Paxton, Octubre 1997. 9. Indonesia-Bank Rakyat Idonesia (BRI) Unit Desa 1970-1996. Stephanie Charitonenko, Richard H. Patten, and Jacob Yaron. June 1998 10. Kenya KREP. Stephanie Charitonenko. August 1998. 11. Mali CVECA - Pays Dogon (in French). Cecile Fruman. Avril 1998. 12. Mali Self-Managed Village Savings and Loans Banks (CVECA - Pays Dogon). Cecile Fruman. May 1998. 13. Niger Credit Unions (Caisses Populaires d'Epargne et de Credit). Korotoumou Ouattara, Mayada Baydas and Julia Paxton. April 1998. 14. Philippines-TSPL TomDichter. August 1998. 15. South Africa: Get Ahead Foundation. Craig Chruchill. January 1998. 16. Thailand BAAC- The Thai Bank/or Agriculture and Agricultural Cooperatives. Tetsutaro Muraki, . Leila Webster, and Jacob Yaron. April 1998. 17. Zimbabwe, Zambuko Trust Peter Fidler and Mohini Malhotra. April 1997. Cases Available on the Web at: http://www-esd.worldbank.org/html/esd/agr/sbp/ SUSTAINABLE BANKING WITH THE POOR 27 ?1· ,, Sustainable Banking with the Poor (S.BP) is a collaborative effort of ASTHR Gender and Poverty Team ana AGRPW Rural Finance at the World Bank, funded by the World Bank, the Royal M111istry of Foreign Affairs of Norway, the Swiss Development Corporation, and t~e For~ foundation. The study aims al improvingith;·ability of donotlgovernments and practitioners to design and implement policieflmdprogroms to build • sustainable financial institutions that effeaively r~och th, poor: The SBP task managers are Lynn Bennett (~Stff ~l and:Jacob Yoron (~GRPW); the technical manager is Carlos Cuefas ((GltPW}, a_nd the administrative assistant is louraGo'inez (ASTH.R). ,:_.,.._ • -·c ,> • • • /•'' The World Bonk ASTHR/AGRPW_·, 1818 .H Street, N.W. WoshingfoQ, D.C. 20433 Phone (202) 458-0277 • fox (202) 522-1662 Internet: CCuevos@WORLDBANK.ORG or LGomez@WORLDBANK.ORG