Bolivia: an economy (almost) without state owned banks

Juan Antonio MoralesJuan Antonio Morales

Central Bank of BoliviaCentral Bank of Bolivia

February 2005February 2005

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Outline

PreliminariesPreliminaries A short history of SOBA short history of SOB The transitionThe transition The current situationThe current situation

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Preliminaries

At the end of the 1980s Bolivia had:At the end of the 1980s Bolivia had:

2 state owned “development” banks2 state owned “development” banks

(SODB)(SODB)

1 “development bank” within the Central1 “development bank” within the Central

Bank (GD)Bank (GD)

1 state owned commercial bank1 state owned commercial bank

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The 2 SODB were closed in 1991.The 2 SODB were closed in 1991. GD was closed in 1995 and its assets and GD was closed in 1995 and its assets and

liabilities transferred to Nacional Financiera liabilities transferred to Nacional Financiera Boliviana (NAFIBO), an institution with private Boliviana (NAFIBO), an institution with private and public capital. and public capital.

The state owned commercial bank was liquidated The state owned commercial bank was liquidated in 1994.in 1994.

The SO Banco de la Vivienda had been closed in The SO Banco de la Vivienda had been closed in 1987 because of severe financial difficulties.1987 because of severe financial difficulties.

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The SODBThe SODB

high concentration of its loans in few creditorshigh concentration of its loans in few creditors were designed to assist small proceducers in the were designed to assist small proceducers in the

agricultural and mining sectors, but the targeting was agricultural and mining sectors, but the targeting was widely missed, the SODB were inclined to favor large widely missed, the SODB were inclined to favor large borrowersborrowers

combined financial activities with commercial activitiescombined financial activities with commercial activities forfor a long a long period high period high geographical concentrationgeographical concentration interest rates charged to their clients were slightly below interest rates charged to their clients were slightly below

the ones charged by the private banks the ones charged by the private banks SODB customers were also able to borrow from the SODB customers were also able to borrow from the

private banksprivate banks

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yet, borrowers preferred to borrow from the yet, borrowers preferred to borrow from the SODB because of:SODB because of:

loans with longer maturitiesloans with longer maturities poor enforcement of creditors’ rights poor enforcement of creditors’ rights the government, lobbied by debtors, could pressure the government, lobbied by debtors, could pressure

the SODB for debt cancellations or for long the SODB for debt cancellations or for long extensions of maturities, in the reprogramming extensions of maturities, in the reprogramming excercisesexcercises

in addition, the SODB would not dare to recover in addition, the SODB would not dare to recover

collateral.collateral.

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The poor performance of the SODB can The poor performance of the SODB can

be explained by:be explained by:

the political viewthe political view more importantly, the agency viewmore importantly, the agency view

the SODB were in fact multipurpose organizationsthe SODB were in fact multipurpose organizations

with multiple stakeholders.with multiple stakeholders.

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Gerencia de DesarrolloGerencia de Desarrollo

As said before, was a bank within the Central As said before, was a bank within the Central Bank.Bank.

Two tier bank, on the asset and liability sidesTwo tier bank, on the asset and liability sides mostly financed with loans of the IFIs to the mostly financed with loans of the IFIs to the

government of Boliviagovernment of Bolivia loaned only to banks, with no direct relationship loaned only to banks, with no direct relationship

with the final users of credits.with the final users of credits.

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Rules for the use of the GD credits were strenghtenedRules for the use of the GD credits were strenghtenedovertime:overtime: Credits were granted in auctions, which mitigated interest rate Credits were granted in auctions, which mitigated interest rate

subsidies subsidies Elegibility criteria were tightened to avoid adverse selectionElegibility criteria were tightened to avoid adverse selection

By mid 1990s, GD had become only a small player in theBy mid 1990s, GD had become only a small player in thefinancial market.financial market.

The main perceived advantage of its credits was that theyThe main perceived advantage of its credits was that theywere long-term.were long-term.

But borrowers, in a era of abundant capital, underestimatedBut borrowers, in a era of abundant capital, underestimatedrefinancing risks and preferred to borrow from the privaterefinancing risks and preferred to borrow from the private

banks’ own resources.banks’ own resources.

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The only state owned commercial bankThe only state owned commercial bank(Banco del Estado) was:(Banco del Estado) was:

in retail bankingin retail banking had many branches in isolated areas, that otherwise would had many branches in isolated areas, that otherwise would

not have had banking servicesnot have had banking services its role in the payments system, especially regarding treasury its role in the payments system, especially regarding treasury

operations, was crucialoperations, was crucial but but Banco del Estado was plagued, in a more subdued Banco del Estado was plagued, in a more subdued

fashion, by the same political and agency problems of the fashion, by the same political and agency problems of the SOBDSOBDIts loan portfolio was particularly problematicIts loan portfolio was particularly problematic

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The The financial indicatorsfinancial indicators of the SOB wereof the SOB were

very poor:very poor:

in particular, the NPLs were very large in particular, the NPLs were very large the SOB had very high administrative costs per the SOB had very high administrative costs per

unit of their oustanding loan portfoliounit of their oustanding loan portfolio the large losses of the SOB represented a threat to the large losses of the SOB represented a threat to

macroeconomic stabilitymacroeconomic stability

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More importantly, the SOB distorted the financial market with More importantly, the SOB distorted the financial market with their leniency toward delinquent borrowers. This represented their leniency toward delinquent borrowers. This represented unfair competition that inhibited the development of private unfair competition that inhibited the development of private banks. There was thus a negative externalitybanks. There was thus a negative externality

Loans from the SOB were considered, to a large extent, Loans from the SOB were considered, to a large extent, “grants”. This weakened market discipline.“grants”. This weakened market discipline.

There was also a significant degree of loan diversion.There was also a significant degree of loan diversion.

The operations of GD were interfered by monetary policy The operations of GD were interfered by monetary policy considerations.considerations.

In turn, these operations impaired the effectiveness of monetary In turn, these operations impaired the effectiveness of monetary policy.policy.

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The transitionThe transition

For fiscal, efficiency and equity reasons, the SOB For fiscal, efficiency and equity reasons, the SOB were closed under the advice (and pressure) of the were closed under the advice (and pressure) of the international organizations.international organizations.

The liquidation of the SOB did not face major The liquidation of the SOB did not face major opposition, in part because it coincided with the opposition, in part because it coincided with the big inflow of capital to Bolivia (and the region) of big inflow of capital to Bolivia (and the region) of the early 1990s.the early 1990s.

The capital inflow mainly took the form of a big The capital inflow mainly took the form of a big increase in bank deposits. increase in bank deposits.

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It seemed at first that the private banks could It seemed at first that the private banks could easily take the relay of the SOB. easily take the relay of the SOB.

The The level of creditlevel of credit to the private sector increased to the private sector increased very rapidly until 1998, after the closing of the very rapidly until 1998, after the closing of the SOB, but the casual link is hard to establish.SOB, but the casual link is hard to establish.

True, there was the problem of long-term capital True, there was the problem of long-term capital finance, but it was believed that an equity market finance, but it was believed that an equity market will develop over time. It did not happen.will develop over time. It did not happen.

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The closure of the SOB was needed for the The closure of the SOB was needed for the development of the banking system, but by itself did development of the banking system, but by itself did not improve the performance of the banking system not improve the performance of the banking system as a whole. More was needed.as a whole. More was needed.

In the mid 1990s, Bolivia suffered a banking crisis.In the mid 1990s, Bolivia suffered a banking crisis. The same factors that contributed to the demise of the SOBThe same factors that contributed to the demise of the SOB seemed at play.seemed at play.

In retrospect, better bank regulations and supervision In retrospect, better bank regulations and supervision of private banks were needed of private banks were needed beforebefore the closure of the closure of SOB.SOB.

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For a while there were second thoughts on theFor a while there were second thoughts on the

liquidation of Banco del Estado.liquidation of Banco del Estado.

Rural an isolated areas, even small towns, were left Rural an isolated areas, even small towns, were left without banking services. This had high social without banking services. This had high social costs.costs.

After the closure of Banco del Estado a weak After the closure of Banco del Estado a weak private bank was contracted to provide the services. private bank was contracted to provide the services. This bank was intervened for liquidation in 1997.This bank was intervened for liquidation in 1997.

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Only when the banking services were outsourced by Only when the banking services were outsourced by the Central Bank and the Ministry of Finance in an the Central Bank and the Ministry of Finance in an auction process, with strict elegibility criteria for auction process, with strict elegibility criteria for participant banks, and a detailed contract, things participant banks, and a detailed contract, things improved.improved.

The country is now The country is now better servedbetter served than before the than before the closure of Banco del Estado. The network of closure of Banco del Estado. The network of branches is now more extense, but the learning branches is now more extense, but the learning process took time and a significant amount of trial.process took time and a significant amount of trial.

Our experience proves that if one can write a good Our experience proves that if one can write a good contract, there is no need of a SOB to serve distant contract, there is no need of a SOB to serve distant and rural populations.and rural populations.

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Also, the credit needs of small farmers and merchants are Also, the credit needs of small farmers and merchants are now well taken care by the extraordinary expansion of the now well taken care by the extraordinary expansion of the microfinance institutions.microfinance institutions.

FONDESIF, created initially as a fund to recapitalize FONDESIF, created initially as a fund to recapitalize banks in trouble, has shifted its operations to the banks in trouble, has shifted its operations to the refinancing of microfinance institutions. refinancing of microfinance institutions.

It is evolving into a second tier SOB to refinance It is evolving into a second tier SOB to refinance microfinance institutions. microfinance institutions.

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The current situationThe current situation

The main remaining problem is the lack of long-The main remaining problem is the lack of long-term capital finance.term capital finance.

NAFIBO, to which the assets and liabilities of the NAFIBO, to which the assets and liabilities of the Gerencia de Desarrollo, were to be transferred, has Gerencia de Desarrollo, were to be transferred, has had a very slow take-off.had a very slow take-off.

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With the onset of the regional crisis in 1998-99, With the onset of the regional crisis in 1998-99, banks have sharply reduced their lending to the banks have sharply reduced their lending to the private sector.private sector.

This reduction in credit, added to the lack of long-This reduction in credit, added to the lack of long-term finance, has led to advocate for the term finance, has led to advocate for the resurrection of SOB.resurrection of SOB.

The lobbies, of many private sectors, that favor The lobbies, of many private sectors, that favor SOB are very active.SOB are very active.

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In the revisionist mood in which is Bolivia after In the revisionist mood in which is Bolivia after October 2003, the Ministry for Economic October 2003, the Ministry for Economic Development has prepared a plan to recreate a Development has prepared a plan to recreate a state-owned development bank.state-owned development bank.

However, there is significant opposition within However, there is significant opposition within Bolivia and in the international financial Bolivia and in the international financial community to this project.community to this project.

Attachment

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Geographical Distribution of Loans of Banco Agrícola

(In percent)

1972-73 1986-90

Eastern Lowlands 86.8 29.3Valleys 8.3 48.3Highlands 4.9 22.4

Total 100.0 100.0

Banco Agrícola loans amounted to 1.9% of GDP in 1972-73; to 1.4% of GDP in 1986-90

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Financial Indicators at the date of closure(In percent)

NPL/L ROEBanco Agrícola 61.7 9.8Banco Minero 75.3 -15.3Banco del Estado 43 0.4Accumulated losses of GD U$77.6 millions

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Banking system(U$ millions)

0500

1,0001,5002,000

2,5003,0003,5004,0004,500

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004Lo

ans

and

depo

sits

Deposits Loans

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SIZE OF THE BRANCH NETWORK

Number of localitiesSOB Banco del Estado 1994 45Private Banco BIDESA 1996 33Outsourced Private Banks 2004 50

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