BOLIVARIAN POLICIES UNDERCUT BOLIVIA'S

UNCLAS SECTION 01 OF 03 LA PAZ 000160

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/AND
TREASURY FOR SGOOCH
MCC FOR AKIRSCHENBAUM

E.O. 12958: N/A
TAGS: ECON EFIN EAID BL
SUBJECT: BOLIVARIAN POLICIES UNDERCUT BOLIVIA'S
MICROFINANCE INDUSTRY

REF: A. LA PAZ 3402

B. LA PAZ 3463

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Summary
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1. (SBU) The GOB issued a supreme decree on January 1 to
establish a state development bank to provide subsidized,
low-rate credits to small businesses associated with social
organizations. Although according to the decree, the
development bank will be a second-tier institution, rather
than a first-tier bank that would be in direct competition
with the private sector, GOB officials and the regulations
governing the bank indicate that it may actually be a
first-tier bank in disguise. World Bank and Inter-American
Development Bank representatives told Econoff on January 17
that, although they are concerned about the potential
negative impact of the bank, they plan to support it, arguing
that through engagement they will be able to shape the bank
in a positive way to minimize harm. The International
Monetary Fund (IMF) representative suggested that Venezuela's
purchase of a prominent Bolivian microfinance institution,
Prodem, (ref B) would likely damage the sector more than the
development bank. Representatives from Bolivia's world-model
microfinance sector told Emboffs on January 19 that they hope
the government and Prodem lending programs reach a different
market than the one they are serving so that the impact will
be limited, but fear that these state-financed programs may
put downward pressure on interest rates and erode repayment
culture. They are concerned that the government may
implement interest rate caps and impose directed lending
requirements, as the Venezuelan government has done.
However, for now, the government's plans for the development
bank and Prodem's plans are unclear. End summary.

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GOB Decree Establishes State Development Bank
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2. (SBU) The GOB issued a supreme decree on January 1 to
establish a state development bank, which is the centerpiece
of its five-year national development plan emitted in June

2006. Previous government statements indicated that the
development bank will provide low-rate credits to micro,
small, and medium enterprises affiliated with social
organizations and syndicates (ref A). According to the
decree, an existing state lending institution, the Bolivian
National Financier (NAFIBO),will be transformed into the
Productive Development Bank (BDP),a second-tier lending
entity, by expanding NAFIBO's capacity through regulatory
changes. During the coming year, the BDP will conduct audits
of another state lending entity, the Financial System
Development Fund (FONDESIF),and certain FONDESIF assets will
be transferred to the BDP, with the eventual goal of phasing
out FONDESIF.


3. (SBU) Although according to the decree the BDP will be a
second-tier institution, meaning that it will lend funds to
existing financial institutions to on-lend to clients rather
than lending directly to clients in unfair, subsidized
competition with private sector financial institutions, GOB
officials and the regulations governing the BDP indicate that
it may be a wolf disguised in sheep's clothing. A government
official indicated in a meeting with USAID that the BDP would
identify loan recipients by name, which if true, would mean
that the first-tier banks would have limited control over
credit risk assessment of clients. BDP regulations allow for
repayment risk to be shifted from the first-tier banks to the

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BDP in loan contracts with clients, supporting the theory
that the BDP will actually be controlling the lending funds
and making decisions regarding how to disburse them.

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IFIs Concerned About Bank, But Plan to Support It
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4. (SBU) In a meeting on January 17, representatives from the
Andean Development Corporation (CAF),Inter-American
Development Bank (IDB),and the World Bank told Econoff that
their institutions plan to support the BDP through either
lending or technical assistance. While the CAF
representative seemed supportive of the GOB's approach, the
IDB and World Bank representatives expressed concern about
the potential negative impact of the BDP on Bolivia's
world-class microfinance industry, but argued that by
engaging the GOB on the development bank, they would be able
to shape the bank in a positive way, whereas if they did not
engage, the government may implement a poorly-designed
development bank that would do even greater harm to the
private sector. The International Financial Institution
(IFI) representatives agreed that the BDP would likely be
more a subsidy transfer mechanism than a lending entity and
anticipated that repayment rates would be low. They also
agreed that the BDP's impact on the private sector would
depend on both the design and the size of the BDP's lending
program. Press reports indicated that the BDP has USD 30
million of lending capital, while government officials have
indicated in meetings with Emboffs that the bank has between
USD 40 and USD 175 million, with up to USD 70 million from
Venezuela. The IFI representatives were unclear how much
Venezuelan funding is mere talk and how much has actually
materialized, as Venezuela does not participate in donor
coordination meetings.


5. (SBU) The International Monetary Fund (IMF) representative
expressed reservations about the GOB's ability to implement
the BDP, and argued that the bigger threat to the sector is
Venezuelan state-owned Industrial Bank's recent purchase of
Prodem, one of the largest and most important Bolivian
microfinance institutions (ref B). He feared that Venezuelan
financing of Prodem could reach levels equivalent to the
total amount of lending by the entire Bolivian microfinance
sector last year, which would have an enormous impact on the
sector if Prodem offered subsidized credit and harmed
Bolivia's repayment culture.

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Microfinance NGOs Concerned About Bank and Venezuela
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6. (SBU) Bolivia's microfinance sector has developed into a
world model, sustainable industry during the past two decades
with considerable support from USAID in lending capital and
technical assistance. The industry now serves approximately
540,000 clients, has an outstanding portfolio of
approximately USD 700 million, and generally offers lower
interest rates than microfinance institutions in the rest of
Latin America. In a round table discussion at USAID on
January 19, microfinance representatives explained that about
80 percent of their loans are for commerce and services, with
only about 20 percent going to production. The government
aims to focus on providing credit to production, particularly
in rural areas which are less saturated, so the regulated
microfinance network hopes that the government will reach a
different market than the one they serve -- one that would
not likely be profitable for nor compete with the private
financial sector. The General Manager of BancoSol calculated

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that the BDP should have USD 150 million in capital, based on
the combination of NAFIBO, FONDESIF, and regional fund
capital, which could be leveraged ten times for a total
lending capacity of USD 1.5 billion.


7. (SBU) The microfinance representatives' two main concerns
regarding the development bank and the Venezuelan purchase of
Prodem are anticipated downward pressure on interest rates
and possible damage to Bolivia's good repayment culture.
Average interest rates are around 20 percent currently, with
a focus on short-term working capital loans. The
representatives feared possible GOB attempts to impose
single-digit lending ceilings or to impose GOB-directed,
sectorial lending requirements by decree, as the Venezuelan
government has done. However, for now, the government's
plans for the BDP and Prodem's plans are unclear. The
representatives explained that the government is divided and
does not have a clear policy and that they do not expect to
have a more certain idea of the future until after the
Constituent Assembly terminates in August 2007. The
microfinance network is engaging the government in attempts
to shape the BDP in as positive a way as possible, but noted
that it is difficult to hold technical conversations with the
GOB, which is focused on political results.

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Comment
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8. (SBU) The impact of the state development bank and
Venezuelan-owned Prodem on the private microfinance sector
will depend on the design and size of the bank's and Prodem's
lending programs. We will continue to monitor this issue
closely. End comment.
URS