Commercialization and Crisis in Bolivian Microfinance

This paper describes the Bolivian microfinance industry in the light of the commercialization that it experienced in the 1990s and the crisis that followed. It discusses the pre-commercialization financial reforms as well as the stakeholders, including NGOs who transformed into commercial institutions, commercial lenders and consumer lenders. It also covers the rise, growth and impact of consumer credit, and the crisis and stakeholder responses.

The study states that commercialization led to competition, which:

• Lowered prices, made service quicker and easier, introduced new products and brought a shift towards individual lending;
• Led to over lending by MFIs, suggesting the relevance of credit bureaus and industry-wide lending practices;
• Made mission driven organizations lose clients in the upper end market, leading to new strategies for making small loans profitable;
• Suggested the importance of the industry’s public image, the need to define good lending practices and to engage with the mainstream.

The paper concludes that:

• Commercialization process largely followed the sole path of NGOs transforming into financial institutions. Other models, such as downscaling of banks and creation of new commercial entities, could be relevant in some countries;
• Policy makers and lenders could learn from the effects commercialization had on service quality, methodology, and new product development;
• Crisis manifests the collective financial behavior and the risk the system could reveal in an economic downturn;
• Underlying the poor judgement shown by the Bolivian lenders are the motivations and conceptual paradigms that exist across many countries.