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Bolivia: an economy (almost) without state owned banks. Juan Antonio Morales Central Bank of Bolivia February 2005. Outline. Preliminaries A short history of SOB The transition The current situation. Preliminaries. At the end of the 1980s Bolivia had: 2 state owned “development” banks

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bolivia an economy almost without state owned banks

Bolivia: an economy (almost) without state owned banks

Juan Antonio Morales

Central Bank of Bolivia

February 2005

outline
Outline
  • Preliminaries
  • A short history of SOB
  • The transition
  • The current situation
preliminaries
Preliminaries

At the end of the 1980s Bolivia had:

2 state owned “development” banks

(SODB)

1 “development bank” within the Central

Bank (GD)

1 state owned commercial bank

slide4
The 2 SODB were closed in 1991.
  • GD was closed in 1995 and its assets and liabilities transferred to Nacional Financiera Boliviana (NAFIBO), an institution with private and public capital.
  • The state owned commercial bank was liquidated in 1994.
  • The SO Banco de la Vivienda had been closed in 1987 because of severe financial difficulties.
slide5
The SODB
  • high concentration of its loans in few creditors
  • were designed to assist small proceducers in the agricultural and mining sectors, but the targeting was widely missed, the SODB were inclined to favor large borrowers
  • combined financial activities with commercial activities
  • for a long period high geographical concentration
  • interest rates charged to their clients were slightly below the ones charged by the private banks
  • SODB customers were also able to borrow from the private banks
slide6
yet, borrowers preferred to borrow from the SODB because of:
      • loans with longer maturities
      • poor enforcement of creditors’ rights
      • the government, lobbied by debtors, could pressure the SODB for debt cancellations or for long extensions of maturities, in the reprogramming excercises
      • in addition, the SODB would not dare to recover collateral.
slide7
The poor performance of the SODB can

be explained by:

  • the political view
  • more importantly, the agency view

the SODB were in fact multipurpose organizations

with multiple stakeholders.

slide8
Gerencia de Desarrollo
  • As said before, was a bank within the Central Bank.
  • Two tier bank, on the asset and liability sides
      • mostly financed with loans of the IFIs to the government of Bolivia
      • loaned only to banks, with no direct relationship with the final users of credits.
slide9
Rules for the use of the GD credits were strenghtened

overtime:

  • Credits were granted in auctions, which mitigated interest rate subsidies
  • Elegibility criteria were tightened to avoid adverse selection

By mid 1990s, GD had become only a small player in the

financial market.

The main perceived advantage of its credits was that they

were long-term.

But borrowers, in a era of abundant capital, underestimated

refinancing risks and preferred to borrow from the private

banks’ own resources.

slide10
The only state owned commercial bank

(Banco del Estado) was:

  • in retail banking
  • had many branches in isolated areas, that otherwise would not have had banking services
  • its role in the payments system, especially regarding treasury operations, was crucial
  • but Banco del Estado was plagued, in a more subdued fashion, by the same political and agency problems of the SOBD

Its loan portfolio was particularly problematic

slide11
The financial indicatorsof the SOB were

very poor:

  • in particular, the NPLs were very large
  • the SOB had very high administrative costs per unit of their oustanding loan portfolio
  • the large losses of the SOB represented a threat to macroeconomic stability
slide12
More importantly, the SOB distorted the financial market with their leniency toward delinquent borrowers. This represented unfair competition that inhibited the development of private banks. There was thus a negative externality

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

There was also a significant degree of loan diversion.

The operations of GD were interfered by monetary policy considerations.

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

slide13
The transition
  • For fiscal, efficiency and equity reasons, the SOB were closed under the advice (and pressure) of the international organizations.
  • The liquidation of the SOB did not face major opposition, in part because it coincided with the big inflow of capital to Bolivia (and the region) of the early 1990s.
  • The capital inflow mainly took the form of a big increase in bank deposits.
slide14
It seemed at first that the private banks could easily take the relay of the SOB.
  • The level of creditto the private sector increased very rapidly until 1998, after the closing of the SOB, but the casual link is hard to establish.
  • True, there was the problem of long-term capital finance, but it was believed that an equity market will develop over time. It did not happen.
slide15
The closure of the SOB was needed for the development of the banking system, but by itself did not improve the performance of the banking system as a whole. More was needed.
  • In the mid 1990s, Bolivia suffered a banking crisis.
  • The same factors that contributed to the demise of the SOB

seemed at play.

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

slide16
For a while there were second thoughts on the

liquidation of Banco del Estado.

  • Rural an isolated areas, even small towns, were left without banking services. This had high social costs.
  • After the closure of Banco del Estado a weak private bank was contracted to provide the services. This bank was intervened for liquidation in 1997.
slide17
Only when the banking services were outsourced by the Central Bank and the Ministry of Finance in an auction process, with strict elegibility criteria for participant banks, and a detailed contract, things improved.

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

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

slide18
Also, the credit needs of small farmers and merchants are now well taken care by the extraordinary expansion of the microfinance institutions.

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

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

slide19
The current situation

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

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

slide20
With the onset of the regional crisis in 1998-99, banks have sharply reduced their lending to the private sector.
  • This reduction in credit, added to the lack of long-term finance, has led to advocate for the resurrection of SOB.
  • The lobbies, of many private sectors, that favor SOB are very active.
slide21
In the revisionist mood in which is Bolivia after October 2003, the Ministry for Economic Development has prepared a plan to recreate a state-owned development bank.
  • However, there is significant opposition within Bolivia and in the international financial community to this project.
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