bancosol and microfinance in bolivia · 2016-04-28 · bancosol and microfinance in bolivia 516-005...

N9-516-005 F E B R U A R Y 2 3 , 2 0 1 6

Professor Rajiv Lal and Case Researcher Annelena Lobb (Case Research & Writing Group) prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2016 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

R A J I V L A L

A N N E L E N A L O B B

BancoSol and Microfinance in Bolivia

Our mission is to provide opportunities for a better future to low-income sectors in Bolivia through access to financial services of the highest quality. That is why we have decided not to move upwards in the market.

— Kurt Koenigsfest, CEO

Kurt Koenigsfest, the CEO of Banco Solidario S.A. (BancoSol), reviewed a slide deck ahead of an upcoming presentation to the bank’s board of directors. BancoSol was a microfinance bank

headquartered in La Paz, Bolivia, with an outstanding loan portfolio of about $1.17 billiona as of the end of 2015. BancoSol’s mission was to provide financial services and opportunity to individuals and companies in low-income sectors throughout Bolivia. In its first 16 years, BancoSol had disbursed more than $5.8 billion to more than 2,400,000 micro-enterprise projects. The bank was present in eight major cities (La Paz, Cochabamba, Santa Cruz, Oruro, Sucre, Tarija, Potosí y Trinidad) through a network of more than 100 branches.1 But a regulatory change had prompted a review of its strategy.

Passed in 2013, Bolivia’s Nueva Ley Bancaria (NLB), or new banking law, required that by 2018 all banks extend 60% of their loans, by volume, to the productive sectorb at no more than 11.5% interest rates. (BancoSol’s average rates for such loans hovered around 18% as of 2015.) Banks had to meet a series of intermediate volume targets during each interim year. At the end of 2015, BancoSol had almost 39% of its loans in the productive sector. Roughly another 7% of its loan portfolio needed to shift each subsequent year to the productive sector, and away from sectors such as trade or services, to reach the 60% target on time. Meanwhile, BancoSol’s rates on productive sector loans were forced to fall to 11.5% at the end of 2015. While remaining loyal to its mission, the bank had to find ways to recoup that lost interest income and continue to grow. From 2009 through March 2015, ROEc had averaged 28.9%, but as the law’s provisions became effective, ROE would come under pressure. Koenigsfest thought that ROE should not fall below a floor of 15%, even if maximizing ROE was not his priority.

a All figures in this case have been translated from the local currency, Bolivianos, to U.S. dollars. When this case was submitted for publication, one Boliviano was worth approximately $0.14135.

b The productive sector was defined as encompassing industries that turned raw materials into intermediate goods, adding value to the goods; typically, productive sector industries involved a skill set or use of machinery, such as clothing manufacture, tourism, mining, and agriculture.

c The company calculated ROE by using the following formula: net income/average equity.

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Koenigsfest had been CEO of the bank since 2000. He had come to BancoSol during a crisis, and successfully repositioned the bank once already. He knew that the challenges ahead were significant. Achieving productive sector loan targets would involve changes at BancoSol that could encompass everything from the structure of branches to the skills and profiles of its loan officers. There was also the question of whether the bank should offer some larger loans, essentially engaging in commercial lending, even though this ran contrary to BancoSol’s mission as a microfinance institution. In addition, Koenigsfest did not want to fire anyone, which would create a serious morale problem.

How would Koenigsfest achieve what seemed like a series of contrary goals—serving BancoSol’s mission as a microfinance bank, maintaining return on equity, avoiding layoffs, and complying with productive sector loan targets under the NLB? He returned to his slides and considered his options.

Bolivia: A Microfinance Success Story

Bolivia was a poor, landlocked country deep in the heart of South America (the only other country on the continent without sea access was Paraguay). Bolivia had a troubled political history; until 1982, it had experienced more coups than it had years of democracy.2 Bolivian society was ethnically complex, with a historically unequal distribution of income (see Exhibit 1). Indigenous people made up 62% of the population, and the main languages spoken in Bolivia were Spanish, Quechua, and

Aymara.3 Quechuas and Aymaras made up 30% and 25% of the population, respectively, but many other indigenous populations were officially recognized, as were at least 36 indigenous languages.4

Bolivia’s urban elite was mostly of Spanish ancestry,5 yet some 60% of Bolivians lived below the poverty line, with the number reaching 75% in rural areas. Indigenous people, particularly outside

cities, were much more likely to live in poverty.6 Most Bolivians scratched out a living through

subsistence farming or mining, or worked as small traders or artisans.7 Bolivia also played a role in the illegal narcotics trade as a coca producer. Coca was the raw material used in cocaine.8

Bolivia featured dramatic, varied topography. Roughly one-third of Bolivia’s territory was spread over the highest mountains in the Andes range. Bolivia’s administrative capital, the city of La Paz, was located high in the Andes Mountains. The city sprawled across altitudes above 10,000 feet that left most unaccustomed visitors short of breath upon arrival.9 The main airport, in the adjacent city of El Alto, was at 13,323 feet, and was the highest international airport in the world. Bolivia’s arid mountainous areas offered a sharp contrast to its more-tropical lowland areas. During the late 20th century, Bolivia’s lowland, in particular the city of Santa Cruz, grew rapidly and began to develop comparable economic

power to La Paz and other highland areas.10 Santa Cruz also had become a cocaine-trafficking hub.11

Against this backdrop, Bolivia had developed what was perhaps Latin America’s most successful microfinance industry. During the 1980s, 1990s, and 2000s, hundreds of thousands of poor people in Bolivia had gained access to credit and built businesses with the help of a microfinance industry that

advanced quickly, particularly in urban areas, and flourished amid competition.12 By 2015, BancoSol was the largest player in the Bolivian microfinance industry.

History of BancoSol

BancoSol had first opened its doors in 1984 as a non-governmental organization (NGO), essentially a credit agency. It provided small working capital loans to groups of three or more people who gave mutual guarantees, or what the bank called “credit solidarity” among a group. BancoSol’s resources came from donations and subsidies; self-sustainability was not a priority during its earliest days. By

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1991, the NGO had $4 million in loans, 17,000 clients, and a presence in four Bolivian cities, La Paz, Cochabamba, El Alto, and Santa Cruz.

In 1992, BancoSol officially became a regulated financial institution, and Latin America’s first

private microfinance bank.13 Much of the Bolivian population lived in poverty and formal unemployment was high. Banking services were available only to a small segment of the population. Most Bolivians were unable to qualify for loans and had few or no assets to use as collateral. BancoSol targeted Bolivia’s poor entrepreneurs, providing these clients with access to the types of lending

services typically available only to the wealthy.14

By the end of 1992, BancoSol had assets of $11.8 million and a loan portfolio of $8.8 million. The bank had about 26,000 clients, with an average loan amount of $340. BancoSol continued to focus on group loans.15 The average BancoSol client had a poor impression of banks because of past negative experiences or exclusion. In efforts to build trust, BancoSol trained its bank officials to be approachable and plain-spoken, and eschewed the use of formal titles. They took pains to ensure that clients understood the repayment terms of any loan or other commitment, and that every transaction or

exchange involving the bank communicated a message of solidarity and trust in the client.16

By 1995, a number of other NGOs had entered the Bolivian microcredit market, attempting to capitalize on the same client base. These NGOs were not regulated financial institutions; they operated outside formal supervision and could take greater risks. In 1998, lending in Bolivia began to expand even more aggressively. Both domestic and foreign banks had arrived in the marketplace, offering consumer loans to the microcredit market without adequate supervision or credit controls. “Competitive pressures finally brought some Bolivian banks to the doorstep of microcredit, a

homegrown innovation they thought they could readily master,”17 one scholar wrote. By 1999, the market was becoming oversaturated, and the borrower-lender relationship was changing:18

The lending growth that propelled MFIs and consumer lenders created a bidding war, with competitors vying for clients by offering larger loans, faster service, and lower interest rates. This momentum inflated the total amount of debt in the informal sector. Once the economy stalled, it quickly became evident that thousands of clients held more

debt than their reduced level of economic activities would allow them to service.19

BancoSol’s ROE dropped from 29% in 1998 to 9% in 1999 as crisis took hold.20 In 1999 and 2000, sobreendeudamiento (overindebtedness) hit both consumer lenders and microlenders. Too much easy credit had been extended and loan performance was deteriorating. Default rates rose and aggressive collections began. Many customers had borrowed from multiple lenders, something that had never

been prohibited; they repaid late, and some desperate clients would get new loans to pay off old ones.21

The Bolivian economy simultaneously weakened as a currency and financial crisis in Brazil shook

the regional economy.22 Coinciding recessions in Japan, Europe, and the U.S., and a drop in mineral and soybean prices, hurt Latin America in general and Bolivia in particular.23

Microfinance clients saw their credit scores drop, and some could no longer get loans, which was called muerte civil or civil death. Some microfinance clients emigrated to the U.S., Spain, and Argentina; their families were often divided as breadwinners left Bolivia. Social unrest rose. Debtors’ associations staged protests demanding debt forgiveness; a few initiated hunger strikes, and some became violent.24

The crisis ultimately led to several changes. The consumer-lending movement in Bolivia collapsed

as bad debt became exorbitant.25 Foreign and domestic banks who had entered the consumer market “fled in disgrace.”26 Bolivian microlenders, meanwhile, adjusted loan approval methods to focus on


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repayment capacity. The national credit bureau was revamped to provide better, more timely information.27 Microlenders also created Asofin, a financial association to represent their interests and share best practices across the industry.

The market was also evolving away from group loans. Though most consumer lenders were gone, more BancoSol clients now wanted individual loans that they could collateralize with tools or merchandise or could obtain with a co-signer. To some extent, BancoSol’s original client base also had outgrown its group loans; the more successful members of borrowing groups could service bigger individual loans. In 1999, BancoSol began to offer some individual loans, which used other guarantees—collateral assets, personal guarantors, and others—instead of credit solidarity or mutual

guarantees among a group.28

Kurt Koenigsfest

The microfinance crisis raised tensions and contributed to political instability. In this environment, Kurt Koenigsfest took the helm as CEO of BancoSol. He had worked in the Bolivian commercial banking sector, at Banco de La Paz, as national head of credit cards. He had later worked at Banco Nacional; again, as head of credit cards; as head of new product development; and finally, as commercial vice-president. He began his tenure at BancoSol in May 2000, and his first efforts as CEO

were to pinpoint the bank’s most serious failures and clean up its lending process.29

Koenigsfest’s assessments showed that delinquency rates were about 10 percentage points higher than previously reported (hovering around 15%, rather than 5% or 6%), and that the bank lacked uniform criteria for even its most basic processes. The bank’s regional managers could essentially make their own rules; as a result, BancoSol’s five regional offices even kept different working hours.30

Koenigsfest knew he had to quickly change BancoSol’s approach. His first major decision was to change the makeup of the executive team, because he felt that the existing team was unreceptive to any serious institutional change. Koenigsfest brought many new people in from his past life in commercial banking, leading to an outcry from employees who remained from the previous era.31

Koenigsfest and his new team next made a number of decisions that began to put BancoSol back on its correct course. These included cutting expenses, forcing strict compliance with banking authority regulations (such as audit requirements), imposing one work schedule on all offices and employees, and downsizing. BancoSol closed and consolidated several branches, which helped reduce administrative costs by almost $1 million in 2001, a drop in administrative costs of about 8.2% from the

prior year. They reorganized the bank and fired 300 employees as part of a massive cleanup.32 A rule was implemented that BancoSol’s clients could no longer borrow from more than three financial institutions (including BancoSol) at once, to mitigate the risk of overindebtedness.

The last major change was a formal shift away from group loans and to individual loans. This necessitated a shift in credit methodology, which, in turn, required that bank employees have different backgrounds. Koenigsfest brought in more staff with finance and business backgrounds, who could better evaluate individual repayment capacity, as opposed to training in sociology and anthropology, which had been more common when BancoSol had focused on group loans. “We needed new skills and different skills—we became more of a bank, and had less of an NGO mentality,” he said.

BancoSol went from offering one product, the group loan, in 1992, to offering seven products by 2001. Besides the Solidario (group loan), BancoSol began to offer the Sol Individual (individual working


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capital loan), the Solicita (small commercial loan), Sol Vivienda (mortgage loan), Sol Vehiculo (car loan), Sol Efectivo (liquidity loan), and Sol De Oro (gold-backed loan).33

Expansion in Solidario loans slowed, growing from $78 million to $81 million from 2000 to 2001. Management had also made a strategic decision to shift the loan portfolio away from Solidario loans, no longer promoting them to clients. During an economic slowdown, they had learned, “solidarity

guarantees are not effective.”34

The 2000s at BancoSol

BancoSol’s performance improved significantly after the industry crisis abated, particularly as of 2003. “The crisis fortunately became part of the past,” Koenigsfest said, “and this was the period when we were able to begin moving from offering simple microcredit to true microfinance. We started with loans, and learned we could do more—taking deposits, providing services, and offering new products. It was a period of growth, with new conditions, without some of the troubles of the past.”

From 2002 to 2009, the number of BancoSol borrowers tripled, and during the same period, the loan portfolio had grown from $80 million to $351 million, savings deposits from $15 million to $142 million, the number of depositors had grown from 50,000 to 255,000, and equity increased from $15 million to $38.5 million, while overall profits grew from 1.72% to 38%.35 By 2008, loan delinquency rates were below 1% (0.93%), compared to approximately 15% in 2000, when Koenigsfest took office.

Koenigsfest’s changes at the start of the decade had proven effective, and the macroeconomic climate in Bolivia improved significantly during the same period. Prices for Bolivian exports of raw materials rose, because of rising demand from other parts of the world. Bolivia had also been able to accumulate the highest net international reserves in its history beginning in 2006, because of higher export prices, low foreign debt, and a financial sector that was not well integrated into international markets. The latter was normally a disadvantage, but in fact favored Bolivia in 2008 and 2009, when a

massive crisis struck the global financial system.36

Competition in the Bolivian microfinance sector had led to much lower interest rates for borrowers. Lending rates at BancoSol dropped from 45% to percentage rates in the mid-20s by the mid-2000s, and continued to fall after that.d In general, and not just at BancoSol, the Bolivian microfinance industry during this period “continued to innovate and reduce interest rates, making their products more accessible to the public. They also began to focus on promoting deposits, which provided capital that

they used to finance growth,”37 one scholar wrote.

BancoSol began to offer a number of other services outside saving and lending, more akin to what a commercial bank offered. It expanded its offerings to include branded ATMs, debit cards, online banking, remittance services, bill payment services, tax payment services, and a wide variety of consumer loans, including home and auto loans. These became new revenue sources. “We had this negative past with consumer loans, but we also understood that if one of our clients needed to buy something like a refrigerator, it was better to have them come to us than to go to the loan sharks,” Koenigsfest noted. Typically, BancoSol’s consumer loans were sold to clients who already had a loan for their business with the bank. Group loans continued to shrink as part of the bank’s business. The

d These rates were low compared to others in the region at the time. “Microfinance institutions in only a few countries, such as Bolivia and El Salvador, had interest rates of less than 25%. The interest rates charged by such institutions in Paraguay and Mexico exceeded 40%, with an average rate in Mexico last year of 64.9%,” wrote one journalist in a 2008 article. Source: Adriana Garcia, “Latam microfinance may reach $20 billion by 2012-IADB,” Reuters News, April 5, 2008, via Factiva, accessed July 2015.


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bank changed its brand name to BancoSol from Banco Solidario S.A., reflecting its shift from Solidario group loans to a focus on individual loans.

Bank staff often had to pair expansion into new technologies with an effort to orient and train clients in their use. Every time the bank issued a debit card, for example, it tried to have a client service representative take the client to the ATM to use the card for the first time; it had a similar process to guide them through online payment services. However, this type of orientation was not always possible, because bank branches continually struggled with long lines of clients waiting for help.

Some specific examples of product innovation during this period included the expansion of the Sol 500 product in 2006. This was a loan of up to $500, with a simplified credit approval process, targeting working capital for microentrepreneurs in lower income segments. On the customer service side, BancoSol also rolled out its Sol Amigo model during the 2000s. This was essentially a single bank teller located inside a gas station, shop, or convenient store. It became a popular way to reach clients in a less expensive manner than the construction of a full-service branch. The bank also began to develop what Koenigsfest called a “culture of insurance” among its clients. “As in most of Latin America, there is no life insurance culture here, unlike in the U.S., where if you have a car, you have insurance; if you have a home, you have insurance.” BancoSol began to offer Sol Vida (life insurance), Seguro Migrante (life insurance for a family member supporting a family through remittances), and Seguro de Desgravamen (credit insurance that covered loan balances if a borrower passed away).

Not every innovation was immediately successful. A foray into the health insurance market, for example, went poorly. This was because many clients using BancoSol’s health insurance product who had long waits or other problems with doctors blamed BancoSol, creating customer service problems, and damaging the brand. Life insurance was difficult to sell to a poor clientele, whose modest budgets might just barely cover basic needs, let alone a product that provided no immediate, tangible benefits. “The price really has to be right,” said Jose Luis Zavala, head of products and services. “We do a lot of surveys, focus groups, work with the insurance companies; and we know these have to be inexpensive, basic coverages.” They had developed a basic life insurance product with a premium of $1 a month, with a payout of up to $5,000 in case of death. Other family members could be added for 70 cents a month apiece. BancoSol eventually moved out from health insurance, but remained in life insurance.

By and large, however, the 2000s were characterized by the rollout of a large number of new products, including and beyond microloans, which let BancoSol’s clients develop deeper ties to the financial sector. “In terms of financial inclusion, and how many people we’ve put in the financial sector, everything stems from credit. From that relationship comes everything else,” Koenigsfest said, noting that credit could change a poor client’s quality of life far more quickly than other products. “If you have a savings account with $5 in it, what difference does it make? It won’t make any difference in terms of accessing a better education, or quality of life, or help in an emergency. Credit is different.”

Bolivia under President Evo Morales

In 2005, Bolivia elected a new president. President Juan Evo Morales Ayma, more often called Evo Morales, was Bolivia’s first indigenous president, and a member of the Aymara group. Morales had completed a high school education, served in the Bolivian military, and worked as a coca farmer before entering politics. He had founded a left-leaning party, the Movimiento al Socialismo (MAS) political party. After winning a seat in the Bolivian legislature, Morales won national election as the MAS

presidential candidate.38 Morales won in a landslide victory, and was the first Bolivian president to win election with a simple majority (54.7%) of votes since the return to democratic rule in 1982. He was

also the sixth president of Bolivia since 1997; a series of predecessors had been ousted or resigned.39


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Morales pledged to reduce poverty, increase the rights of indigenous groups, nationalize the energy industry, and change policy so that a president could serve for two terms.40 Morales capitalized on political turmoil, economic inequality, and social unrest to earn political support from much of Bolivia’s poor, indigenous, and disenfranchised population. In his speeches, he bristled against market-based solutions to poverty and the neoliberal agenda’s focus on free markets and foreign investments.41 This represented a radical shift from the market-based policies espoused by Bolivia’s prior presidents. “The (neoliberal) economic model is not the solution for our country. It may be the solution for a European

or African country; in Bolivia, the neoliberal model does not work,”42 Morales said in 2006.

Morales’ policy, or at least his rhetoric, essentially put him at odds with a robust, competitive Bolivian microfinance industry. “His ideology opposes companies that profit off the very people who have suffered decades of economic and political oppression,”43 one scholar wrote. “The profit not only signals that the microfinance institutions could offer their products at lower costs, but it also symbolizes the neoliberal economic policies that have failed to lift the majority of Bolivian citizens out of poverty.”

Yet Morales could not simply deny or undo the success of Bolivian microfinance. And, despite leftist policy and rhetoric, Morales’ government showed signs of economic pragmatism. He did not completely nationalize the natural gas industry, for example, allowing private companies 180 days to renegotiate their contracts while the state-owned petroleum company took control of gas fields, even though there was overwhelming public support for complete nationalization. This was done because

the state-owned company lacked the capacity to properly run the production facilities.44 Nonetheless, many in the microfinance industry suspected the Morales government would impose stricter regulations, and were fearful of the imposition of interest rate caps or government-subsidized

microfinance services, which would distort the market.45 In the mid-2000s, one scholar wrote:

The ideological stance of the government is that any profit made on the poor is signifying that the interest rates are too high. Despite the strong belief that the interest rates should be lower, the Morales administration has not implemented a cap on interest rates. The threat is real, however, that the government may require single-digit interest rates from microfinance institutions in the future. Such a requirement…could force

private microfinance institutions out of business.46

Morales’ arrival also coincided with the beginning of a period of real improvement in the Bolivian economy, in part because of rising natural resource prices. Bolivia had plentiful oil and natural gas. It had South America’s second-largest proven natural gas reserves, of about 24 trillion cubic feet. Most of Bolivia’s natural gas was exported to Brazil and Argentina. Bolivia also had a large mining industry

that produced silver, zinc, and lead.47

GDP per capita rose from about $1,000 in 2005 to close to $3,000 in 2014. Central bank reserves rose

to $15.1 billion from $1.7 billion.48 (For macroeconomic data, see Exhibit 2.) This helped finance many expensive and popular projects, such as the $234 million Mi Teleférico (My Cable Car), a cable car system

that opened in 2014,49 connecting La Paz to El Alto, and allowing commuters to avoid hours of traffic on mountain roads between the neighboring cities.50 Koenigsfest said:

We have a government that calls itself populist, but it is not like the government of [Venezuela’s Hugo] Chavez, [Venezuela’s Nicolas] Maduro, or [Ecuador’s Rafael] Correa. It is more responsible in fiscal management. There are subsidies—for school-aged children, mothers-to-be and the elderly. But it is controlled and the government is not really giving money away all over the place.


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In 2009, a new constitution was approved by voters through a popular referendum to allow for a second presidential term. Morales won a second five-year term soon after. In 2014, a constitutional court determined that because his first five-year term had preceded reform, he would be allowed to

run again.51 Morales won a third term, and in 2015, he was still poised to hold office until 2020.52

The New Banking Law

In 2013, some of the developments feared by the microfinance industry came to pass. Morales’ government passed its new banking law, with huge implications for BancoSol. The Nueva Ley Bancaria (NLB) would determine minimum rates on deposits and maximum rates on loans, set targets for loans to specific economic segments (e.g., 60% of loans would be slotted for the productive sector, with rates for loans to that sector not to exceed 11.5%), offer greater protections to consumers, and raise some taxes. The law also capped or banned income that the bank could collect from certain fees. NLB goals were to be met by 2018, with interim annual targets.

From its earliest days, the Morales government had prioritized the productive sector (defined as the industries that added value to primary products) of the Bolivian economy. As one scholar described it:

Central to the Morales administration’s development plan is the idea of fostering the creation of chains of production. In Bolivia, traditional development strategies, based on capitalism and colonialism, created and later exacerbated inequality and dependency. In order to rectify this historic problem, Bolivia must shift its focus from the export of primary products to one of value-add industries by developing the productive sector. The Morales government believes that supporting the productive sector is the only way to generate dignified and sustainable employment in Bolivia.53

The NLB was one way to promote the productive sector, though the law had other ideological goals. The law was conceived “with the implication that a bank is a social good, not just a private enterprise, or profit maximizing,” said Koenigsfest. “Other implications included the role of the government in setting interest rates; that consumers would have greater protections; and that the government would determine what specific sectors of the economy to lend to.”

Implementation of the NLB began in 2014. Savings accounts could no longer pay less than 2%, and fixed-term deposits were required to pay between 0.18% and 4.1%, depending on term length. Corporate taxes ostensibly were 25%, but BancoSol’s effective tax rate was about 55%, given that institutions with an ROE higher than 13% now paid an additional 12.5%, institutions with foreign exchange as a revenue source paid another 5%, and those with international investors paid still another 12.5%. BancoSol fell into all three categories.

Koenigsfest thought that BancoSol and its competitors would increasingly chase the same productive-sector clients as 2018 approached, unless some of them moved out of microfinance. If many competitors dropped out, it might pose an opportunity for BancoSol to acquire new, high-quality microfinance clients at a low cost. Koenigsfest did not think the productive sector in Bolivia was big enough for all of the players in the banking sector in 2015 to reach the 60% target. ”It is not possible for all of us to get there,” he said.

In 2015, loans outstanding across all Bolivian banks were worth $16 billion, with perhaps 35%, Koenigsfest estimated, or about $5.6 billion, loaned to the productive sector. If lending grew overall by 10% annually, by 2018, banks would have some $23 billion outstanding. Yet to reach the government-mandated 60% target, some $14 billion of that total would have to consist of loans to the productive


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sector, almost triple the amount loaned to the productive sector in 2015. Koenigsfest, meanwhile, estimated that the productive sector in Bolivia might generate $8 billion in loans by 2018. He said:

If we all try to reach 60%, banks will reach out to too many clients, perhaps clients they would not take on otherwise, or who stretch the definition of being in the productive sector—maybe they are merchants, with a small, parallel business in the productive sector, and so on. And the same ones who qualify in 2018 may not qualify in 2016.

Ironically, moving out of microfinance entirely was one straightforward way to comply with the law. BancoSol could instead focus on issuing large loans to commercial enterprises in the productive sector. Large loans had much lower interest rates, of 6% to 7%. Issuing more such loans would make it much easier to place a larger overall percentage of BancoSol’s loans, by volume, in the productive sector, with rates of 11.5% or below, and help BancoSol quickly move 60% of its portfolio into the productive sector by 2018. In other words, BancoSol could become a commercial bank. Another option was to buy a commercial bank that already focused on this type of lending, adding its portfolio to that of BancoSol, and skewing the bank’s total loan portfolio closer to government-mandated rate targets.

Koenigsfest presented his dilemma to the board and to his shareholders. “We needed to make them understand the magnitude of what the NLB meant for us,” he said. Though there was a mix of opinions—a minority of board members were exclusively focused on maintaining as high an ROE as possible, even if that meant moving up in the market, closing unproductive branches, and firing people—most ultimately wanted to try and stay as close to the bank’s original mission as possible.

Koenigsfest knew that realistically they would have to make some larger loans, and would likely have to move into offering more rural loans. (BancoSol had long focused on an urban clientele; agriculture was part of the productive sector, yet was considered riskier because of the unpredictability of farming.) But they did not entirely change their mandate. “We have decided not to move upwards in the market, and to remain with our clientele—even though we have experienced all the changes of the banking law,” Koenigsfest said. “Becoming just another commercial bank would be easy. I think in the end we wanted to take the more difficult path, at least give it a try.”

Complying with the NLB

In 2015, BancoSol had $454.4 million of its loan portfolio in the productive sector, or 39%, and $718.1 million of its loan portfolio outside the productive sector, or 61%. The goal, by 2018, was to have approximately $931.2 million in the productive sector, or 60%, with a new interest rate of 11.5%, and $620.8 million outside the productive sector, or 40%, for a total loan portfolio of $1.55 billion. BancoSol’s board of directors had projected this $1.55 billion figure on the basis of a supposed 10% to 15% annual portfolio growth rate under the NLB—far less than recent years, when annual growth had ranged between 18% and 25%.

Assuming the overall portfolio grew, productive sector loans would have to grow by a disproportionate amount, while loans outside that category would ultimately shrink, to keep portfolio percentages in line with the government’s 60/40 target. The low-hanging fruit in the productive sector was thought to be in manufacturing and construction, both big sectors in the Bolivian economy that BancoSol knew well. After those two sectors had been explored, BancoSol planned to target agricultural loans, particularly in Santa Cruz and Cochabamba. These were established farming areas with good land and economic growth. For target sectors within the productive sector through 2018, see Exhibit 3.


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Outside the productive sector, loans had 18% rates, on average, and BancoSol did not plan to raise them, as they felt that doing so would drive away many of their best clients to competitors. Instead, they hoped the overall changes they planned to make to their business model would reduce costs and increase productivity to the point that the bank could nonetheless bolster its ROE.

BancoSol’s ROE in 2015 was 27%. Koenigsfest did not want it to fall much below 15%. For changes in ROE over time, see Exhibit 4. How would BancoSol move 60% of its portfolio to the productive sector by 2018 and sustain a viable ROE? Koenigsfest knew he could try a variety of approaches. He looked at lending, cost structure, non-interest income, and other areas where the bank was already considering and making changes.

Lending at BancoSol

Each BancoSol loan officer focused on loans below $20,000 had, on average, a loan portfolio of about $990,000, and about 213 clients. At the end of 2015, BancoSol had 1,180 such loan officers. About seven loans matured on a monthly basis, and had to be replaced in the portfolio. Average loan size was about $4,600, and while the average contractual loan term was roughly 36 months, they were repaid, on average, in about 19 months. By 2015, just 2% of loans were still group loans; most were made to individuals. As loans matured, loan officers would replace them with new loans to maintain their portfolio size. Some clients also refinanced their existing loans; sometimes existing clients referred new clients to the bank. BancoSol’s non-performing loan (NPL) rate hovered around 1.04% in 2015, compared to 1.72% for the entire banking system. For NPL rates across the industry, see Exhibit 5.

Each month, a loan officer generated about 12 new loans to keep his or her portfolio close to $1 million; perhaps 8 were rollovers and four were new clients; three perhaps came from referrals, and one was a newly-scouted client. Of every five loan offers a loan officer extended, about four accepted. “Every day is different,” said one loan officer in the El Tejar neighborhood branch in La Paz. “At the start of the month, we get a list of clients whose loans are ending, another list of excellent clients who would be allowed to borrow more, and we start to develop a schedule of who to visit when.” Loan officers primarily generated loans and collected payments. They were encouraged to close new loans as quickly as possible. New clients were increasingly interested in getting loans as quickly as possible, sometimes within 24 hours, given robust competition in the Bolivian microfinance industry.

Each loan officer focused on loans above $20,000 had, on average, a portfolio of about $2 million and some 200 clients. Perhaps five loans needed to be replaced each month, of which three would come from existing clients, and two were newly scouted. To find these two, a loan officer might visit 20 candidates. These loans took five or six more days to process than the ones below $20,000, because they not only needed approval at the branch level, but by other departments such as legal and risk analysis. Average term length for loans above $20,000 was about 60 months.

The Crediting Process

Loan officers were split in two groups, one trained to assess creditworthiness for loans of less than $20,000, the other for loans greater than $20,000. BancoSol had determined the $20,000 dividing line according to their credit methodology; above that figure, lending methodology changed in terms of the collateral required, as well as considerations around a business’s sales volume, equity, and other factors. (For loans broken down by sector and size, see Exhibit 6a and Exhibit 6b. For actual and projected numbers of loan officers, see Exhibit 6c and Exhibit 6d.)

For each client seeking a loan of less than $20,000, the credit assessment process involved visiting his business, followed by his home. At his place of business, loan officers would evaluate any assets,


11

inventory, utility costs, and existing financial ledgers. “Is the business well run? Is it orderly? Do they ask about rates only or do we discuss other benefits?” said one loan officer. An initial visit to a new client might take an entire afternoon, she said. For a sampler of BancoSol clients in 2015, see Exhibit 7.

Part of the process involved assessing a borrower’s character and willingness to repay a loan; loan officers would also speak to the person’s neighbors, asking, for example, if others were coming around to collect on debts that the borrower had not mentioned. At the client’s home, the loan officer would look for factors such as evidence of a stable family life, and if possible, would interview the person’s spouse, asking whether that person supported the borrower’s business plans. Loan officers would also try to visit a neighbor or a local shop to ask about the potential client’s reputation.

Branch managers and their under-managers, who supervised credit officers and loan officers, could approve loans. Both a borrower’s debt and his or her spouse’s debt were taken into consideration. Credit information on individuals and small businesses could usually be obtained from the Autoridad de Supervisión del Sistema Financiero (ASFI), a government bureau that tracked financial activity and use of financial services, or from Infocred BIC S.A. (BIC), a credit information bureau that tracked, in particular, use of microfinance services.

Some loans of less than $20,000 were collateralized with assets such as equipment (sewing machines, tools for carpentry, etc.) or inventory; loans of less than $3,000 could be uncollateralized, but these loans typically had a co-signer, someone who was capable of paying the loan and was legally responsible if the borrower defaulted. Some very small loans instead used what they called documentos en custodia, or documents in custody—this involved asking the borrower to leave papers for a car or asset at the bank—a psychological guarantee, rather than anything the bank could act upon.

Loans of more than $20,000 were going to more experienced entrepreneurs. Most had already spent several years running their businesses. Some had successfully borrowed much smaller amounts before. Issuing these loans involved more traditional credit analysis, using credit scores and financial valuation tools, and relied less on the informal, interpersonal assessments that were used for microloans. Even so, some loans between $20,000 and $50,000 also had co-signers rather than formal collateral.

Recruiting Loan Officers

Going forward, BancoSol would have to prioritize the sourcing and training of talent who could analyze credit in the over-$20,000 market segment. These people typically had higher-level degrees and a stronger business education than loan officers who worked with the under $20,000 market. They also demanded higher pay. A loan officer in the sub-$20,000 category cost the bank about $20,000 a year, on average, plus $5,000 or $6,000 in benefits, as well as other expenses. For a more skilled loan officer, costs might rise by 35% to 40% per person.

BancoSol would have to adjust its compensation and incentive packages. Variable incentives, for example, would skew toward landing larger, higher-quality, productive sector loans. The number of loan officers in the sub-$20,000 category—in 2015, there were 1,093 employees in that role—would have to fall, and the number of loan officers in the $20,000 and up category—in 2015, there were 51—would have to rise. By 2018, the sub-$20,000 category would have 870 officers; the $20,000 and up category would have 188 officers.

Some officers for smaller loans would be retrained to procure larger loans; others would be promoted to branch manager, or take on other roles at BancoSol. Some officers in the larger loan category would also be hired from outside. BancoSol’s financials showed a line item of $99 million in


12

administrative costs, mostly salaries; this was projected to rise through 2018, as employee demographics changed, but fall as a percentage of BancoSol’s overall loan portfolio (see Exhibit 8).

Existing employees in the market above $20,000 would have to be retrained for greater productivity. The bank would also prioritize the issuance of lines of credit, rather than loans, to this sector, because lines of credit were more easily and quickly renewed, once repaid.

From Loan Officer to Business Officer

Koenigsfest wanted the loan officer role to evolve to one of a business officer. Perhaps 65% of a loan officer’s time was spent doing administrative work, such as filling out paperwork. By using new, paperless technology, Koenigsfest hoped this figure would over time drop closer to 20%, and that the bulk of a business officer’s time would be spent on revenue-generating activities (e.g., sales).

In April 2016, BancoSol planned to pilot a mobile application that would allow loan officers on client visits to reduce paperwork and facilitate the cross-selling of products. An officer could input new credit applications and other data on a phone or tablet, as well as offer products other than credit, such as savings accounts or debit cards, on the spot. Koenigsfest estimated that the app would lead officers to close 18 to 20 new loans a month. BancoSol also planned to create new fabricas de creditos (credit factories), where data would be processed, liberating loan officers from much administrative work.

The bank had also hired an external consultant to work with its loan officers for the seven months ending in August of 2016, in part to train them to better cross-sell and redeploy them as business officers. Koenigsfest thought that this project would lead to widespread reassignment of roles as individuals were evaluated. Someone who had sold smaller loans might move to issuing larger ones, if that was deemed a better fit; others might move from the front to the back office, and so on.

Points of Service

BancoSol had 105 bank branches across Bolivia, with 17 in La Paz. Bank branches each had ATMs, a handful of tellers, and a two-person customer service department. Regional offices also had back office functions. The El Tejar (a La Paz neighborhood) branch, for example, had three work teams; each one had seven people, six loan officers, and a supervising credit officer; they coordinated work, visits, collections, new client incentive projects, and so forth. Each branch had a branch manager supervising the teams. Many transactions occurred in person, at branches. Loan payments in particular often occurred in brick and mortar offices (roughly 80% of all loan payments were thought to occur in person at a branch). Loan officers also visited clients who wanted to pay in person. “It creates a feeling of importance as a customer, to have business to do at the branch,” Koenigsfest said.

BancoSol had also offered its services through its Sol Amigo model as of 2009. By 2015, the bank had more than 100 Sol Amigos, which ran an average of 4,000 transactions per month. While running a Sol Amigo cost less than running a full bank branch, BancoSol still had to negotiate with and pay rent to the host (typically, a convenience store or gas station). BancoSol had to build an armored booth for the teller according to strict specifications set by the government. Fixed costs per Sol Amigo had risen to about $15,000 as these specs changed, up from perhaps $5,000 when the model rolled out. Armored trucks also had to make rounds and collect money daily from Sol Amigos. Sol Amigo users could pay utilities, loans, or make transfers to other accounts, but Sol Amigos did not issue credit products.

Another goal was to complete more transactions in less expensive ways by 2018. In 2015, some 20.5 million transactions were completed; it was estimated that 33 million transactions would be completed in the year 2018. In 2015, 58.1% were completed at branches, 20.4% at Sol Amigos, 13.6% at ATMs, 6.0%


13

on a mobile phone, and 2.0% online. Transactions completed at branches cost, on average, about $1.42; at a Sol Amigo, about $0.70; at an ATM, $0.30; online, $0.01; and through a mobile phone, $0.06. Despite the fact that transactions at Sol Amigo outposts cost about half as much as those completed at branches, BancoSol planned to move toward other, even less expensive options. “Sol Amigo is a person, a salary, a fixed cost. There are other solutions for this that are done through point-of-service (POS) terminals. You can basically offer the same transactions we offer through Sol Amigo without time limitations,” said Zavala. The bank also wanted to reduce branch costs by consolidating back-office functions.

In general, the bank saw itself moving away from large physical offices to a more efficient business model, focused on online banking, mobile sales of products, clustered sales of many products and services, and the centralization of back-office functions. Koenigfest said:

What does the bank of the future look like? It’s focused on microfinance, closer to our clients, with better alternative channels, with loan officers who function as business officers. Branches and people in the field will generate more revenue and cut their costs. And it will involve intensive use of technology—mobile, CRM, cloud, social media—with high brand value.

Non-Interest Income

Koenigsfest knew that the total number of borrowers BancoSol reached would decline as the bank complied with the requirements of the NLB. But he had set a goal of reaching the same number of total clients over time from the bottom of the socioeconomic pyramid; this was one way he thought he could effectively continue to operationalize BancoSol’s mission. If the total number of borrowers had to fall, he thought, the bank could compensate by increasing the number of depositors it reached. (For growth in the lending market and deposit volumes over time, see Exhibit 9a and Exhibit 9b.) In 2015, the bank had some 250,000 credit customers, 85% of whom did not use other services beyond a basic account through BancoSol, and 600,000 depositors, of whom almost 90% did not use other services at the bank.

For many years, non-interest income had come primarily from remittances, particularly from Bolivians sending money home from Spain, until that country’s economy had collapsed in 2008. BancoSol had moved away from the remittance business when the Spanish economy faltered. While BancoSol had offered other services outside saving and lending since the mid-2000s, they had not marketed them aggressively to clients. Though the NLB placed some limits on the sums BancoSol could earn from fees, Koenigsfest thought that non-interest income could double by 2017. He said:

We think we can go back to remittances, in a more selective way, and with a different approach. Bolivians living in Argentina, Brazil, and the U.S. are going to be part of this strategy—we see possibilities there again. Our ATM network needs a better strategy. We will make sure our clients use our ATMs and third-party ATMs. Our clients are traveling more, because of improved economic conditions in Bolivia. They go to Chile and Argentina, to buy goods and bring them back. We want to teach them to take a credit card and use ATMs abroad. The idea is to set up a whole department that is in charge of non-interest transactions—remittances, ATMs, tax collection, bill payment.

In 2015, perhaps 4% of BancoSol’s revenues came from non-interest income; the bank hoped to double this amount by 2017. (See Exhibit 10a and Exhibit 10b for actual and projected revenues that came from services outside saving and lending.) By 2015, the bank had sold 100,000 life insurance policies, but saw a potential market for 600,000. Koenigsfest said:


14

We are not happy with 100,000. At the same time, you have to consider all of the factors—lack of an insurance culture, lack of knowledge, the cost. On our side, we may not yet be very good at selling insurance policies. Our customer service people always have a line of about 20 people waiting. We train them to sell everything to everyone, but with a long line, you never can.

Cost Structure

Koenigsfest saw several places in his administrative costs for potential savings opportunities: BancoSol kept longer hours than most other Bolivian banks, and moving to their hours would save, he estimated, $2.6 million; a new LED lighting system could save $1.6 million in utilities costs; in the upgrade of vehicles and equipment, he saw potential savings of $4.8 million. (For administrative expenses, see Exhibit 11.)

Competitive Landscape

As BancoSol had grown and evolved, so had the market and competitors. (For data on market share, see Exhibit 12.)

FIE

Banco FIE (Fomento a las Iniciativas Económicas) was founded as an NGO in 1985. It became a

Private Financial Fund in 1998 and a bank in 2010.54 The institution was founded to provide economic resources to Bolivians with little or no access to formal credit who were engaged in economic projects. It provided both short and long-term loans to “micro and small enterprises,” many of which were helmed by women.55 In 2013, FIE had 237,870 active borrowers and 743,546 depositors. With $1.1 billion in assets, it had a gross loan portfolio of $925.2 million. The average loan balance for each borrower was about $3,889.56

Banco Prodem

Banco Prodem, headquartered in La Paz, Bolivia, and founded in 1986, offered individual and group loans to Bolivians in both rural and urban areas. In 2013, it had 142,270 active borrowers and

824,938 depositors.57 It had a gross loan portfolio of $640.6 million and $828.3 million in assets. The average loan holder had a balance of $4,503.58

ProCredit

Banco Los Andes ProCredit SA (ProCredit) was a microfinance institution that was established when Caja los Andes SA, a mutual aid society, became a bank in 2005. Procredit operated mainly, though not exclusively, in Bolivian cities La Paz, Tarija, Sucre, Santa Cruz, Beni, Potosí, and Cochabamba. It provided small businesses and micro operations with individual loans and saving programs. It worked in sectors including housing, commerce, production, service, and industrial, while

also working to help finance infrastructure projects, including water and sewage facility construction.59 ProCredit was a subsidiary of the ProCredit Group, which operated in Eastern Europe, Latin America, and Germany to “create transparent, inclusive financial sectors in developing countries and transition economies.”60 Its parent company, ProCredit Holding, was officially established in 1998 based on the

work of consulting firm IPC.61Banco Los Andes ProCredit employed over 800 people in 2014, down 25% from 2013, at its 56 locations (compared to 58 in 2013). In 2014 it had total assets of $788 million. It

had a gross credit profile of $607 million, of which productive credits totaled $190 million.62


15

Banco EcoFuturo

Banco PYME EcoFuturo (EcoFuturo) was a microfinance institution founded in 1999 and headquartered in La Paz. EcoFuturo provided group and individual loans, which comprised 75% and 25% of its loans, respectively. In addition, it provided services such as loans for cooperatives and housing microcredits. In 2013, it had 59,767 active borrowers and 243,369 depositors. Borrowers had an average loan balance of $4,464. EcoFuturo had a gross loan portfolio totaling $266.8 million and $306.9 million in assets.63

Banco Union

Banco Union was a state-controlled bank, based in Santa Cruz, with a microcredit program. Its mission was to expand access to financial services and to contribute to social and economic development in Bolivia. Banco Union was part of Grupo Union, also the parent of Valores Union and SAFI Union.64 Banco Union had a portfolio of $1.6 billion, 31% of which was comprised of microloans.

Banco Nacional

Banco Nacional de Bolivia S.A. (Banco Nacional), headquartered in La Paz, was a full-service bank offering both personal and corporate banking services, including microloans. It had $1.7 billion in overall loans outstanding, of which 8% consisted of microloans. Its parent company, Grupo BNB, also held the investment fund Nacional SAFI and stock brokerage Nacional de Valores.65

Racing Ahead

In October 2015, BancoSol announced that it would for the third time sponsor Bolivian driver Walter Nosiglia in the 2016 Dakar Rally race through Argentina and Bolivia. Like thousands of micro-entrepreneurs, “BancoSol Hero Entrepreneur” Nosiglia had converted an opportunity into a successful venture, Koenigsfest proclaimed.66 Koenigsfest himself had been doing the same. In July 2015, BancoSol launched the Sol Productivo credit to provide micro-, small, and medium-sized enterprises up to $250,000 in local currency accessibly, flexibly and on favorable terms67—36 months for working capital and up to 10 years for investment capital. To Koenigsfest, this was another manifestation of the bank’s commitment to Bolivia’s economic development.68

Koenigsfest knew he would have to make many adjustments going forward to continue with the bank’s mission, remain profitable, and comply with the new law. He did not want BancoSol to become a commercial bank, which, ironically, would be the easiest way to comply with the new law, because it would no longer be executing its mission to serve the poor.

To achieve NLB loan portfolio goals, the bank needed more, better trained loan officers in the above $20,000 category for both productive-sector and non-productive-sector loans. Koenigsfest also had to consider the implications of building a cadre of loan officers able to generate and manage larger loans and work with the productive sector, and the impact that might have on staff that had been focused on smaller loans and loans outside the productive sector.

Koenigsfest also would need these loan officers to be ready to capitalize on market disruption for competitors, especially since he thought that the Bolivian productive sector as a whole was not big enough to support all banks reaching a 60% productive-sector loan target. If other microfinance banks facing the same regulatory dilemma dropped out of microfinance over the next three years, then BancoSol would try to scoop up their good clients, again, particularly those in the productive sector.


16

In order to remain a true microlender, BancoSol, according to Koenigsfest, would have to keep at least 75% of its loans below $20,000. Before the new banking law, the target had been to keep 80% of loans at less than $20,000. Koenigsfest also thought about how the portfolio could be split between loans over $20,000 and loans below that level. Loans of less than $20,000 accounted for 94% of all loans but needed to fall to 75%. Average loan sizes in the $20,000-and-up category would have to rise from $27,500 to $43,000. In the sub-$20,000 category, the average loan size would have to rise from $2,000 to $5,800. Overall, the average loan size would rise from $4,200 to $8,100.

In order to maintain an ROE of 15% or better, in addition to meeting NLB targets and complying with BancoSol’s mission, Koenigsfest would have to make other changes—from growing income outside the lending portfolio, to making technological changes and cost cuts, and redeploying staff without engaging in layoffs. Without remaining solvent and liquid, BancoSol could not lower the cost of providing financial services to its clients. The bank would need to continue to add new products that would increase non-interest revenues, such as the Visa debit card, ATMs, life, health and accident micro-insurance, certificates of deposits, international wires, home credits for Bolivian migrants, and

cell phone banking.e BancoSol would also need reduce administrative and other costs and use better technology to streamline operations. They needed to move more transactions online and to phones, and to make better, more efficient use of Sol Amigos, so transactions overall would become cheaper.

What should the bank look like going forward and how should Koenigsfest lead it there?

e BancoSol, http://www.mixmarket.org/mfi/bancosol, accessed November 2015.

http://www.mixmarket.org/mfi/bancosol


17

Exhibit 1 Bolivia: Income Inequality, 1999 to 2012

Bolivia: Gini Index, 1999 – 2012(p)(Values between 0 and 1)

0.58

0.63

0.59

0.61 0.600.59

0.56

0.53

0.50

0.46

0.47

0.40

0.45

0.50

0.55

0.60

0.65

1999 2001 2005 2007 2009 2012(p)

0.57

0.55

0.54

0.53

0.52

0.52

0.50

0.49

0.47

0.47

0.45

0.44

0.41

0.38

0.30 0.40 0.50 0.60

Brazil

Paraguay(d)

Colombia

Panama(d)

Rep. Dominicana

Chile(d)

Costa Rica

Mexico

Ecuador

Bolivia

Peru

El Salvador

Venezuela

Uruguay

0.61

0.60

0.57

0.55

0.53

0.53

0.53

0.53

0.52

0.50

0.49

0.49

0.47

0.46

0.30 0.40 0.50 0.60 0.70

Brazil

Bolivia

Rep. Dominicana

Colombia

Ecuador

Panama

Mexico

Paraguay

Chile(a)

Peru(c)

El Salvador(b)

Venezuela

Costa Rica

Uruguay(c)

Latin America: Gini Index

(Values between 0 and 1)

2005 2012(p)

Source: Company documents.

Note: The Gini coefficient measures income inequality, with a higher coefficient indicating greater inequality.


18

Exhibit 2 Bolivia: Macroeconomic Data

Gross Domestic

Product 2014: 32,770 MM$

GDP per cápita 2014: 2,922 $

GDP growthAverage

2006 – 20145.1%

2005: 9,525 MM$

2005: 1,010 $

Average1985 – 2005

3.0%

Net International

Reserves

2014: 15,123 MM$

2005: 1,714 MM$

Latin America: International Reserves 2014(% of GDP)



19

Exhibit 3 Projections for BancoSol’s Productive Sector Loans, in $ and by percentage, 2014 to 2018

Sector 2014 2015 2016 2017 2018

Agriculture & Cattle Raising 53,721 55,616 61,567 67,724 74,496

Hunting, Forestry & Fishing 326 326 326 326 326

Oil & Natural Gas Extraction 0 0 0 0 0

Minerals 3,085 3,085 3,085 3,085 3,085

Manufacturing 196,457 292,516 416,457 559,293 719,296

Production & Distribution, Electricity & Gas 285 288 291 294 297

Construction 35,219 52,829 60,753 72,903 91,129

Tourism 674 1,011 1,719 3,437 6,875

TOTAL 289,767 405,670 544,198 707,062 895,504

Sector 2014 2015 2016 2017 2018

Agriculture & Cattle Raising 18.54% 13.71% 11.31% 9.58% 8.32%

Hunting, Forestry & Fishing 0.11% 0.08% 0.06% 0.05% 0.04%

Oil & Natural Gas Extraction 0.00% 0.00% 0.00% 0.00% 0.00%

Minerals 1.06% 0.76% 0.57% 0.44% 0.34%

Manufacturing 67.80% 72.11% 76.53% 79.10% 80.32%

Production & Distribution, Electricity & Gas 0.10% 0.07% 0.05% 0.04% 0.03%

Construction 12.15% 13.02% 11.16% 10.31% 10.18%

Tourism 0.23% 0.25% 0.32% 0.49% 0.77%

TOTAL 100% 100% 100% 100% 100%



20

Exhibit 4 BancoSol’s Return on Equity (ROE), 2009-Q1, 2015


Evolution – ROE


21

Exhibit 5 Rate of Non-Performing Loans, December 2007 to March 2015



22

Exhibit 6a Productive and Ex-Productive Sector Loans, Actual and Projected, in thousands of dollars, 2015-2018

Productive Sector Portfolio

December 2014

December 2015

December 2016

December 2017

December 2018

$20,000 or more 14,670 32,176 137,536 290,565 468,178

Less than $20,000 286,971 422,200 432,532 448,786 468,178

Total 301,640 454,376 570,068 739,351 936,356

Rest of Portfolio December

2014 December

2015 December

2016 December

2017 December

2018

$20,000 or more 51,137 54,380 48,938 45,576 41,878

Less than $20,000 707,260 663,740 670,740 633,794 582,360

Total 758,397 718,121 719,678 679,370 624,237

Entire Portfolio December

2014 December

2015 December

2016 December

2017 December

2018

$20,000 or more 65,807 86,557 186,474 336,141 510,056

Less than $20,000 994,231 1,085,940 1,103,272 1,082,580 1,050,537

Total 1,060,038 1,172,497 1,289,746 1,418,721 1,560,593


Exhibit 6b Productive and Ex-Productive Sector Loans, Actual and Projected, by percentage, 2015-2018

Productive Sector Portfolio

December 2014

December 2015

December 2016

December 2017

December 2018

$20,000 or more 4.86% 7.08% 24.13% 39.30% 50%

Less than $20,000 95.14% 92.92% 75.87% 60.70% 50%

% Total Portfolio 28.46% 38.75% 44.20% 52.11% 60%

Rest of Portfolio December

2014 December

2015 December

2016 December

2017 December

2018

$20,000 or more 6.74% 7.57% 6.80% 6.71% 6.71%

Less than $20,000 93.26% 92.43% 93.20% 93.29% 93.29%

% Total Portfolio 71.54% 61.25% 55.80% 47.89% 40%

Entire Portfolio December

2014 December

2015 December

2016 December

2017 December

2018

$20,000 or more 6.21% 7.38% 14.46% 23.69% 32.68%

Less than $20,000 93.79% 92.62% 85.54% 76.31% 67.32%

Total 100% 100% 100% 100% 100%



23

Exhibit 6c Total Number of Loan Officers by Type, Actual and Projected, 2014-2018

Officer Type December

2014 December

2015 December

2016 December

2017 December

2018

Commercial

Officers ($20,000+)

51 145 165 188

Loan Officers

(below $20,000)

1,141 1,093 1,059 945 870

Total 1,141 1,144 1,204 1,110 1,058


Exhibit 6d Total Percentage of Loan Officers by Type, Actual and Projected, 2014-2018

Officer Type December

2014 December

2015 December

2016 December

2017 December

2018

Commercial

Officers ($20,000+)

0% 4% 12% 15% 18%

Loan Officers

(below $20,000)

100% 96% 88% 85% 82%

Total 100% 100% 100% 100% 100%



24

Exhibit 7 Sampler of Existing BancoSol Clients, 2015

Many existing clients were tradespeople, shopkeepers, or small businesspeople. They included:

A La Paz carpenter, who made home furnishings, who had started doing business with BancoSol about three years earlier, with a $2,300 loan, used mainly to buy lumber. He used two or three machines in his workshop as collateral. He averaged revenues of about $1,000 a month, and kept about half in profits. By mid-2015, he had repaid his first loan and taken out a second loan of $3,300, with a 36-month term. He also had a savings account through BancoSol, and paid bills through a nearby BancoSol bank branch.

A La Paz tailor, who made traditional polleras, or tiered skirts, worn by Bolivian women, frequently of indigenous origin. He and his wife worked together. He had started as a client with a loan of $6,600 five years earlier, working his way up to a new loan in 2015 of $13,300. The funds were used largely for fabric and other supplies. The first loan, already repaid, had featured a 24-month term and a 19.5% rate; his current loan was a 36-month loan, and because clothing manufacture was part of the productive sector, his rate would fall to 11.5% by the end of 2015. This client also had a BancoSol savings account, from which monthly loan payments were debited. “Long ago, I also did business with others, but they would ask for more guarantees or documentation. The best bank is the one that treats you like a friend,” he said.

A husband and wife team in El Alto had a weaving business that made, among other pieces, mantas, or woven cloths used for carrying goods or for decorative purposes. They had a $40,000 loan, collateralized with their weaving machines. They sold about $2,000 to $3,000 in merchandise daily, and wanted to use their funds for new weaving machinery and to build a bigger storage space for inventory. Some of their mantas were sold in bulk to vendors who would then re-sell them in markets in Peru. Again, because their work was considered part of the productive sector, their loan rate had fallen to 11.5%. This couple had been with the bank for more than a decade. The wife recalled: “When we began, I had a $50 group loan, with four other people, and sold merchandise in the street,” she said.

Source: Casewriter research.

Exhibit 8 Administrative Expenses, Actual and Projected, in thousands of dollars, 2015-2018

2015 2016 2017 2018

Administrative Expenses 99,011 105,405 113,170 116,967

Administrative Expenses/

Average Gross Portfolio

8.91% 8.60% 8.40% 7.89%



25

Exhibit 9a Change in Loan Volume and Market Share, December 2007 - March 2015



26

Exhibit 9b Change in Deposit Volume and Market Share, December 2007 to March 2015



27

Exhibit 10a Non-Interest Income (in thousands of dollars), 2013-2015

Description December 2013 December 2014 December 2015

Other Operating Income 4,070 4,653 5,426

Service Commissions 2,058 2,014 2,634

Commissions on Transfers (e.g., remittances) 822 584 454

Commissions on Tax Revenues 451 482 610

Commissions on Debit Cards 305 271 207

Insurance Commissions 100 164 403

Other Commissions 381 603 960

Exchange Rate Arbitrage 998 1,008 1,269

Income from Realizable Property 84 76 209

Income from Permanent Nonfinancial Investments 33 48 84

Miscellaneous Operating Income 896 1,417 1,229


Exhibit 10b Actual and Projected Non-Interest Income (in thousands of dollars), 2015-2018

2015 2016 2017 2018

Other Operating Income 5,426 6,924 9,480 12,811

Other Operating Costs 3,078 2,844 3,521 4,099

Net Other Operating Income 2,348 4,080 5,959 8,712



28

Exhibit 11 Administrative Expenses (in thousands of dollars), 2013-2015

Description December 2013 December 2014 December 2015

Administrative Costs 88,551 91,371 99,011

Personnel 52,576 55,567 60,428

Contracted Services 6,817 7,643 9,804

IT 2,198 2,337 1,438

Security 2,016 2,671 4,533

Legal (external) 59 78 94

Auditing (external) 57 80 68

Cleaning services 804 953 1,112

Contracted consultants 397 456 1,081

Insurance 3,468 2,856 1,563

Communications & transfers 3,161 3,095 3,852

Telephones 1,940 2,037 2,031

Telex 0 0 0

Mail 64 64 74

Airfare 823 634 695

Freight & storage 100 104 110

Fuels & lubricants 233 254 260

Other 0 0 682

Taxes 720 653 654

Repair and maintenance 2,800 2,455 2,000

Depreciation and amortization of fixed assets 3,362 4,071 4,751

Amortization of deferred charges 1,180 1,248 1,058

Other administrative expenses 14,467 13,784 14,900

Notarial and judicial expenses 185 150 215

Rents 3,617 3,519 3,538

Electricity 1,170 1,066 1,046

Stationery 1,343 1,310 1,489

Subscriptions and affiliations 40 52 51

Advertising and publicity 2,651 1,713 2,016

Representation costs 6 35 1

Contributions to financial entities 1,018 1,183 1,363

Contributions to other entities 267 179 187

Donations 574 437 275

Fines from financial entities 3 7 5

Contributions to Financial Restructuring Fund 3,509 4,061 4,646

Expenses for press communications 72 57 50

Other Expenses 13 15 17



29

Exhibit 12 Market Share (ASOFIN Members)

Entity Portfolio Market Share Client Market Share

BancoSol 25.8% 34.0%

FIE 25.4% 32.3%

Prodem 18.2% 17.8%

Banco Los Andes 14.8% 5.2%

Ecofuturo 8.2% 7.8%

Fortaleza 5.2% 2.4%

Comunidad 2.4% 0.5%

Total ASOFIN 100% 100%

Source: BancoSol’s Annual Report, 2014.


30

Exhibit 13 Income Statement for 2014 and 2015

Year Ended December

31, 2015 Year Ended December

31, 2014

Financial Income 187,026,138 179,081,170

Financial Expenses (37,958,903) (31,330,456)

Gross Profit From Financing

Activities 149,067,235 147,750,714

Other Operating Income

5,261,051

4,511,409

Other Operating Expenses (2,984,606) (2,302,210)

Gross Profit From Operations 151,343,680 149,959,913

Recovery of Financial Assets

4,635,894

3,964,844

Charges for Non-Performance and

Impairment of Financial Assets (12,927,253) (19,154,213)

Total from Operations after

Uncollectables 143,052,321 134,770,545

Administrative Expenses

(96,006,799)

(88,598,750)

Net Operating Profit 47,045,521 46,171,795

Exchange Adjustments and

Maintenance Value

(4,779)

(8,206)

Total After Exchange

Adjustments and Maintenance

Value 47,040,742 46,163,589

Other Income

1,057,891

-

Other Expenses - -

Net Total for the Period after

Prior Period Adjustments 48,098,634 -

Prior Period Income

-

-

Prior Period Expenses (8,576) (3,595,482)

Total Before Taxes and Inflation

Adjustments 48,090,058 42,568,107

Inflation Adjustments

-

-

Total Before Taxes 48,090,058 42,568,107

Corporate Income Tax

(16,400,984)

(16,863,848)

Net Income for the Year

31,689,074

25,704,259



31

Exhibit 14 Balance Sheet for 2014 and 2015

2015 2014

Assets

Cash and Banks

38,788,683

65,632,453

Temporary Investments 172,683,180 132,768,298

Portfolio 1,115,418,285 1,008,462,461

-Current Loan Portfolio 1,121,096,218 1,016,669,279

-Past Due Loan Portfolio 5,684,792 5,478,761

-Loan Portfolio In Execution 5,513,743 4,353,713

-Current Restructured Loan Portfolio 4,490,234 1,317,478

-Past Due Restructured Loan Portfolio 72,687 14,424

-Restructured Loan Portfolio in Execution 80,663 43,582

-Accrued Interest on Loans Receivable 13,000,962 12,765,848

-Provision for Non-performing Loans (34,506,880) (32,180,628)

Other Accounts Receivable

9,318,724

8,439,069

Assets Received in Payment of Loans 628 402

Permanent Investments 35,031,224 13,357,828

Fixed Assets 19,130,409 19,211,330

Other Assets 2,732,383 3,412,887

Total Assets

1,393,103,516

1,251,284,728

Liabilities

Obligations to the Public 965,355,545 855,139,435

Obligations to Fiscal Institutions 894 346,365

Obligations to Banks, Financial Institutions 104,881,424 95,782,647

Other Accounts Payable 37,525,542 36,758,612

Provisions 25,208,574 24,164,249

Securities Outstanding 96,046,579 95,974,137

Subordinated Obligations 28,312,476 30,264,656

Total Liabilities

1,257,331,033

1,138,430,101

Net Equity

Paid in Capital

88,504,013

69,293,092

Contributions Not Capitalized 238,816 5,087,121

Reserves 15,340,581 1,277,055

Retained Earnings 31,689,074 25,704,259

Total Net Equity

135,772,483

112,854,627

Total Liabilities & Shareholders’ Equity 1,393,103,516 1,251,284,728

Contingent Accounts 74,571 143,504

Memorandum Accounts 1,324,954,555 983,889,955



32

Endnotes

1 BancoSol, http://www.mixmarket.org/mfi/bancosol, accessed November 2015.

2 Council on Hemispheric Affairs, “A Brief Recent History of Bolivia and the Rise of President Morales,” January 24, 2009, available at http://www.coha.org/a-brief-recent-history-of-bolivia-and-the-rise-of-president-morales/, accessed September 2015.

3 World Directory of Minorities and Indigenous Peoples, Bolivia Overview, http://www.minorityrights.org/2410/bolivia/bolivia-overview.html, accessed July 2015.

4 Bolivia Information Forum, available at http://www.boliviainfoforum.org.uk/inside-page.asp?page=43&section=2, accessed September 2015.

5 Bolivia Country Profile, BBC News, available at http://news.bbc.co.uk/2/hi/americas/country_profiles/1210487.stm, accessed July 2015.

6 Rural Poverty in Bolivia, available at http://www.ruralpovertyportal.org/country/home/tags/bolivia, accessed July 2015.



9 The Editors of Encyclopaedia Britannica, “La Paz, Bolivia,” Encyclopaedia Britannica, available at http://www.britannica.com/place/La-Paz-Bolivia, accessed July 2015.

10 Charles W. Arnade, “Bolivia,” Encyclopaedia Britannica, available at http://www.britannica.com/place/La-Paz-Bolivia, accessed July 2015.

11 William Neuman, “Video of Killing Crystallizes Bolivian Anger Over Crime,” The New York Times, May 2, 2013, available at http://www.nytimes.com/2013/05/03/world/americas/killing-puts-spotlight-on-bolivian-drugs-and-crime.html?_r=0, accessed September 2015.

12 Elisabeth Rhyne, “Why Bolivia? Why Microfinance?” Mainstreaming Microfinance: How Lending Began, Grew, and Came of Age in Bolivia, Kumarian Press, Inc.: 2001, Bloomfield, Connecticut, pages 1-5.

13 Elisabeth Rhyne, “A World-Class Performance,” ReVista: Harvard Review of Latin America, Fall 2011, Bolivia: Revolutions and Beyond, available at http://revista.drclas.harvard.edu/book/bolivia-fall-2011, accessed July 2015.

14 Company documents.



17 Elisabeth Rhyne, “A Sketch of Bolivian Microfinance in 1999,” Mainstreaming Microfinance: How Lending Began, Grew, and Came of Age in Bolivia, Kumarian Press, Inc.: 2001, Bloomfield, Connecticut, page 31.


19 Elisabeth Rhyne, “Surviving the Crisis: Microfinance in Bolivia, 1999-2002,” The Development of the Financial Sector in Southeast Europe: Innovative Approaches in Volatile Environments, edited by Ingrid Matthaus-Maier and J.D. von Pischke, 2004, p. 92.


21 Elisabeth Rhyne, “A Sketch of Bolivian Microfinance in 1999,” Mainstreaming Microfinance: How Lending Began, Grew, and Came of Age in Bolivia, Kumarian Press, Inc.: 2001, Bloomfield, Connecticut, page 144-145.


http://www.mixmarket.org/mfi/bancosol

http://www.coha.org/a-brief-recent-history-of-bolivia-and-the-rise-of-president-morales/

http://www.boliviainfoforum.org.uk/inside-page.asp?page=43&section=2

http://www.nytimes.com/2013/05/03/world/americas/killing-puts-spotlight-on-bolivian-drugs-and-crime.html?_r=0


33

23 BancoSol, 2001 Annual Report.

24 Elisabeth Rhyne, “A World-Class Performance,” ReVista: Harvard Review of Latin America, Fall 2011, Bolivia: Revolutions and Beyond, available at http://revista.drclas.harvard.edu/book/bolivia-fall-2011, accessed July 2015.


26 Elisabeth Rhyne, “A Tale of Microfinance in Two Cities,” December 13, 2010 (updated May 25, 2011), The Huffington Post, accessed September 2015.

27 Elisabeth Rhyne, “A Tale of Microfinance in Two Cities,” December 13, 2010 (updated May 25, 2011), The Huffington Post, accessed September 2015.










37 Joshua Loehrer, “What Does Evo Morales Mean For Microfinance in Bolivia?” Stanford Journal of Microfinance, vol. 1 (2008), p. 21.

38 This paragraph draws heavily from The Editors of Encyclopaedia Britannica, “Evo Morales,” Encyclopaedia Britannica, http://www.britannica.com/biography/Evo-Morales, accessed July 2015.




42 Translated by casewriter from http://servindi.org/actualidad/273, accessed September 2015.





47 Bolivia: Extractive Industries, Natural Resource Governance Institute, available at http://www.resourcegovernance.org/countries/latin-america/bolivia/extractive-industries, accessed July 2015.


49 See http://www.miteleferico.bo/teleferico/pdf/planificacion/Informe%20de%20Gestion.pdf, accessed November 2015.

http://servindi.org/actualidad/273

http://www.miteleferico.bo/teleferico/pdf/planificacion/Informe%20de%20Gestion.pdf


34

50 “Largest Urban Cable Car Soars Over the Desperate Commuters of La Paz,” The Guardian, available at http://www.theguardian.com/cities/2014/apr/09/largest-urban-cable-car-la-paz-bolivia, accessed July 2015.


52 Emily Achtenberg, “How Evo Morales’ Third Term Will Challenge Bolivia’s Social Movements,” NACLA.org, available at https://nacla.org/blog/2015/03/28/how-evo-morales's-third-term-will-challenge-bolivia's-social-movements, accessed July 2015.


54 Global Alliance for Banking on Values, “Banco FIE,” http://www.gabv.org/our-banks/banco-fie, accessed November 2015.

55 MixMarket, “Banco FIE,” http://www.mixmarket.org/mfi/banco-fie, accessed November 2015.

56 MixMarket, “Banco FIE,” http://www.mixmarket.org/mfi/banco-fie, accessed November 2015.

57 MixMarket, “Banco Prodem,” http://www.mixmarket.org/mfi/banco-prodem, accessed November 2015.

58 MixMarket, “Banco Prodem,” http://www.mixmarket.org/mfi/banco-prodem, accessed November 2015.

59 Overview Banco Los Andes ProCredit SA, via Bankscope, accessed November 2015.

60 ProCredit Holding, “About Us,” http://www.procredit-holding.com/en/about-us/procredit-today.html, accessed November 2015.

61 ProCredit Holding, “About Us,” http://www.procredit-holding.com/en/about-us/procredit-today.html, accessed November 2015.

62 Los Andes ProCredit, “Memoria Anual 2014,” http://www.losandesprocredit.com.bo/archivos/doc/88-26-05-15-00-00-00.pdf, accessed November 2015, p.7.

63 MixMarket, “Banco PYME EcoFuturo,” http://www.mixmarket.org/mfi/banco-pyme-ecofuturo, accessed November 2015.

64 Banco Union S.A., BNAmericas profile, available at http://www.bnamericas.com/company-profile/en/banco-union-sa-banco-union, accessed February 2016.

65 Banco Nacional de Bolivia S.A., BNAmericas profile, available at http://www.bnamericas.com/company-profile/en/banco-nacional-de-bolivia-sa-bnb-bolivia, accessed February 2016.

66 “Banco Sol apoya a Nosiglia por tercer año consecutivo,” El Diario, October 17, 2015, http://www.eldiario.net/noticias/2015/2015_10/nt151017/deportes.php?n=87, accessed November 2015.

67 “Crédito: “Sol productivo” para Mipymes,” El Diario, July 23, 2015, available via http://www.eldiario.net/noticias/2015/2015_07/nt150723/economia.php?n=9&-credito-sol-productivo-para-mipymes, accessed November 2015.

68 “Crédito: “Sol productivo” para Mipymes,” El Diario, July 23, 2015, available via http://www.eldiario.net/noticias/2015/2015_07/nt150723/economia.php?n=9&-credito-sol-productivo-para-mipymes, accessed November 2015.

http://www.gabv.org/our-banks/banco-fie

http://www.mixmarket.org/mfi/banco-fie

http://www.mixmarket.org/mfi/banco-fie

http://www.mixmarket.org/mfi/banco-prodem

http://www.mixmarket.org/mfi/banco-prodem

http://www.procredit-holding.com/en/about-us/procredit-today.html

http://www.procredit-holding.com/en/about-us/procredit-today.html

http://www.losandesprocredit.com.bo/archivos/doc/88-26-05-15-00-00-00.pdf

http://www.losandesprocredit.com.bo/archivos/doc/88-26-05-15-00-00-00.pdf

http://www.mixmarket.org/mfi/banco-pyme-ecofuturo

http://www.bnamericas.com/company-profile/en/banco-union-sa-banco-union

http://www.bnamericas.com/company-profile/en/banco-union-sa-banco-union

http://www.bnamericas.com/company-profile/en/banco-nacional-de-bolivia-sa-bnb-bolivia

http://www.bnamericas.com/company-profile/en/banco-nacional-de-bolivia-sa-bnb-bolivia

http://www.eldiario.net/noticias/2015/2015_10/nt151017/deportes.php?n=87

http://www.eldiario.net/noticias/2015/2015_07/nt150723/economia.php?n=9&-credito-sol-productivo-para-mipymes

http://www.eldiario.net/noticias/2015/2015_07/nt150723/economia.php?n=9&-credito-sol-productivo-para-mipymes

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