But, there is a heavy price to pay for this success and it has come in the form of private consumer loan finance companies. Their activities threaten years of hard and costly work spent developing methods of microcredit, such as group and individual loans, village banks, and co-operative savings and loan schemes, as well as providing financial and technical advice to thousands of clients to help them run efficient businesses.

As true predators, the newly arrived consumer finance companies have begun to reap the harvest from what non-governmental organisations have sown and fertilised, not least a clientele nurtured to honour their debts.

These finance companies give consumer loans irresponsibly and have produced an over-indebtedness on the part of microfinance clients that seriously threatens the viability of client s’ microenterprises as well as that of microcredit programmes themselves. Portfolio-at-risk rates have risen to levels unheard of only eight months ago. An average 4% arrears rate has soared to over 10% because these private companies have ignored the principles and practices of successful microfinance.

Trust
Microfinance is based on the long-established – some might say old-fashioned – character of lending where a relationship of trust exists between the lender and the borrower, and lasts throughout the lifetime of the loan. Traditionally, a loan officer is responsible for approving the loan and making sure it is repaid. Keeping these two functions – loan placement and recovery – together is an essential element in microfinance. Newly arrived consumer lending finance companies in Bolivia, however, separate the two. A loan officer, or ‘promoter’, finds clients for loans and works on commission! Promoters are not responsible for the repayment of loans and so their sole motivation is to place as many loans as possible, and for the highest amounts, in order to increase their commission. Other companies collect the loans and they also work on commission so the more loans repaid means higher earnings for the collectors who put enormous pressure on clients to repay debts. Verbal and physical abuse is common, as is the entering of people’s homes at odd hours to harass clients or confiscate property to pay off arrears.

Evaluation
Another microfinance practice is to evaluate clients thoroughly, as well as the economic activities to be financed. Consumer loan companies, on the other hand, have been merely satisfied to know that applicants have already had loans from a microfinance institution. This is taken as a guarantee that clients are ‘disciplined to honour debts’. No financial evaluations are carried out nor is care taken to consider repayment capacity, an enterprise’s viability or the level of indebtedness of clients.

Appropriate loans
Sound banking practice dictates that loans approved must be in amounts within a client’s daily experience of managing money and must also reflect the actual cash requirements of an enterprise. Experience shows that if too much money is lent it is diverted into non-productive areas which makes the repayment of the loan less likely. Since the consumer finance company promoters are on commission there is a tendency to approve high amounts unrelated to a client’s income generating activities and this makes defaulting on repayment more likely.

Genuine groups
Microfinance institutions mostly lend to groups rather than individuals and ensure that the members of a group know and live near each other, and know about each other’s economic activities. This shared knowledge replaces traditional guarantee and collateral requirements and each member of the group accepts responsibility for the repayment of the group loan. Consumer loan companies have also used the group method but in an irresponsible way. Groups have been formed by the companies from customers waiting in line to be served. The instruction has sometimes been, “The first four in this line form a group”. Clients have been happy to do so because they thought it was simply a way for them to get their own personal loan and they gave little or no attention to who the other members of ‘their’ group were. Later, they have been shocked to discover they are not only responsible for their own loan but those of three or four others as well!

Microfinance institutions in Bolivia are weathering this particular storm as best they can and increasing numbers of people are realising the dangers of taking out loans with companies only interested in making a quick profit. If, as a result, people decide only to do business with reputable microfinance institutions this could deter those who do not follow responsible microfinance practice and principles, and who are not committed to the poor.

Ms Pilar Ramirez is President of the Eco-nomics Initiatives Foundation Private Financial Fund, in Bolivia and also a member of the ECLOF Board of Directors.