VZCZCXRO5971
PP RUEHLMC
DE RUEHLP #0160/01 0231626
ZNR UUUUU ZZH
P 231626Z JAN 07
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 2152
INFO RUEHAC/AMEMBASSY ASUNCION 6477
RUEHBO/AMEMBASSY BOGOTA 3800
RUEHBR/AMEMBASSY BRASILIA 7678
RUEHBU/AMEMBASSY BUENOS AIRES 4926
RUEHCV/AMEMBASSY CARACAS 2169
RUEHPE/AMEMBASSY LIMA 2257
RUEHMD/AMEMBASSY MADRID 3275
RUEHMN/AMEMBASSY MONTEVIDEO 4358
RUEHQT/AMEMBASSY QUITO 4809
RUEHSG/AMEMBASSY SANTIAGO 9400
RUEHLMC/MILLENNIUM CHALLENGE CORP
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUMIAAA/USCINCSO MIAMI FL
RUEHUB/USINT HAVANA 0099
RHEHNSC/NSC WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 LA PAZ 000160 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/AND 
TREASURY FOR SGOOCH 
MCC FOR AKIRSCHENBAUM 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID BL
SUBJECT: BOLIVARIAN POLICIES UNDERCUT BOLIVIA'S 
MICROFINANCE INDUSTRY 
 
REF: A. LA PAZ 3402 
     ¶B. LA PAZ 3463 
 
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Summary 
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¶1. (SBU) The GOB issued a supreme decree on January 1 to 
establish a state development bank to provide subsidized, 
low-rate credits to small businesses associated with social 
organizations.  Although according to the decree, the 
development bank will be a second-tier institution, rather 
than a first-tier bank that would be in direct competition 
with the private sector, GOB officials and the regulations 
governing the bank indicate that it may actually be a 
first-tier bank in disguise.  World Bank and Inter-American 
Development Bank representatives told Econoff on January 17 
that, although they are concerned about the potential 
negative impact of the bank, they plan to support it, arguing 
that through engagement they will be able to shape the bank 
in a positive way to minimize harm.  The International 
Monetary Fund (IMF) representative suggested that Venezuela's 
purchase of a prominent Bolivian microfinance institution, 
Prodem, (ref B) would likely damage the sector more than the 
development bank.  Representatives from Bolivia's world-model 
microfinance sector told Emboffs on January 19 that they hope 
the government and Prodem lending programs reach a different 
market than the one they are serving so that the impact will 
be limited, but fear that these state-financed programs may 
put downward pressure on interest rates and erode repayment 
culture.  They are concerned that the government may 
implement interest rate caps and impose directed lending 
requirements, as the Venezuelan government has done. 
However, for now, the government's plans for the development 
bank and Prodem's plans are unclear.  End summary. 
 
--------------------------------------------- 
GOB Decree Establishes State Development Bank 
--------------------------------------------- 
 
¶2. (SBU) The GOB issued a supreme decree on January 1 to 
establish a state development bank, which is the centerpiece 
of its five-year national development plan emitted in June 
¶2006.  Previous government statements indicated that the 
development bank will provide low-rate credits to micro, 
small, and medium enterprises affiliated with social 
organizations and syndicates (ref A).  According to the 
decree, an existing state lending institution, the Bolivian 
National Financier (NAFIBO), will be transformed into the 
Productive Development Bank (BDP), a second-tier lending 
entity, by expanding NAFIBO's capacity through regulatory 
changes.  During the coming year, the BDP will conduct audits 
of another state lending entity, the Financial System 
Development Fund (FONDESIF), and certain FONDESIF assets will 
be transferred to the BDP, with the eventual goal of phasing 
out FONDESIF. 
 
¶3. (SBU) Although according to the decree the BDP will be a 
second-tier institution, meaning that it will lend funds to 
existing financial institutions to on-lend to clients rather 
than lending directly to clients in unfair, subsidized 
competition with private sector financial institutions, GOB 
officials and the regulations governing the BDP indicate that 
it may be a wolf disguised in sheep's clothing.  A government 
official indicated in a meeting with USAID that the BDP would 
identify loan recipients by name, which if true, would mean 
that the first-tier banks would have limited control over 
credit risk assessment of clients.  BDP regulations allow for 
repayment risk to be shifted from the first-tier banks to the 
 
LA PAZ 00000160  002 OF 003 
 
 
BDP in loan contracts with clients, supporting the theory 
that the BDP will actually be controlling the lending funds 
and making decisions regarding how to disburse them. 
 
--------------------------------------------- ---- 
IFIs Concerned About Bank, But Plan to Support It 
--------------------------------------------- ---- 
 
¶4. (SBU) In a meeting on January 17, representatives from the 
Andean Development Corporation (CAF), Inter-American 
Development Bank (IDB), and the World Bank told Econoff that 
their institutions plan to support the BDP through either 
lending or technical assistance.  While the CAF 
representative seemed supportive of the GOB's approach, the 
IDB and World Bank representatives expressed concern about 
the potential negative impact of the BDP on Bolivia's 
world-class microfinance industry, but argued that by 
engaging the GOB on the development bank, they would be able 
to shape the bank in a positive way, whereas if they did not 
engage, the government may implement a poorly-designed 
development bank that would do even greater harm to the 
private sector.  The International Financial Institution 
(IFI) representatives agreed that the BDP would likely be 
more a subsidy transfer mechanism than a lending entity and 
anticipated that repayment rates would be low.  They also 
agreed that the BDP's impact on the private sector would 
depend on both the design and the size of the BDP's lending 
program.  Press reports indicated that the BDP has USD 30 
million of lending capital, while government officials have 
indicated in meetings with Emboffs that the bank has between 
USD 40 and USD 175 million, with up to USD 70 million from 
Venezuela.  The IFI representatives were unclear how much 
Venezuelan funding is mere talk and how much has actually 
materialized, as Venezuela does not participate in donor 
coordination meetings. 
 
¶5. (SBU) The International Monetary Fund (IMF) representative 
expressed reservations about the GOB's ability to implement 
the BDP, and argued that the bigger threat to the sector is 
Venezuelan state-owned Industrial Bank's recent purchase of 
Prodem, one of the largest and most important Bolivian 
microfinance institutions (ref B).  He feared that Venezuelan 
financing of Prodem could reach levels equivalent to the 
total amount of lending by the entire Bolivian microfinance 
sector last year, which would have an enormous impact on the 
sector if Prodem offered subsidized credit and harmed 
Bolivia's repayment culture. 
 
--------------------------------------------- ------- 
Microfinance NGOs Concerned About Bank and Venezuela 
--------------------------------------------- ------- 
 
¶6. (SBU) Bolivia's microfinance sector has developed into a 
world model, sustainable industry during the past two decades 
with considerable support from USAID in lending capital and 
technical assistance.  The industry now serves approximately 
540,000 clients, has an outstanding portfolio of 
approximately USD 700 million, and generally offers lower 
interest rates than microfinance institutions in the rest of 
Latin America.  In a round table discussion at USAID on 
January 19, microfinance representatives explained that about 
80 percent of their loans are for commerce and services, with 
only about 20 percent going to production.  The government 
aims to focus on providing credit to production, particularly 
in rural areas which are less saturated, so the regulated 
microfinance network hopes that the government will reach a 
different market than the one they serve -- one that would 
not likely be profitable for nor compete with the private 
financial sector.  The General Manager of BancoSol calculated 
 
LA PAZ 00000160  003 OF 003 
 
 
that the BDP should have USD 150 million in capital, based on 
the combination of NAFIBO, FONDESIF, and regional fund 
capital, which could be leveraged ten times for a total 
lending capacity of USD 1.5 billion. 
 
¶7. (SBU) The microfinance representatives' two main concerns 
regarding the development bank and the Venezuelan purchase of 
Prodem are anticipated downward pressure on interest rates 
and possible damage to Bolivia's good repayment culture. 
Average interest rates are around 20 percent currently, with 
a focus on short-term working capital loans.  The 
representatives feared possible GOB attempts to impose 
single-digit lending ceilings or to impose GOB-directed, 
sectorial lending requirements by decree, as the Venezuelan 
government has done.  However, for now, the government's 
plans for the BDP and Prodem's plans are unclear.  The 
representatives explained that the government is divided and 
does not have a clear policy and that they do not expect to 
have a more certain idea of the future until after the 
Constituent Assembly terminates in August 2007.  The 
microfinance network is engaging the government in attempts 
to shape the BDP in as positive a way as possible, but noted 
that it is difficult to hold technical conversations with the 
GOB, which is focused on political results. 
 
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Comment 
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¶8. (SBU) The impact of the state development bank and 
Venezuelan-owned Prodem on the private microfinance sector 
will depend on the design and size of the bank's and Prodem's 
lending programs.  We will continue to monitor this issue 
closely.  End comment. 
URS