Lending Technologies, Competition, and Consolidation in the Market for Microfinance in Bolivia

Access to credit for the poor, especially in the urban areas, has dramatically improved in Bolivia during the past decade. This improvement has been largely due to the introduction of new microlending technologies. These technologies differ significantly from the collateral-based lending technology typically used by commercial banks. They also differ significantly across several microfinance organisations.

To compare microlending technologies, a benchmark model is developed. Using this model, the lending technology of two Bolivian microlenders is studied - BancoSol and Caja Los Andes. These two lenders enjoy the lion's share of urban microlending in Bolivia. Each of them, however, employs a different technology to be able to lend to the poor without threatening the financial sustainability of the organisation.

Caja Los Andes:

• Offers a personalised loan contract, as screens every borrower in order to determine their repayment capacity;
• Accepts imperfect collateral;
• Monitors borrowers to minimise the possibilities of moral hazard.

BancoSol:

• Offers a standardised loan contract to all takers, as does not screen each borrower;
• Uses joint liability in credit groups to control for moral hazard;
• Has lower monitoring costs as, over the years, has learnt the distribution of productivity types among its potential borrowers.

In both cases, portfolio quality and portfolio size matter, because microlenders have to cover substantial fixed handling costs related to lending to the poor.

Each lending technology attracts a different pool of borrowers. Low-productivity borrowers prefer the standard loan contract since, in this case, the possibility of cross-subsidisation from high-productivity borrowers exists. If the additional costs are reasonable, high- productivity borrowers prefer a personalised loan contract. The model predicts that high-productivity BancoSol borrowers (who will most likely be the wealthiest) will switch to Caja Los Andes.

The results show that:

• The borrowers who have switched to Caja Los Andes are significantly less poor and more productive than the average BancoSol borrower;
• The average Caja Los Andes borrower is less poor and more productive than the average BancoSol borrower.