United Nations Capital Development Fund

Project Evaluation Summaries
Prepared by the Policy, Planning and Evaluation Unit (PPEU)

Bolivia

I. Basic Project Data

Project Number:	BOL/90/C01
Project Title:	Support to PRODEM Microenterprises
Government Executing Agency:	Ministry of Planning and Coordination
National Implementer:	PRODEM
Sector:	Finance
Sub-Sector:	Microenterprise
UNCDF Budget:	US$ 2,263,310
Other Budget (PRODEM):	45,472
Total Budget:	2,308,782
UNCDF Expenditures at Evaluation:	1,849,895
Date Project Approved:	28 Oct 1991
Date Project Began:	May 1992
Date Project Evaluated:	Mar 1996
Type of Evaluation:	Ex-Post

II. Background

In the mid-1980s, Bolivia enacted an austerity and stabilization program to combat hyperinflation and general economic deterioration. At the time, escalating unemployment was accompanied by an increase of activity in the informal economic sector. Rather than combat this rise in the informal sector, the Government determined that, if properly directed, this new activity could help reinvigorate the private sector.

One solution was to form PRODEM (Promotion and Development of Microfinance), an initiative that was created through the private efforts of Bolivian businesses in 1986 to channel international finance to informal, urban microenterprises. It started in the capital, La Paz, and by 1991 PRODEM had expanded to most of Bolivia's largest cities and had extended more than 15,000 loans. With a low rate of arrears (97.7% repayment), the project was a widespread success. However, because it had to cover 97% of all finance and operating costs, PRODEM found itself limited by its status as an NGO. In 1991, it decided to create a new commercial bank to which it would gradually transfer its portfolio. As a result, Banco Solidario S.A. (BancoSol) was established in early 1992. With BancoSol covering PRODEM's former urban clientele, PRODEM redefined its mission to provide credit services to smaller cities and rural areas.

The project's two target provinces had been particularly hard-hit by the austerity plan, and UNCDF committed itself to a three-year program to help improve local incomes and living conditions in the provinces through loans for working capital, small investments, and increased savings, channeled through PRODEM.

III. The Project

Through this project UNCDF intended to replicate and expand PRODEM's successful credit and savings experience to two new urban markets. Specific objectives were to increase incomes and to improve living conditions through microenterprise/entrepreneurial support in the urban centers and provinces of Oruro and El Alto. Strategies differed for the two provinces and included supporting working capital loans, or investment loans, and encouraging improved savings services.

Development objective

The development objective of this project was to increase incomes and improve living conditions among the urban poor of the project areas through credit and savings services.

Immediate objectives

• In Oruro, the project was to provide working capital loans favoring solidarity groups representing 5,000 microentrepreneurs, with an $800,000 active portfolio to be transferred after three years to the commercial bank, BancoSol.

• In El Alto, the project was to provide small investment loans for about 800 microenterprises, with an active portfolio of $600,000 after nine months. In each area, real interest rates were to be charged. In addition, there was a perceived need to establish a voluntary savings program for PRODEM clients, and to set up an information and monitoring system of savings, withdrawals, and the status of loans. At the end of the project, the portfolio was to be transferred to BancoSol.

• UNCDF provided $2.3 million to PRODEM for a three-year duration. At the end of this period, the portfolio would be transferred, and the fund placed on deposit, at BancoSol. The project was approved in 1991, and began operation in May 1992. At the time of the evaluation, about $1.5 million was held under the name of PRODEM/UNCDF in fixed-term deposits at BancoSol, with earned interest of about $200,000.

IV. Purpose of the Evaluation

This ex-post evaluation was asked to analyze the results of the project, in particular regarding the mobilization of savings, institutional performance, and the impact on the target population. In addition, the consultant was requested to assess the implications of the loan fund portfolio transfer from PRODEM to BancoSol, and to provide recommendations for its future use.

V. Findings of the Evaluation

A. Assessment of the results achieved

PRODEM was successful in reaching both urban and rural marginalized populations using various financial instruments. This can be attributed in part to the lack of market competition within these underserved markets and to a high level of trust by the population in the reputation of PRODEM. Market access was facilitated by PRODEM's reliance on its previous

experience, concentration on merchant loans which made the best use of its technology, and maintenance of flexible outreach methods, including weekend hours for its offices to conform with market days and cash availability.

Institutional Capacity:

• BancoSol benefited from the intermediate role performed by PRODEM with grant assistance by UNCDF. Through the partnership it was able to diversify its portfolio. At the same time, as a relatively new financial institution with social objectives, it also avoided potentially high startup costs and the burden of new risk.

• In Oruro: Loan disbursal conformed to PRODEM's previous experience and methodology, with ready availability of funds, relatively small loans (averaging $500), and short repayment periods. The average loan size was found to be above the limits agreed to with UNCDF (up to $300), but the overall results were positive. High levels of repayment enabled portfolio transfer to BancoSol after two years of operation, rather than the three years that had been projected.

• In El Alto: PRODEM developed a credit instrument with which it had no prior experience. Rather than small ready-access loans with short terms, the credit was for targeted small investment projects, and had much higher average loans ($10,000). This product was poorly designed, and the formation of solidarity group was inappropriate. The credit line posted an arrears rate of 15% while UNCDF funds were used. However, after a recuperation campaign that followed UNCDF project termination, the recovery rate was increased to 98.5%.

• The savings component initially had little positive effect. Upon transfer of the savings portfolio to BancoSol, the original compulsory savings policy (5%) was relaxed to voluntary savings. There was a rapid outflow as people quickly sought to convert their savings to more stable dollars, a product not then offered by BancoSol. Later, when BancoSol was permitted to offer dollar savings accounts, savings accumulation was able to reach about US $7 million, covering some 20% of assets.

• Administrative procedures at PRODEM were found to be of high quality. Regular, proper financial statements, the availability and timeliness of data, and the staff's identification with the institution and with the clientele were all strong. High staff motivation was found to be a key to PRODEM's ability to reach clients in remote areas.

• PRODEM does appear to have problems covering the full cost of administration. It's rates of 4% a month are above those of similar organizations in Bolivia and higher than market rates. In addition, PRODEM has to charge a fee for services. However, while the fee covers operating and financial costs and inflation, it has yet to cover its cost of capital. This implies that operating costs are still too high. The evident high costs may be worrisome considering that group leaders undertake some administrative roles, and that the solidarity groups have generally been shown to provide good collateral in the Bolivian context [NB: it is common for credit projects to require several years to achieve self-sufficiency].

Impact on target population:

• While some discrepancies were found in the precise numbers of clientele, in general the system provides for good portfolio management. However, there are only limited data collected on broadly classified client groups, making calculations of project impact on incomes and of the borrowers' capacity to carry debt difficult. A new computerized program has been put in place helping to solve some of these problems, but still performing only minimal individual tracking of the clients' key economic or social indicators.

• While the consultant found project impact assessment difficult due to the fungible nature of money, blurred economic or family ties, and the lack of baseline data tracking or control groups, the clients stated that PRODEM loans had improved their enterprises and helped them directly or indirectly to finance improvements to housing, furniture, utility coverage, etc.

Gender:

• In Oruro, nearly 70% of the loans serviced women's ventures, while in El Alto (where the loans were on average much larger) nearly 70% of the loans were for men's businesses.

B. Assessment of project design

The relationship between the NGO PRODEM and BancoSol has been well-designed to facilitate sustainable access to credit and savings by the target populations, expanding the formal financial sector's reach into the informal and semiformal sectors of low-income borrowers and small- to -medium-sized businesses. The project effectively opened up both savings and loan instruments to informal-sector Bolivians who had previously been isolated from the services of formal sector financial markets. UNCDF grant funds enabled PRODEM to facilitate this market opening, covering startup costs and initial risks.

Despite an overall positive evaluation, PRODEM did not follow several specific guidelines of the UNCDF agreement. Loan limits and loan averages both exceeded the agreed ceilings, and some of the portfolio was transferred to BancoSol prior to the initial project agreement and without direct consultation with UNCDF. However, utilization of UNCDF funds permitted PRODEM to surmount liquidity problems encountered in early phases of microfinance projects, and transfer of a portion of the portfolio prior to the project agreement may have facilitated PRODEM's entry to additional market areas.

VI. Recommendations

UNCDF should encourage PRODEM to proceed with the planned opening of 20 additional branches (for a total of 48) through 1998, and authorize the use of UNCDF fixed-term deposits at BancoSol for this purpose, provided that this does not erode the capital base of PRODEM. The funds should not be targeted to specific sectors or credit products, but rather to the administration of ready credit.

VII. Policy Implications and Lessons Learned

Successful financial products rely on careful incentive structures, corresponding not only to the needs of the financial mechanism itself but also to the ability of the implementing institution to suitably respond to the market. Financial products operating for the purpose of social impact should maintain a capacity for flexibility in terms of product design, criteria, and delivery systems.

Too high a commitment to solidarity group models in place of conventional collateral-based guarantees can actually break solidarity and the work ethic, especially when one or two members in a group of four or five receive larger loans whose debt cannot be easily guaranteed by the group. Positive returns to solidarity group models diminish as loans grow larger and more diverse.

Smaller loans tend to be more effective in reaching women beneficiaries. A mixed strategy of providing small and larger scale loans, as well as targeting women for larger loans should be considered.

The good performance of PRODEM and BancoSol in terms of loan recovery is a direct consequence of prudent evaluations of the clients' cash flows and the disbursal of appropriate loans (i.e. low debt:income ratios). Its success is also due to strong information-gathering systems, and the ability to rapidly respond to problems in cases of payment delays. This points to the critical role of monitoring and information systems, clear loan criteria, and solid loan packaging and counseling for clients. PRODEM provides a good, replicable model for the design of these systems.

VIII. Evaluation Team

The evaluation was conducted in March 1996. The mission consultant was Norah Becerra of Integration MBA, Frankfurt, Germany.