34098 CGAP Agricultural Microfinance CaseStudy No. 3 August 2005 Caja Los Andes (Bolivia) Diversifies into Rural Lending This case study was researched and written by Douglas Pearce, Myka Reinsch, Joao Pedro Azevedo, and Amitabh Brar. The authors thank Juan Buchenau for his valuable contributions to this case study, and Richard Rosenberg and Brigit Helms for their comments as CGAP reviewers. Summary Caja Los Andes (CLA) has distinguished itself as a profitable, diversified provider of individual loans in the highly competitive Bolivian microfinance market. (Caja Los Andes, F.F.P., became Banco Los Andes Procredit in January 2005.) After inheriting a three-year-old urban lending portfolio from its parent organization (Procrédito) in 1995, CLA immediately began to expand its operations to rural areas and add agricultural loans to its portfolio. Despite a difficult recession that began in 1999, CLA has performed well and continues to hold close to 10 percent of its total portfolio in rural and agricultural loans. This case study examines the adaptation of CLA's urban lending methodology for rural and agricultural loans, its risk management techniques for agricultural finance, and the impact of socio-political constraints in Bolivia that limit portfolio growth. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Background Challenges of Rural Lending Caja Los Andes (CLA) opened in La Paz, Bolivia in With its expansion into rural Bolivia, Caja Los 1995. It was the offspring of Procrédito, a financial Andes faced a spectrum of challenges familiar to NGO founded in Bolivia in 1992 with support from MFIs around the world that have attempted the German consulting firm International Project agricultural finance. Consult (IPC). CLA was the first fondo financiero privado (private financial fund, or FFP) licensed Higher Cost of Reaching Rural Clients under then new microfinance regulations. CLA was CLA took a number of steps to minimize the costs by no means the first institution on the Bolivian associated with the physical distance between rural microcredit scene, but it distinguished itself from its clients. It strategically selected the locations of its competitors by pursuing individual lending, as rural offices, focusing on small town hubs in more opposed to solidarity group loans. densely populated rural regions, and favored areas Although Procrédito had focused on an urban that had good irrigation systems and a sound base of clientele, CLA immediately began expanding its crops with well-established markets.1 These rural credit portfolio to include rural enterprises. The offices do not lend exclusively to rural clients, so urban market for microfinance in Bolivia was the lower cost of lending to clients in town, becoming saturated, and the failure of state-owned combined with the slightly higher interest rates agricultural banks in the 1980s had left enormous charged for agricultural loans, helps cover the swathes of the largely rural country with no access expense of lending to clients in more isolated areas. to banking services. CLA hoped that rural expansion The cautious provision of some consumer credit to would help diversify its portfolio and deepen its salaried employees also helps offset agricultural mission of improving living standards by providing lending expenses. financial services to the poor. 1CLA established its first rural office in 1996 in Punata, a small town in the relatively well-populated agricultural department of Cochabamba. See Buchenau, "Financing Small Farmers in Latin America," 1997. CGAP Agricultural Microfinance Case Study In keeping with its individual lending CLA as collateral for up to 50 percent of the methodology in urban areas, CLA makes larger first value of a loan. loans to agricultural clients if warranted. It bases · Appraisal, disbursement, and repayment: Dis- loan sizes on repayment capacity rather than a bursements can be made in installments corre- stepped approach, in which borrowers establish a sponding to the crop cycle, and payments are set credit history by starting with smaller loans and according to revenue flows. Several disburse- working their way up. CLA also moves up-market ment and repayment plans are offered, with its clients, making increasingly larger and depending upon the needs and risk level of the longer-term loans as their enterprises grow. These borrower, including: practices boost efficiency and balance the agricultural portfolio, allowing CLA to continue 1. single disbursement with a single lump sum reaching out to new, lower-income borrowers. payment of capital and interest at the end of the term; Mitigation of General Agricultural Risk 2. single disbursement followed by periodic Bolivia has a natural advantage for the diversi- repayments with two variations (fully amor- fication of agricultural risk: an array of altitudes tized with periodic payments in equal and microclimates, even within small areas, that amounts, or partially amortized with helps protect against widespread crop losses. CLA periodic interest payments and a balloon institutionalizes and builds on these natural payment at the end of the term); advantages by focusing its services on clients who 3. two or three periodic disbursements with diversify their own risk, either through the one final capital and interest payment at the cultivation of multiple crops, planting in several end of the term; and locations, and/or combining dairy farming, 4. different, irregular disbursements and livestock, or other income-generating activities with repayments tailored to the cash flow crop production.2 Borrowers with more diversified schedule of the individual enterprise. enterprises may access larger loan amounts than farmers relying on fewer income sources. Managing Borrower-Specific Risk in a More CLA worked with IPC to develop a lending Complex Environment technology that treats the various activities of a rural All of CLA's rural loan officers have degrees in family as a single socioeconomic unit and accounts agriculture and/or backgrounds in agronomy, plus for all cash flows of a multi-faceted rural enterprise. significant experience living in the local area. These This approach helps the institution maintain a high qualifications ensure that staff has thorough repayment rate on its agricultural portfolio. knowledge of agricultural inputs, risks and business models, as well as local culture and indigenous Adaptation of Loan Products to Meet languages. Loan officer training in lending method- Rural Needs ology and credit analysis is followed by approxi- CLA and Procrédito adapted existing policies on mately one year of on-the-job training under the collateral, appraisal, disbursement and repayments close supervision of a branch manager. to meet rural conditions: CLA also takes a hard stance on repayment. · Collateral: Many potential rural clients did not One of the institution's abiding challenges is to possess sufficient assets or even registered land change rural borrowers' perceptions and habits titles. Bolivian law, moreover, prevented many regarding financial services because many farmers' small farmers from using their land as previous experience with credit involved unsustain- collateral.3 CLA already used a flexible able rates and terms, and ready loan forgiveness. approach to collateral though, that focused on CLA thus made a point of establishing a reputation the value of pledged assets to the borrower, for not tolerating delinquency. Loan officers visit rather than the recovery value for the lender. clients immediately after the first missed payment, Rural loans under US $7,500 are collateralized in part to help address any business problem before with farm or household assets, and non- the damage multiplies. Penalty interest rates are registered land titles may be deposited with charged to delinquent clients, while reduced interest rates are offered to repeat clients in good standing. 2Most rural families in Bolivia engage in two-to-five different income-generating activities, as compared to urban citizens, who typically have only one or two income sources. See Buchenau, "Financing Small Farmers," 1997. 3Bolivian land reform laws are intended to protect poor farmers from land seizure by predatory lenders. 2 Caja Los Andes Quick Turnaround Times CLA's overall portfolio in 2002, approximately 12 CLA emphasizes a rapid application and percent in terms of numbers of loans, and carried an disbursement process. Staff use sophisticated elevated portfolio at risk greater than 30 days (PAR computer software to develop balance sheets and > 30) of 8.26 percent; as compared to 7 percent for cash flow statements for efficient, systematic the portfolio as a whole. In 2003, agricultural analysis. Approvals are decentralized, with branch lending declined 4 percent of portfolio volume, managers responsible for loans of up to US $5,000, about 10 percent of the number of loans, with an and regional directors, up to $20,000. Staff improved PAR > 30 of 3.4 percent. The institution remuneration is tied to the size, number and quality was finally self-sufficient, and its return on equity I of officers' loans, providing an incentive to process 2002 and 2003 was over 20 percent. (See table 1 for loans quickly and accurately.4 The process takes an additional information. average of three to seven days; repeat borrowers In spite of regional financial instability starting enjoy faster service. in the mid-1990s and a Bolivian recession that began in 1999, Caja Los Andes and the regulated Seven Years of Rural Lending Bolivian microfinance industry as a whole continued to flourish through 2003. Those institu- Between 1995 and 2002, CLA's loan portfolio grew tions with a substantial rural portfolio fared at an average annual rate of more than 40 percent. noticeably better than their exclusively urban By 2002, the organization had 477 employees counterparts.6 While political uncertainty and operating through 27 branches in six (of nine) borrower protests in urban areas contributed to a regions, offering a variety of both urban and rural significant decline in the country's formal banking financial products. The MFI's primary products sector, the FFPs managed to nearly double their were individual loans and savings deposits for portfolios, lower their arrears rates andalthough micro-, small- and medium-sized enterprises. Loans modest compared to previous yearsmaintain typically carried interest rates of 1.3 percent to 2.5 profitability.7 percent per month for US dollar denominations (up During this volatile economic period, CLA to 3.5 percent per month for disbursements in gradually increased its rural lending (averaging Bolivianos), with terms of up to five years. CLA between 15 and 17.5 percent of overall portfolio also offered time deposits, credit lines to proven between 1999 and 2002), which served to balance customers, letters of guarantee, urban housing CLA's portfolio and allowed it to continue growing, renovation loans, consumer credit to salaried work- despite widespread defaults in the microfinance ers, and gold-based pawn loans. industry in 2000. The value of the rural portfolio At the end of 2002, CLA had a total during the downturn reinforced CLA's commitment outstanding credit portfolio worth US $64.2 to maintaining a well-diversified, urban-rural million,5 comprised of 51,000 loans to 47,000 portfolio. Rural lending volume peaked in mid-2001 clients. Its portfolio alone represented 26 percent of and then declined as loan sizes began to decrease the outstanding loan portfolio of the regulated (see table 3). Over the course of 2003, agricultural microfinance sector in Bolivia in 2002. The PAR > 30 was restored to the approximate level of institution's savings deposits were valued at $34.6 the portfolio as a whole, 3.4 percent (compared to million and comprised about 30,000 accounts. 3.1 percent overall), but the agricultural portfolio Loans ranged in size from under $500 (21 percent of declined to 4 percent of total loan activity (see table loans) to $200,000, with an average loan size of 4 below). $1,250. Around 20 percent of agricultural loans were for longer-term investments (up to $30,000 per Donors and Investors loan), such as tractors (up to $30,000), trucks (up to $25,000), cowsheds (up to $3,000) and milking Over the course of its development, CLA and equipment (up to $4,000). Procrédito have received technical assistance from Loans to rural clients, which included IPC (funded by Gesellschaft für Technische agricultural credit as well as rural enterprises, Zusammenarbeit, or GTZ); the multilateral financial accounted for 9 percent of overall portfolio volume institution Corporación Andina de Fomento; the and 15.3 percent in terms of number of loans. Agricultural credit alone comprised 6 percent of 6Based on 2001 Bolivia statistics from the MIX Market (www.themixmbb.org); and Buchenau, "Products in the 4FAO, Term Financing In Agriculture, 2003. Process of Commercialization," 2001. 5All monetary figures are given in US dollars unless 7Von Stauffenberg, "How Microfinance Evolves," 2001; otherwise noted. Caja Los Andes, Annual Report 2002. 3 CGAP Agricultural Microfinance Case Study Table 1 Financial indicators of Caja Los Andes, 2000-2003 Item 2000 2001 2002 2003a Outreach Outstanding gross portfolio (US$) 46,759,853 52,633,750 64,219,989 82,179,376 Number of outstanding loans 44,180 46,605 51,073 53,213 Average outstanding loan size (US$) 1,058 1,129 1,257 1,544 Average loan size as % of GDP/per capita 105% 121% 143% 164% Total savings deposits (US$) 13,920,534 21,719,87 34,550,321 49,100,000 Number of saving accounts 18,589 23,308 29,701 NA Average deposit balance (US$) 749 932 1,163 NA Sustainability/Profitability Return on Assets (%) 1.4% 1.5% 1.6% 2.1% Return on Equity (%) 13.6% 11.5% 20.1% 25.5% Operational self-sufficiency (%) 1.55% 1.49% 1.40% NA Financial self-sufficiency (%) 1.07% 1.07% 1.08% NA Operational efficiency Operating expense ratio (expenses/average portfolio) 12.15% 13.02% 12.46% NA Loan officer productivity (clients per loan officer) 379 366 326 NA Portfolio quality PAR > 30 days 5.1% 6.3% 4.8% 3.1% Exchange rate (Bolivianos/US$): . 6.81b 7.48c Sources: Caja Los Andes Annual Report; CGAP consultant visit,.2003; Caja Los Andes internal reports. Notes: aUnaudited financials. CLA, 2003, Annual Report 2002. Unaudited financials, December 2003. b c Table 2 Evolution of CLA Rural Loan Portfolio, 1996­2002 1996 1997 1998 1999 2000* 2001* 2002* Total CLA loans 23,905 29,545 34,838 39,335 44,180 46,605 51,073 No. of rural loans 906 1,285 3,312 5,817 7,770 7,136 7,833 % Rural 3.8% 4.3% 9.5% 14.8% 17.6% 15.3% 15.3% Gross CLA portfolio (US$) 11,899,908 20,459,135 28,613,915 35,852,453 46,897,140 54,912,371 66,386,519 Rural portfolio (US$) 386,586 740,027 2,547,420 5,073,053 7,103,379 6,337,044 6,132,715 % Rural 3.2% 3.6% 8.9% 14.1% 15.2% 12.0% 9.5% Average rural loan size (US$) 427 576 769 872 914 888 783 Source: FAO, 2003. * Gross portfolio figures for 2000-02 are from the Mix Market. 4 Caja Los Andes Table 3 Agricultural Loan Portfolio 2000­03 2000 2001 2002 2003 (unaudited financials) Outreach Active portfolio (US$) 4,333,280 4,258,519 3,884,503 3,432,856 Share of total active portfolio 9% 8% 6% 4% Growth from prior year NA -2% -9% -12% Number of loans outstanding NA 5,755 5,815 5,006 Average loan size (US$) NA 740 668 686 Portfolio quality PAR > 30 days as % of portfolio 6.29% 10.15% 8.26% 3.40% Source: Caja Los Andes, 2003 unaudited data, Annual Report 2002, and CGAP consultant visit, 2003. Multilateral Investment Fund of the Inter-American · Loan structure and repayment schedules should Development Bank, plus financing from an array of be tailored to fit the inherent seasonality of international and Bolivian investors. many rural enterprises. IPC played an integral role in helping CLA · Diversification through agricultural lending can adapt Procrédito's urban lending methodology to help preserve an MFI's profitability during serve an agricultural market and become a self- economic recession. sustaining institution. Its technical assistance included help in establishing financing relationships, · Political instability poses a grave threat to conducting feasibility studies, arranging extended agricultural and urban, microfinance, learning visits to Calpiá in El Salvador, and particularly when appeals to the masses by conducting staff training. The long-term perspective political candidates create incentives to default. of IPC and other donors, plus the combination of When lending in an area contaminated by past technical and financial support extended to CLA, agricultural debt forgiveness, a particularly contributed to its success. Finally, the commitment strict approach to late and non-payments is of CLA board members and managers to the rural required, but may not be sufficient to ensure portfolio helped the institution weather difficult high portfolio quality. times. Conclusion Lessons Learned The experience of Caja Los Andes illustrates both The following lessons can also be drawn from Caja the potential and the limits of expanding Los Andes' experience in agricultural microfinance: microfinance operations into rural contexts and agricultural activities. While the CLA portfolio in · Agricultural loans can be sustainableeven profitableif combined with other types of agriculture is well managed, sustainable, and significant in terms of volume and clientele, it now rural and urban financing. represents less than 10 percent of CLA's overall · When first expanding into rural areas, it can be portfolio. The weight of agricultural lending in the effective to initiate operations in more portfolio is similar in other applications of the IPC populous, lower-risk, and high-opportunity model (15 percent of the gross portfolio at Calpiá in regions before expanding to more challenging El Salvador, for example). Poorer clients in remoter areas. areas are also not served in the initial stages of · Agricultural portfolio risk can be mitigated by expansion into agricultural lending at least, with targeting borrowers engaged in diversified branches opened in rural population centres for economic activities. clients with diverse income sources. · Loans to rural enterprises should be awarded on the basis of all agricultural and non-agricultural CLA's diminished agricultural portfolio over the income streams. past few years can be traced to high delinquency rates in two rural offices, and to a broader 5 CGAP Agricultural Microfinance Case Study undercurrent of political instability in Bolivia. Civil performance has remained strong and continues to unrest, increased protectionist policies and ongoing grow, making up for diminished loan values and the pressure from interest groups seeking government- higher delinquencies of the agricultural portfolio. mandated loan forgiveness for farmers have neces- Nevertheless, political instability is putting at risk sitated a scaling back of rural and agricultural the long-term sustainability of CLA's agricultural lending in recent years. CLA's overall institutional portfolio. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Bibliography Buchenau, J. "Financing Small Farmers in Latin America." Paper presented at the First Annual Seminar on New Development Finance, International Projekt Consult, Frankfurt, Germany, September 1997. Buchenau, J. "Products in the Process of Commercialization: Commercialization of Micro and Small Rural Loans." Frankfurt: IPC, 2001. FAO (Food and Agriculture Organization of the United Nations). Term Financing In Agriculture: A Review of Relevant Experiences. FAO Investment Center Occasional Paper, no. 14, Report No. 03-054 CP-GEN. Rome: FAO, 2003. Los Andes FFP. Annual Report 2002. La Paz: Caja Los Andes, 2003. Rubio, Frank. "Caja Los Andes S.A. Fondo Financiero Privado." Consultant report for CGAP, Washington, DC, 2003. Von Stauffenberg, Damian. "How Microfinance Evolves: What Bolivia Can Teach Us." Microenterprise Development Review 4, no. 1 (July 2001). 6 Caja Los Andes - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Agricultural Microfinance Case Studies FINANCIAL INDICATORS DEFINITIONS TABLE Outstanding gross portfolio--the outstanding principal balance of all of the MFI's outstanding loans including current, delinquent, and restructured loans, but not loans that have been written off. Number of active borrowers--the number of individuals who currently have an outstanding loan balance with the MFI or are responsible for repaying any portion of the gross loan portfolio. Average loan balance per borrower--the outstanding gross portfolio divided by the number of active borrowers. Average loan balance as percent of GNI per capita--average loan balance per borrower divided by the country's World Bank-published gross national income per capita. Total savings deposits--the total value of funds placed in an account with the MFI that is payable on demand to the depositor. This item includes any current, checking, or savings accounts that are payable on demand. It also includes time deposits, which have a fixed maturity date. Number of savings accounts--the total number of deposit accounts at the MFI, as a proxy for the number of depositing individuals that the MFI is liable to repay. This number applies only to deposits that are held by the MFI, not to those deposits held in other institutions by the MFI's clients. The number is based on individuals rather than the number of groups. It is possible that a single deposit account may represent multiple depositors. Average deposit balance--total savings deposits divided by number of savings accounts, as a proxy for average client savings. Portfolio at risk (PAR > 30 days)--the value of all loans outstanding that have one or more installments of principal past due more than 30 days. This item includes the entire unpaid principal balance, including both the past due and future installments, but not accrued interest. It also does not include loans that have been restructured or rescheduled. Return on assets Net operating income plus taxes Measures how well the MFI uses its total assets to (ROA) Average assets generate returns Return on equity Net operating income less taxes Calculates the rate of return on the average equity for (ROE) Average equity the period Operating revenue Measures how well an MFI can cover its costs through (Financial expense plus Loan loss operating revenues. In addition to operating expenses, Operational self- provision expense plus Operating it is recommended that financial expense and loan loss sufficiency expense) provision expenses be included in this calculation as they are a normal (and significant) cost of operating Adjusted operating revenue Measures how well an MFI can cover its costs taking Financial expense plus Loan loss into account a number of adjustments to operating Financial self- provision expense plus Adjusted revenues and expenses. The purpose of most of these sufficiency operating expense adjustments is to model how well the MFI could cover its costs if its operations were unsubsidized and it were funding its expansion with commercial-cost liabilities. Operating expense Operating expense Includes all administrative and personnel expense, and ratio Average gross loan portfolio is the most commonly used efficiency indicator Loan officer Number of active borrowers Measures the average caseload of each loan officer productivity Number of loan officers 7