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Executive Summary

Ecuador’s current economic outlook is similar to that of many commodity-exporting Latin American countries, with moderate growth forecasted for 2009. The country’s exports consist mostly of hydrocarbons and agricultural products. Since the country is dollarized, and therefore dependent on United States monetary policy, it will probably not be able to withstand international shocks as well as its non-dollarized neighbors. Microfinance in Ecuador continues to experience growth and relative stability in large part because of support from the government, international donors and aid agencies. Clear laws specifying client rights and responsibilities support the status of client protection in Ecuador.

• The general consumer protection law in Ecuador includes provisions on transparency, mechanisms for redress of grievances, appropriate collections practices and privacy of client information.
• The SALTO project demonstrates the importance of the microenterprise sector in Ecuador and shows commitment by the Banking Superintendent to address the current regulatory setbacks facing the industry. 
• The Inter-American Development Bank and the Banking Superintendent have identified the need to focus efforts on strengthening consumer protection and building a financial culture.

Introduction

Ecuador has long been one of the poorest countries in Latin America. The economy in Ecuador is mainly based in mining, agriculture, and fishing. The country's largest export is petroleum, which accounts for 40% of the export income and a quarter of the government's total revenue. The fluctuation of world markets has had a substantial effect on the Ecuadorian economy. Ecuador is frequently affected by natural disasters, a factor that limits economic growth. This fact, combined with a decline in world petroleum prices and political instability, contributed largely to the collapse of the Ecuadorian economy, culminating in the 1999 banking crisis and recession.

In response to the crisis, Ecuador adopted the U.S. dollar as the national currency in 2000. In conjunction with structural and regulatory modifications, the dollarization stabilized the economy and allowed for large economic growth from 2002-2006.

Although he was Finance Minister in the previous administration, the current president, Rafael Correa, is not exactly the banking institution’s sweetheart. According to Diario Hoy, “During [the past] two years [of Correa’s mandate] the financial sector has received negative comments from the President, who has even threatened, on several occasions, to jail its main representatives.”

The Ecuadorian microenterprise sector is extremely important to the growth of the country because it employees a substantial percentage of the workforce. According to a USAID report, the microenterprise sector provided jobs for an estimated 1,018,135 people, or 25% of the urban workforce. Sales from these jobs totaled 25.7% of GDP.  One of the sector’s main challenges is the lack of growth that microenterprises generally experience. In addition, only a quarter of microenterprises have either tax ID numbers or municipal licenses, making it difficult for microfinance organizations to grant official loans. 

Legal Framework

Ecuador’s Ministry of Finance directs and administers the country’s public finances, promoting their sustainable and consistent development and assigning public resources in an equitable and transparent manner. At the same time, the Central Bank manages the country’s monetary policy, setting interest rates and balancing the nation’s finances.

The Banking Superintendent is the governmental entity in charge of safeguarding the financial system and making sure that banks and other financial institutions govern themselves according to existing law. The superintendent investigates all financial institutions for compliance with the Superintendent’s rules and those of the Central Bank. It also provides the public with an information center containing comprehensive information on banks, interest rates and complaints. Such information is displayed on their website.

Among its other functions, the Superintendent oversees the banking system and ensures customers the degree of transparency established by the National Law on Transparency. The transparency law mandates all public institutions make their procedures public. Transparency is also required for private and other non-public institutions.

Since 1994, the General Law on Institutions in the Financial System has governed the Ecuadorian banking system. This law underlines the general rules for financial institutions including banks, homeowner societies, savings, and credit cooperatives. First, banks must correctly disclose both interest rates and conditions of their loans and must include such information in any marketing materials and supporting documents. As well, only authorized persons, including credit bureau representatives, are permitted to view client data.

In December of 2008, the National Assembly amended the General Law with the Law that Creates a Financial Safety Network. This law’s basic tenant seeks to prevent future financial crises in a country where crises are commonplace. It establishes a $1.2 billion dollar emergency liquidity fund which will be jointly funded by banks and the government. Moreover, the new law establishes strict criteria for shareholders and the board of directors of failed banks. The law stipulates that such individuals may never buy stock in other banks or serve on the board of any other banks. However, no additional articles within this new law target client protection.

The country’s General Law on Client Protection was passed in May of 2000. It established national client protection standards and made them the responsibility of the National Ombudsman. 

The law establishes the rights and obligations of clients, namely:

• The right to adequate, clear, truthful, opportune and complete information about goods and services including price, characteristics, quality, terms and possible risks that might be incurred through their use
• The right to transparent, equal and non-discriminatory treatment
• The right to be protected against misleading advertising
• The right to client education
• The right to complain
• The obligation to be a rational and responsible consumer of goods and services
• The obligation to take care of the environment
• The obligation to avoid health risk to themselves and others

Moreover, the law has four specific articles that deal with credit: 

• Regarding transparency, clients are entitled to know:
  - The net price of goods or services in the transaction, 
  - The total amount of payment corresponding to interest rates and delinquency rates, 
  - The number, amount and schedule of payments, and
  - The total sum to be paid for the good or service.
• Clients will always be entitled to pre-pay the partial or full amount they owe. Interest will only be accrued on the remaining debt. 
• During collections, clients shall not be subject to ridicule, defamation or any type of coercion. 
• All prices for credit card transactions shall be the same as cash transactions. Moreover, any sales discounts or offers related to cash sales shall be applicable to credit card transactions.

Despite a Microfinance Division within the Banking Superintendent, microfinance in Ecuador was largely unsupervised before 2002. Supervisors had little knowledge of the basic concepts of microfinance and risk-based supervision had not yet been introduced. The Microfinance Division supervised cooperatives yet ignored other institutions involved in microfinance. Furthermore, banking law did not provide a regulatory framework or even a definition for micro loans.

In 2003, USAID/Ecuador financed a project known as “Strengthening Access to Microfinance and Economic Liberation” (SALTO) in order to provide information regarding the Ecuadorian microenterprise industry to microfinance institutions and the Ecuadorian government. The primary objectives of the project were:

• To generate an understanding of the extent to which micro entrepreneurs have access to and use financial services
• To identify the constraints micro entrepreneurs face in accessing formal sector financial services
• To provide a framework through which donors and microfinance institutions (MFIs) could plan more effective programs and expand outreach

The SALTO project focused on increasing the availability of microfinance services to the poorer segments of the population and ensuring more direct benefits to smaller microenterprises. The project helped the Superintendent begin to draft microfinance-relevant norms, which were eventually approved by the Banking Board in December of 2002. The following constitute the Ecuadorian microfinance norms:

• A microloan is a loan that finances a microenterprise. Income generated by the microenterprise provides the source of repayment.
• The maximum microloan is $20,000.
• Loan provisioning is mandatory after 5 days of arrears.
• MFIs can establish the loan size above which guarantees are required. Loans below this amount require a personal guarantor or document signed by the borrower stating that personal assets can be seized in the event of loan default. 
• Financial institutions can choose to provision above specific provision requirements set by Superintendent.
• Loans that are 90 days past due must be provisioned at 100% and written off no more than 180 days past due.

The Superintendent sought to align loan-provisioning norms for microloans and consumer lending. Loan provisioning for consumer loans must follow the strict standards set for microloans. This was done for three reasons:

• To avoid market distortions. Financial institutions had been classifying their loans as consumer credit to benefit from their less strict provisioning requirements.
• Norms should take into account evolving market trends. 
• A perception existed that MFIs were penetrating the consumer lending niche.

SALTO assisted the Superintendent in developing policies to govern the formation of private credit bureaus in Ecuador. These policies allowed equal exchange of information between all financial intermediaries, regulated and non-regulated. This exchange of information was designed to reduce the risk of over indebtedness that has plagued many countries whose consumer credit systems do not allow access to all financial intermediaries.

According to DAI, the USAID contractor that implemented the project, “one major SALTO success was its work with the Superintendent of Banks to establish the first norms for licensing private credit bureaus. By the end of 2003, SALTO had helped attract four private groups to establish credit bureaus in Ecuador, serving the full range of clients seeking reliable credit information on current and potential borrowers (not limited to microfinance but also covering the full range of commercial, consumer, housing, and other forms of credit).”

In addition to the SALTO program, the Superintendent has pursued other initiatives to improve the conditions of microfinance in Ecuador. These initiatives include improving communication with financial services consumers. The Superintendent provides information on its own mission, Credit Bureaus, and Transparency on its website.

The Inter-American Development Bank and the Ecuadorian government have sent out a Request for Proposals for a project on Client Protection and Financial Culture in Microfinance. The project, which will cost $US 840,000, seeks to improve the current status of client protection in the country by:

• Designing client protection schemes in microfinance and strengthening the process of supervision.
• Designing and implementing an education campaign so that clients are informed of their rights when purchasing financial products and services.  

 Networks  

The formally regulated sector is made up of 26 savings and loan cooperatives, two large commercial banks, and one non-bank financial institution. The number of formally regulated MFIs in Ecuador is projected to grow substantially. The informal sector is composed of nearly 300 savings and loans cooperatives with a membership base of 1.3 million people. The informal sector tends to offer smaller loans and work with the poorest individuals in the most remote areas.

The main microfinance banking network in Ecuador is the Red Financiera Rural. The network has approximately 40 members including NGOs, savings and loans cooperatives and specialized microfinance institutions. The network focuses almost exclusively on rural microfinance. The members have approximately 600,000 clients, more than 50% of whom are women.

Since 2002, the network has been trying to actively implement the principles of financial transparency among its members, and to develop monitoring and benchmarking based on the prudent standards set by CGAP.

The Private Banks Association of Ecuador has 16 member banks, two of which are specialized microfinance banks (Pro Credit and Banco Solidario). It is the oldest banking association in the country and seeks to represent its members’ interests to the regulatory authorities and Ecuadorian society in general. The Association’s website makes no mention of transparency or other related client protection principles.   

Conclusion

Ecuador’s economy is very vulnerable to international shocks because its dollarization has made it dependent upon the decisions of the U.S. Federal Reserve Bank. Despite this weakness, the Ecuadorian microfinance sector is quickly becoming a significant economic force, serving more than a million clients of microfinance services.

Though much work remains before Ecuador achieves full financial inclusion, initiatives such as SALTO have contributed to improvements in the framework for microfinance in Ecuador.

The current landscape of client protection in Ecuador is strong in the sense that client rights are clearly outlined and formal rules exist regarding transparency, mechanisms for redress of grievances, client privacy and collections practices. These initiatives make an important contribution to client protection to the extent that banks follow them and regulators monitor them. Moreover, the initiatives IADB-Banking Superintendent project is a significant indicator of support for client protection in microfinance.

These profiles are not exhaustive and have not been reviewed by country experts. If you notice a gap or error in any of the profiles, we would very much appreciate your comments about how they can be improved. In this way we can work together to expand our understanding of the variety of client protection strategies and initiatives that are being pursued in different parts of the world.

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