Client Protection in Bolivia

Executive Summary

Bolivia’s banking system has long suffered from corruption and weak regulation. There has been little political will or other resources dedicated to the creation of a framework for consumer protection. This is especially in light of the country’s current political landscape featuring a stark division between President Evo Morales and his opponents as the president tries to pass a new constitution. Many recommendations to improve client protection for financial services in Bolivia have been made by local and international organizations. However, the status of consumer protection in Bolivia is weakened by little or no state action on this issue and scarce initiative on behalf of banks to self-regulate.

The principal banking networks of Bolivia have not set client protection standards.
No agreement has been made between banks and the regulatory authorities about the creation of a financial services ombudsman.
The instructions that have been erected to protect clients are sector-specific and leave out financial services.

Introduction

Bolivia is amongst the poorest Latin American countries and has an economy dependant mostly on its natural resources including tin, copper, silver, and natural gas. It is also highly dependent on foreign aid. The banking system in Bolivia has long suffered from corruption and weak regulation. The country has a central bank, but few private banks.

In 1993, Bolivia passed the Banking Law (which has been subsequently reformed several times), which improved and opened the banking sector to foreign participation. The lack of credit given by banks to microenterprises made microcredit NGOs a source of capital for many Bolivian entrepreneurs. As the NGOs became regulated institutions and the Bolivian microfinance industry matured, vibrant competition developed, which is generally positive for consumers. However, there has also been great concern about protecting bottom-of-the-pyramid clients, and so regulatory measures have been put in place by the state.

Regarding the financial industry as a whole, there has been little work to try to create a client-protection framework. Moreover, with the current status of the Bolivian political landscape, a near deadlock between the ruling coalition and the opposition, passing any law is a highly politicized process, especially with a constituent assembly presently re-drafting the country’s constitution. This presents an uncertain prospect for the passage of any law in the near future, at least until the Constituent Assembly’s draft Constitution is ratified by a national referendum.

Legal Framework

The General Law on Banking and Financial Institutions of 1993, last modified in May 2004, is Bolivia’s general banking law. As such, it enforces the rules and regulations for all banks and financial institutions. It is quite generic in its main points, but there are a few items worth highlighting:

Non-bank financial institutions (NBFIs) cannot lend individuals or groups a value above 1% of their net equity without a guarantee. The exception is a housing credit, in which case NBFIs cannot lend above 5% or 10% without authorization from the Banking Superintendency.
Directors of banks must maintain the privacy of both operations within the banking system and their clients' information.
The law created the Superintendencia de Bancos y Entidades Financieras (SBEF), which is the banking comptroller general.

On April 16, 2008, President Evo Morales issued Supreme Decree 29519, which regulates competition and consumer protection with regards to conduct that negatively influences the market. The decree will be executed by the Bolivian Institute of Metrics and the Business Superintendence. To prevent price and quantity speculation, the decree determines what constitutes competitive and anti-competitive behavior. However, it does not contain any caveats about financial services in general or describe consumer rights. There has been strong criticism of this decree from the Santa Cruz Chamber of Commerce (CAINCO) because the Superintendence does not have the facilities to perform its job under the decree. CAINCO argues instead that there must be clear and well defined norms that protect Bolivians’ economy, health, and access to more and better products.

The Ministry of Finance and the Central Bank have a mandate to determine the country’s monetary and fiscal policy as well as to oversee and regulate the financial industry of the country. Within that context, the SBEF’s objective is to strengthen the role of all actors to measure and monitor the risk of every financial institution as well as the system as a whole, thus contributing to a healthy financial system that is efficient and profitable, benefiting the security of the public’s savings.

The Superintendency of Banking also issues periodic regulatory updates with the objective to improve the Bolivian financial industry. One of these updates is the Regulation and Supervision of Microfinance Institutions in Bolivia (Regulación y Supervisión de las Entidades Microfinancieras en Bolivia). Some of the important norms contained in this update include:

MFIs now have a specific credit risk rating scheme, with the objective of using a general risk assessment tool to allow uniform interpretation of information.
MFIs can obtain credit history information from the credit bureaus as well as provide information to them in order to increase transparency in the microfinance sector and have more accurate information about over-indebtedness.
MFIs should disclose all details of their operations in their contracts, including nominal and variable interest rates and detailed information about all charges and fees.
Furthermore, before contracting an agreement, MFIs should clearly disclose in writing all the terms and conditions of loans.
Given their nature, MFIs will provide a record of its clients credit history in order to integrate people into the formal sector.
The Superintendency will implement two types of monitoring for MFIs:

Bolivia also has the Financial System Development and Productive Sector Support Fund, or FONDESIF for its Spanish acronym. It is that state institution that serves as a public policy instrument to orient and support the microfinance sector, widening coverage, diversifying products, and democratizing access to credit through economic initiatives for the bottom of the pyramid to be viable.

FONDESIF partners with sustainable MFIs to expand their coverage to regions previously without financial services or consolidate the MFIs presence in an area. It assigns resources to these MFIs in two ways:

Loans for the establishment of a portfolio that will allow the MFI to serve the identified clients.
Technical assistance, subject to conditions, for the subsidization and financing the MFI’s operational costs.

Furthermore, FONDESIF provides resources to promote research and seminars that advance the microfinance sector in Bolivia. The resources for these efforts come from the Bolivian government, international donors, and cooperative agencies.

The government also has a consumer protection institution called the Consumer Protection Office, or ODECO for its Spanish acronym. It is a service of the sectoral regulation system to provide a servomechanism of redress to the consumers of the electric, hydrocarbon, sanitation, telecommunications and transportation sectors. The institution embraces the best consumer protection practices and seeks to implement international experiences to provide an effective protection of user and consumer rights. Clients of financial services cannot use ODECO’s mechanisms.

There is a citizen-led NGO that strives to protect consumers called the Bolivian Consumer Rights Defense Committee, or CODECO for its Spanish acronym. It is a member of the Consumers International Global Federation. In Bolivia, it seeks to represent consumers and patients across the country who seek to promote citizen participation in safeguarding their rights. Unfortunately, with its very diverse agenda, financial services are not included in their program of activities.

In 2004, an unofficial UNCTAD report found the status of consumer protection in Bolivia to be particularly weak. It mentioned that Bolivia does not have institutions that dedicate themselves to the protection, promotion and defense of consumer interests. Furthermore, it stated that no clear consumer protection laws that existed for specific sectors. A series of recommendations were issued by the organization including:

The need to build a societal consensus around the need for consumer rights.
The need to extend the reach of institutions who are designed to protect certain consumers, to encourage them to go beyond basic services.
The need to establish a culture of consumer and user rights in public and private sectors to advance social and academic policies that introduce this idea to all sectors of society.
The need to strengthen the role of civil society with regard to consumer protection in order for civilians to defend their interests and represent themselves.

Both UNCTAD and CODECO have suggested that the current consumer protection and competition Decree could be turned into law.

Networks

Bolivian Private Banks Association

The Bolivian Private Banks Association (ASOBAN) is the largest association of private banks in Bolivia, and has 12 members. Its objective is to design policies to develop banking in Bolivia as well as preserve and maintain the interests of the banking sector in the economic development of Bolivia. It biannually publishes a report on the state of the banking industry in Bolivia along with several other studies on the state of the Bolivian economy. The ASOBAN website does not list any policy protections regarding consumer protection.

Assocation of MFIs

Assocation of MFIs (ASOFIN) is the largest microfinance network in the country. Its mission is to promote policies that strengthen microfinance in Bolivia and safeguard the interests of the sector. It has 8 members, among them Bancosol, which has been characterized as Bolivia’s best bank. ASOFIN does not have any clear consumer protection policy or a statement that characterizes the policies of the network on consumer protection.

ASOFIN in turn has a couple of provocative publications on its website: “A study on the Feasibility of a Financial Ombudsman” and another one on the “Lessons Learned about Microfinance Regulations in Bolivia.”

Association of Financial Institutions for Rural Development

The Association of Financial Institutions for Rural Development (FINRURAL) is a group of 15 organizations that work in the microfinance and microenterprise sector in Bolivia. They promote improved institutional management, product diversification, and recognition for MFIs in Bolivia. FINRURAL promotes innovation and technology transfers and proclaims itself a leader in the sector. All of its members are non-regulated financial institutions, but they have clear policies to promote self-regulation. The objectives of this system of self regulation are to:

Increase the credibility of MFIs so they will be able to reach more people who have previously been excluded from the formal financial sector;
Promote the continued advancement of good MFI management to promote efficiency and effectiveness in generating value and risk reduction;
Harness MFIs to act as a group to consolidate their efforts; and
Promote development of a healthy and sustainable microfinance sector.

The website has a section on self-regulation where they specify what their internal regulations are, from tax reporting to interest rate methodology. Unfortunately, there is no consumer protection policy where they clearly outline a pro-consumer approach.

Bancosol has published a report entitled “The Bolivian Financial Market and the Defender of Financial Consumer Protection.” In this report, they mention that a certain financial culture has been developed in Bolivia where institutions provide adequate information and consumers are no longer fooled by banks’ marketing strategies. It also mentions that banks have the duty to provide clear and sufficient information to consumers about the conditions and characteristics of the products that they advertise. This paper also makes the argument that a Financial Services Ombudsman contributes to equalizing the imbalance of power between the banks and the consumers. An ombudsman would help clients confront abuse, injustice and lack of quality in financial services. Moreover, Bancosol’s report mentions that ASOFIN, FINRURAL and ASOBAN have all committed themselves to institutionalize the Financial Ombudsman, though this has not yet been implemented.

Conclusions

The Bolivian legal framework is rather vague when it comes to client protection. It does not have specific clauses regarding sectoral regulations for financial services. However, there are institutions dedicated to the protection of consumer rights for the electricity, hydrocarbons, sanitation, telecommunications and transportation sectors. Currently, financial services are not seen as a basic service, which is something that will need to change in order to create a strong enabling environment for client protection in microfinance. Furthermore, the general law on banks does not contain specific clauses regarding transparency, over-indebtedness, reckless lending, or client rights. Some good measures have been implemented by the Superintendency of Banking, but they are directed exclusively at microfinance organizations, and are not mandatory for the rest of the financial sector.

Finally, the banking networks lack clear client-protection policies, and although they all welcome the existence of a banking ombudsman to protect consumers, so far they have not taken the initiative to advertise and implement client-protection codes and practices.

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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