Bolivia, often labelled as one of South America’s poorest countries, might pull a surprise in 2o13: the IMF expects this landlocked Andean country to grow by 6.7 per cent – its highest rate in ten years.

Despite the fierce anti-capitalist rhetoric and nationalisation policy of President Evo Morales (pictured), Bolivia’s gross domestic product has tripled to $27bn since he took office in January 2006, and economic growth has been chalking up an impressive 5 per cent average. As a consequence, the financial sector has also grown substantially. Any worries?

According to a report this week by BNamericas, a business intelligence service:

Bolivia’s banks, microfinance institutions, cooperatives, and savings and credit mutuals have all been enjoying rapid growth since 2006, thanks to strong expansion in the national economy in recent years and the pragmatic relationship between President Evo Morales’s government and the financial sector. Credit and deposit levels have been breaking records year after year, while delinquency rates remain low.

Government officials say their redistributive policies of recent times has helped to lift 4m people out of extreme poverty. The financial sector has one of the highest microcredit penetration rates in the world – a big part of some banks’ business.

From BNamericas:

The growth of the economy, high liquidity, and the expansion of the microfinance segment are the factors driving the profits of financial institutions in Bolivia.

However, in that quest to redistribute wealth to the country’s impoverished population, Morales has brought a number of the country’s utilities and commodities industries into state hands. Although he has not yet touched on banks, in the past two years the government has been raising taxes on the sector. Most of all, the specific regulations of a new financial services law, which was passed in August, are expected to be set this week.

This will force financial institutions to be more redistributive: giving the state the power to set deposit rate floors as well as lending rate ceilings; allocating some bits of the loan portfolio to productive projects and social housing; and augment financing in rural Bolivia.

This shouldn’t be surprising to some readers, as Bolivia’s finance minister Luis Arce has said that the state “is the engine of the economy, the planner, the investor, the banker.” More recently, he told beyondbrics that “the new [financial services] law, fundamentally, leaves to the state the possible definition of rates on [loans] for the productive sector and houses.” That means, banks will now be “giving greater importance to the consumer.”

Fair enough, but aside from itchy feet from some bankers, the IMF warned last week this could have some unwanted side effects:

The Bolivian financial system remains solid and well capitalized. Nevertheless, the new Financial Services Law could pose a risk to financial stability. The law contains various constructive provisions that strengthen the safety net and the integrity of the financial system. The law’s emphasis on the objectives of financial inclusion and productive development are also appropriate, but the instruments chosen (e.g., interest rate caps and minimum portfolio quotas) could lower the profitability and capitalization of the financial system and lead to a reduction in the funds available for lending over the medium term.

Additionally, the price and credit allocation distortions could complicate the conduct of monetary policy and contribute to the over-indebtedness of certain segments of the population. The objectives set out in the law could be achieved using other instruments that would mitigate the systemic risks associated with financing small customers or those with little financial experience.

Related reading:
Bolivia: not all investors are equal, beyondbrics
Microfinance: Bolivia pioneer starts to hit the mainstream
, FT
Bolivia: ‘capitalism is an old man’
, beyondbrics

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