Bolivia's financial reform to force private banks to become more efficient, competitive

Tuesday, April 15, 2014

The historic financial reform that Bolivia passed last year will force the country's private sector banks to become more efficient and competitive in the face of lower profitability, César Arias, a ratings analyst at Fitch, told BNamericas.

The reform has more than 550 articles and was signed into law in August by left-wing President Evo Morales.

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A 90-day window was set for its implementation and the first decrees were issued in the middle of December.

At the heart of the reform is interest rate ceilings, mandatory lending quotas and greater financial inclusion.

As a result of the reform, private sector banks will see increased competition from state-owned Banco Unión and the country's already large microfinance sector, Arias said. The reform's strong focus on financial inclusion is likely to benefit Union and microfinance institutions more than the private sector banks, he noted.

The private banks "will have to get used to making less" and they have "no other option" than to pursue improved efficiency and competitiveness, said Arias, who added that banks in countries like Venezuela and Ecuador have shown that this is possible when faced with reforms and government policy that reduce profitability.

Private sector banks have already been hurt in the last few years by taxes aimed at reducing their "excess" profitability.

Private banks' average ROE dropped from 21% in 2007 to 17.5% in 2012 and then to 14% last year, primarily as a result of additional taxes on extraordinary earnings and a tax on foreign exchange transactions.

Arias said that it is too early to tell by how much banks' profitability could fall as a result of the financial reform, but something positive is that the government has taken a gradual approach to implementing the new law.

For example, the law states that no less than 60% of banks' loan portfolio will have to go to financing of so-called productive and social sectors. This represents a big change for several of Bolivia's private sector banks which have focused on specific market niches. However, depending on each bank, there will be a period of two to four years for banks to comply with the 60% requirement, said Arias.

Arias also noted that the interest rate ceiling on housing loans - a key issue for the government - was set at 5.5-6.5% depending on the value of the house. Compared to the prevailing market rates of 7-8% for these type of loans, it does not represent a huge change for banks and part of the negative impact on margins can be offset from the expected increase in the number of people who will be able to access a housing loan, he said.

Bolivia's private banks are also benefiting from the country's strong economic growth (a record 6.5% last year) and annual credit growth of around 20%, which are both factors that can help mitigate the impact on profitability that the financial reform is likely to have in the coming years, said Arias.