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Ecuador moves to cut interest rates for poor

Banks and microlenders say Ecuador's leftist president may hurt most those he wants to help with 'financial justice' law.

By Matthew ClarkStaff writer of The Christian Science Monitor / July 6, 2007

Quito, Ecuador

– Ecuador's new leftist president, Rafael Correa, is wasting no time forging his own path toward the "21st-century socialism" championed by Venezuela's anti-US leader, Hugo Chávez.

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In April, three months after taking office on promises to wrest control of the country from the hands of a corrupt elite, Mr. Correa kicked out the representative to the World Bank. He blames the financial institution for forced privatization programs that have failed to benefit the poor, he says.

Now he's pushing through a controversial "financial justice" bill to increase state control of the banking sector.

The bill, which is expected to pass into law this week or next, paves the way for a complete overhaul of an abusive financial system, say government officials. It's also the latest example of a populist movement strengthening throughout Latin America.

But this new law could hurt most those Correa hopes to help. As he strives to protect Ecuador's poor from predatory lenders and free the country from the "Father-knows-best" conditionality of international institutions, such as the World Bank, he risks putting microlending groups out of business, preventing thousands of Ecuadoreans from receiving cash loans to lift themselves out of poverty.

"[Correa] wants to control the prices," says Diego Ponce, the Ecuador director of the Washington-based microfinance institute FINCA, explaining that if the government gets the ability to lower interest rates by decree (under the new law), it could jeopardize FINCA's ability to serve Ecuador's poorest. "Controlling abuses is fine, but [Correa] wants total control. He wants to eradicate the free market."

Private banks are also up in arms. "The future of the country is in jeopardy," screams one of many full-page newspaper ads run by the Association of Private Banks of Ecuador, which has also been churning out prime-time TV spots slamming the bill.

Mr. Ponce says that if the government does lower interest rates even just a few percentage points below the current average, many smaller banks and microlending agencies may have to fold, meaning that up to 500,000 poor Ecuadoreans will no longer receive microloans.

Betsy Lozán is one of those who could be hurt most.

Four years ago, she could only rely on loan sharks to get the money she needed to start up her business selling diesel, rice, and animal feed in the dusty, rural village of Yolán.

As pigs, cows, and donkeys saunter through the village's only intersection, Ms. Lozán tells about how $100 and $200 loans from FINCA helped her double her earnings in the past three years.

Few here have more than an elementary school education, but the loans have enabled Lozán to send her daughter to college. "That's why I work," she says, explaining that she hopes her daughter will get a good job, and eventually help the family financially.

In a gritty neighborhood on the outskirts of Ecuador's commercial capital, Guayaquil, Alejandra Ojalá says microloans helped her triple the size of her convenience store business, enabling her to send her three children to a decent private school with a pool, state-of-the-art English lab, and karate classes.