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.

– 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.

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.

Government officials say that the new law would help the poor by helping create more jobs by lowering interest rates. "For the first time, the rate of interest will be a regulator of the economy," says Luis Maldonado Lince, one of two presidential representatives to the junta bancaria, a government body that would help set interest rates if the law passes. "Finally, we can finance our growth based on the actual production," says Mr. Lince, arguing that private banks in Ecuador have long charged interest rates far too high for the pace of economic growth.

Lince dismisses the claim that the new law would undermine the free market. The law is very important, he says, because it sets the tone for a more just financial system. "When Correa talks about 21st-century socialism, he's talking about humanism, rescuing capitalism from the claws of neoliberalism, and giving the people their due."

But many analysts say Correa's background as an economics professor and lack of practical business experience could lead to gross mismanagement. "It seems like Correa doesn't understand the banking system," says Ramiro Crespo, the president of Analytica Securities, a Quito-based financial analysis group. "I'd assume someone with a doctorate in economics wouldn't be that naive about the market. We're going back to the 1970s and '80s where these things were already tried. I think this is very worrying."

Correa's move is prompting fresh concerns among critics that he is following in the footsteps of Mr. Chávez, who has increased state-ownership of Venezuela's lucrative oil industry.

But Adrian Bonilla, the director of the Ecuador branch of the Latin American Faculty of Social Sciences, says that Correa is no Chávez. Chávez has basically left the banking system alone, while Correa wants only to regulate – not seize – the means of production, says Mr. Bonilla. "Correa and Chávez share the same rhetoric, but Correa doesn't have the resources," he says, adding that Correa doesn't share Chávez's anti-US views.

Meanwhile, Correa's government is rolling out its own plan to spend $30 million to provide 70,000 Ecuadoreans with small loans this year alone. The loans of up to $5,000 will be at 5 percent, which is nearly 25 percent lower than the average actual interest rate most private microfinance groups offer the poor.

FINCA's Ponce says that this plan is not sustainable. "With 5 percent interest rates, the government will have to heavily subsidize the microloans," he says. "Maybe Venezuela can handle that [budgetary drain], but not Ecuador."

Still, Bonilla points out that Correa's antipoverty message remains popular. His approval rating is still above 65 percent, according to recent polls.

"I agree with everything Correa has said and done so far," says university student Diego Maldonadoin in Quito. "All presidents before Correa have been slow to do things for the poor. That's why people leave the country."

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