Microenterprises and Microfinance
in Latin America
CAF-GDN Round Table discussion on “Financial development in Latin America and Beyond”
Washington, November 17, 2014
Fernando Álvarez
Principal Economist, Socioeconomic Research
Financial Development is a key subject in the Region
•
Latin America financial system is underdeveloped even when comparing to
countries with similar per capita GDP. Examples: Financial depth/Access
•
Well establish connection between financial development and economic growth
and inclusion (however, not the only barrier to development in the region).
These comments are based on two REDs
(CAF annual Flagship on development issues).
• [2011] Financial Services for development: Promoting access
in Latin America.
• [2013] Enhancing productivity in Latin America: from
subsistence to transformational entrepreneurship.
For this presentation I will focus on microfinance and microenterprises.
Micro-entrepreneurs represent sizable
sector!
• They represent more than 90% of the number of firms and more than
1/3 of the employment in the region. It is also a crucial sector to
promote social inclusion since it concentrates vulnerable families.
• However, it is dominated by self-employment. This translated in an
occupational structure with too few salaried workers (in quality jobs).
This has implication for aggregate productivity.
Occupational Structure in Latin America?
90
80,4
80
Percentage
70
60
50
40
30
20
10
54,8
9% have
31% have
10+
10+
32.7
employees employees
9,5
3,3
4,0
28,7
6,1
0
CAF 2013
Employers
“Entrepreneurs”
United States
Self-employed
Salaried
Asalariados
workers
Latin America (average)
Important development of MFIs
– During the last years, microfinance has developed significantly ,
providing access to credit to millions of customers previously excluded
from formal sources.
Loans (in thousand of $) (LEFT) and number of clients (RIGTH) in the main regulated MFI in Bolivia. 1998-2009.
Caja Los Andes
FIE
Prodem
Banco Sol
Otros FFP
Caja Los Andes
400,000
140,000
350,000
120,000
300,000
FIE
Prodem
Banco Sol
Otros FFP
100,000
250,000
80,000
200,000
60,000
150,000
40,000
100,000
20,000
50,000
0
0
1998
2000
2002
2004
2006
2008
2009
1998
2000
2002
2004
2006
2008
2009
Fuente: Grandi (2010).
• The distinguishing future of this microfinance revolution in Latin America
is probably its commercial or business orientation.
The Latin American Approach: A Commercial Orientation
(a) Source of Funding
(b) Ratio deposit-assets
100
80
60
40
20
Donors
Total
South Asia
Middle East and North Africa
Latin America and the
Caribbean
East Asia and the Pacific
Europe and Central Asia
Sub-Saharan Africa
0
Commercial Investors
(c) Sufficiency Index
(c) Average loan size
Sources: (a) CGAP (2009). (b)-(d) Own elaboration based on mix.org
Does The Commercial approach lead to the
abandonment of the poorest?
• This commercial orientation and the increase in the average loan size of
MFIs in Latin America has not necessarily meant neglecting the poorest .
BANCO SOL (1992 vs . 2009)
1992
2009
Loan size (USD)
Number of
clients
Less than 500
[501 - 1,000]
Variation in N° of
clients 1998-2009
(%)
Proportion
Number of
clients
2,173
8.7
24,835
7.1
1,043
4,938
19.9
21,595
13.3
337
[1,001-5,000]
16,069
64.6
63,623
51.6
296
[5,001-10,000]
1,379
5.5
16,375
19.2
1,087
[10,001-15,000]
204
0.8
2,141
6.7
950
Greater than 15,000
102
0.4
1,271
2.2
1,146
Proportion
All Regulated MFIs (1998 vs . 2009)
Loan size (USD)
1998
Number of
Proportion
clients
2009
Number of
Proportion
clients
Variation in N° of
clients 1998-2009
(%)
Less than 500
67,956
31
128,730
23
89
[501 - 1,000]
48,486
22
94,660
17
95
[1,001-5,000]
80,653
37
243,068
44
201
[5,001-10,000]
15,019
7
54,455
10
263
[10,001-15,000]
4,479
2
13,611
2
204
Greater than 15,000
1,979
1
13,835
3
599
Important development of MFIs But……
1. Heterogeneity in the level of development across countries
% of families whose
main income comes
form a Microfirm
% of
microentrerpeneurs
with formal credit.
Argentina
28.85
5.03
Bolivia
31.21
21.87
Brasil
9.00
16.33
Colombia
24.43
11.14
Ecuador
22.90
15.77
Perú
30.40
19.32
Uruguay
19.76
17.70
Venezuela, R.B.
29.32
2.96
Panamá
24.37
4.53
Average
24.47
12.20
Country
Fuente: CAF (2010).
2. Informal financial sources has not yet been crowded out. A
dual credit market has emerged.
Informal lending still a pervasive phenomenon
(% surveyed micro-entreprenures)
FF + FNF + I
8%
FNF + I
7%
26 % combines formal and
informal
41% has
a loan sources
form informal
sources.
FF
28%
FF + I
11%
30 % of those having a loan
from formal sources has also
a loan from informal ones.
I
15%
FNF
16%
FF + FNF
15%
FF= Formal and financial (Banks, NGOs)
FNF=Formal non financial ( Suppliers)
I=Informal (Moneylenders, family and friends )
Fuente: elaboración propia con base en USAID-MIDAS (2007).
The coexistence of formal and informal financing sources for the
same micro-entrepreneurs is specially remarkable, given the large
differences in interest rates
This result may have to do with the lack of flexibility of contracts with formal creditors (see
proportion with regular payments and proportion that provide collateral)
Characteristics of contracts by source
Source
Informal
Proportion of
Average
entrepreneurs credit (USD)
with a credit
Duration
(days)
Proportion
Proportion
with regular that provide Interest rate
payments (%) collateral
--------------------------------------------------------------------------------------------------------------------------------------------
Family and friends
16
1,550
210
30
30
78
Money lender
15
621
89
84
59
270
Formal and financial
--------------------------------------------------------------------------------------------------------------------------------------------
NGO
17
147
704
100
90
17
Cooperative or Credit Union
8
3,150
964
100
90
24
Bank
17
3,530
1084
96
87
23
Formal and non financial
Supplier
Source: CAF (2011).
-------------------------------------------------------------------------------------------------------------------------------------------25
9,815
42
25
28
58
Boom of Microfinance: reduction of
poverty and gain in productivity?
•
Some key results from RCT (mostly from outside the Region)
1.
2.
3.
•
Access to credit has a very heterogeneous impact. It is more effective for those who initially
perform better; that is, those with more skills (Karlan and Zinman 2009).
Training also matter. Access to credit and skills complements each other. The design of the
training program does matter. (Valdivia 2010, and Drexler et. al. 2010).
Development of other instrument are necessary. e.g. Savings instruments can help the microentrepreneur to grow (Dupas and Robinson 2009).
Key messages for policy :
–
–
(1) Not all micro-entrepreneurs are equal, then selection matters! . A clear classification
mechanism is not trivial.
(2) For micro-entrepreneur with less potential (as entrepreneur), microfinance may still improve
their living conditions; however, their permanent departure from poverty requires skills that
improve their employability.
Microenterprises: real growth opportunities?
Micro-entrepreneurs: to whom do they look like?
CAF Survey 2012
25%
education
family environment
Similar to
Similar to
salaried
larger
workers
Microentrepreneur
employers
75%
entrepreneurial abilities
Low
employability
preference for salaried employment
occupational history
These results are consistent with:
• Entrepreneurship as a refuge from unemployment
• Low transition to employer status
• Low transition to formal salaried worker (low employability and scarce labor demand)
Finals remarks
1. It is clear that Latin America has experienced an important development in
Microfinance (with a commercial orientation). However, the development has been
heterogeneous across countries and informal financing is still pervasive.
2. It is less clear its effect on poverty and aggregate productivity. Impacts of access to
credit and other interventions (e.g. training) are very heterogeneous. A good
targeting is important.
3. Some relevant policy questions:
•
•
Targeting size or age? It is good to subsidize indefinitely small firms? Be careful with bad incentives.
Improving entrepreneurial skill or employability?
The best contribution to development of (the many) subsistence micro-entrepreneurs
is as salaried workers in high quality job. Public policy (including those related to
microfinance) must promote this occupational reallocation.