Microenterprises and Microfinance in Latin America

CAF-GDN Round Table discussion on “Financial development in Latin America and Beyond” Washington, November 17, 2014

Fernando ÁlvarezPrincipal 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.

“Entrepreneurs” Asalariados

9,5

32.7

Self-employed

3,3 6,1

28,7

4,0

80,4

54,8

Employers

31% have 10+

employees

9% have 10+

employees

Salaried workers

United States Latin America (average)

Occupational Structure in Latin America?

CAF 2013

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.

• The distinguishing future of this microfinance revolution in Latin America is probably its commercial or business orientation.

Loans (in thousand of $) (LEFT) and number of clients (RIGTH) in the main regulated MFI in Bolivia. 1998-2009.

Fuente: Grandi (2010).

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1998 2000 2002 2004 2006 2008 2009

Caja Los Andes FIE Prodem Banco Sol Otros FFP

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1998 2000 2002 2004 2006 2008 2009

Caja Los Andes FIE Prodem Banco Sol Otros FFP

The Latin American Approach: A Commercial Orientation

0

20

40

60

80

100

Sub-

Saha

ran

Afr

ica

Euro

pe a

nd C

entr

al A

sia

East

Asi

a an

d th

e Pa

cific

Lati

n A

mer

ica

and

the

Cari

bbea

n

Mid

dle

East

and

Nor

th A

fric

a

Sout

h A

sia

Tota

l

Donors Commercial Investors

(a) Source of Funding (b) Ratio deposit-assets

(c) Sufficiency Index (c) Average loan size

Sources: (a) CGAP (2009). (b)-(d) Own elaboration based on mix.org

• This commercial orientation and the increase in the average loan size of MFIs in Latin America has not necessarily meant neglecting the poorest .

Number of clients

ProportionNumber of

clientsProportion

Less than 500 2,173 8.7 24,835 7.1 1,043

[501 - 1,000] 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

Number of clients

ProportionNumber of

clientsProportion

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

BANCO SOL (1992 vs . 2009)

All Regulated MFIs (1998 vs . 2009)

Loan size (USD)

Loan size (USD)

1998 2009 Variation in N° of clients 1998-2009

(%)

1992 2009 Variation in N° of clients 1998-2009

(%)

Does The Commercial approach lead to the abandonment of the poorest?

Important development of MFIs But……

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

% of families whose main income comes

form a Microfirm

% of microentrerpeneurs with formal credit.

Fuente: CAF (2010).

Country

1. Heterogeneity in the level of development across countries

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)

41% has a loan form informal sources.

41% has a loan form informal sources.

Fuente: elaboración propia con base en USAID-MIDAS (2007).

26 % combines formal and informal sources

26 % combines formal and informal sources

30 % of those having a loan from formal sources has also a loan from informal ones.

30 % of those having a loan from formal sources has also a loan from informal ones.

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)

SourceProportion of

entrepreneurs with a credit

Average credit (USD)

Duration (days)

Proportion with regular

payments (%)

Proportion that provide

collateral

Interest rate

Informal

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 25 9,815 42 25 28 58

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Characteristics of contracts by sourceCharacteristics of contracts by source

Source: CAF (2011).

Boom of Microfinance: reduction of poverty and gain in productivity?

• Some key results from RCT (mostly from outside the Region)

1. 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).

2. 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).

3. Development of other instrument are necessary. e.g. Savings instruments can help the micro-entrepreneur 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.

Micro-entrepreneurs: to whom do they look like?

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)

Microentrepreneur

Similar tosalaried workers

75%

Microenterprises: real growth opportunities?

education

family environment

entrepreneurial abilities

preference for salaried employment

occupational history

Similar to larger employers

25%

Low employability

CAF Survey 2012

Finals remarksFinals 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.