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Microfinance Growing Credit Access in Guatemala

credit access in GuatemalaGuatemala, a country located in Central America, is known for its dedication to financial transparency, especially in regards to credit access.

Credit access in Guatemala is a make-or-break factor in determining the success of a business, regardless of its size. Credit allows businesses and their owners to make purchases that typically lie outside of their disposable income. This often includes startup costs and capital improvements; however, it can also be used for everyday expenses such as payroll.

Larger companies tend to have an easier time attracting creditors, whereas smaller businesses often have trouble, an alarming problem for a country where 60 percent of the economy is made up of small businesses.

Banks are the most common provider of credit access in Guatemala. Microlending is the main reason people turn to banks for credit access, as it allows citizens who do not have any credit history to build credit in a timely fashion. As of now, there are 24 microfinance institutions in Guatemala.

The top five microfinance institutions in Guatemala are:

  1. Genesis Empresarial
  2. Compartamos – GTM
  3. FONDESOL
  4. FINCA – GTM
  5. FUNDEA

However, since 2014 there has been an increase in the default rates on microloans. Rocael Garcia, manager of the microfinance firm Finca, credits this problem to people in rural areas having less ability to pay and people in the middle class having less willingness to pay.

Other, less conventional ways of acquiring credit include financial freedom, venture capital and equity investors. While some people try to acquire credit access on their own, it proves to be difficult, as the government controls 50 percent of the financial services offered in Guatemala.

Of the three unconventional methods above, venture capital is the strongest, most secure option. There is a 39 percent chance that Guatemalan entrepreneurs will successfully find venture capital. Since 2014, the amount of people looking into venture capital has steadily increased.

Equity investors are considered to be the least effective sources of credit access in Guatemala, as it is incredibly difficult to raise money by issuing shares on the stock market. To make the process even more difficult, a public offering is only allowed if it is previously registered according to the Law of Value Markets.

Credit access in Guatemala continues to be available as the country focuses on economic opportunity and financial transparency. While the distribution of income remains relatively unequal, credit access – or rather, the opportunities given to business owners who have access to credit – steadily works to even out the scale.

– Chylene Babb

Photo: Flickr

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Farmers Gain New Options for Credit Access in Burundi

credit access in Burundi

Burundi is a resource-deficient country that has been struggling to emerge from years of civil war. Underdeveloped in the manufacturing sector with the agriculture area accounting for roughly 40 percent of its GDP and employing over 90 percent of the population, the large majority of Burundians rely on agriculture to make a living. In order for the people of Burundi to grow income-generating businesses in the agricultural sector, the demand for financial assistance must be able to meet the supply. Poverty among the population has limited the capacity for credit access in Burundi.

Being able to obtain a loan at banks in Burundi is not easy; Burundi ranks 129th out of 137 economies in the 2017-18 Global Competitiveness Index compiled by the World Economic Forum. As a result of this difficulty, most entrepreneurs turn to loan sharks.

Traditional banking services are not sturdy or large enough to serve the population’s needs in building assets and establishing property. Retail and corporate banking is at a very early stage of development and many depend on microcredit or informal lending for credit access in Burundi.

Burundian farmers rely on agriculture for their livelihoods, and One Acre Fund (OAF) has experienced an immense demand from these farmers for the services they offer. One Acre Fund is a nonprofit that offers credit and guidance in order to assist small landowners in growing their way out of famine and help them build thriving futures. Burundi is just one out of the many developing countries they serve.

OAF offers a complete package of services, utilizing a four-step market-based strategy that allows the organization to remain financially sustainable and grow to touch the lives of more farmers each year.

  1. Asset-Based Loans
    Financing for quality seeds and fertilizer is given to farmers on a credit basis, and they are offered a flexible repayment plan that allows them to repay their loans in any amount throughout the term.
  2. Delivery
    Farm inputs are delivered to areas that are within walking distance of all the farmers that OAF serves.
  3. Training
    Trained professionals offer the farmers guidance on advanced agricultural techniques throughout the entire season.
  4. Market Facilitation
    Solutions for storing crops and techniques on monitoring the constant variations of the market are taught to the farmers so that they are able to time the sale of their crops in order to maximize profits.

This strategy has allowed for thousands of families to yield higher-quality crops without spending additional funds. With Burundi being one of the poorest countries globally, farmers that are usually starting at a low-profit baseline have seen large improvements in their earnings since being involved with One Acre Fund. Subsequently, retention of farmers and loan repayment rates in Burundi are some of the highest of all the countries OAF serves. By providing all of these services in one, One Acre Fund allows farmers a useful way to get farming help and credit access in Burundi.

– Zainab Adebayo

Photo: Flickr

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Expansion of Credit Access in Vietnam Vital for Small Businesses

Credit Access in VietnamSmall and medium-sized enterprises (SMEs) play a very important role in Vietnam’s economy. They produce approximately 40 percent of the country’s GDP and provide employment to approximately 50 percent of workers. Although a vital part of the economy, many SMEs struggle with credit access in Vietnam and are unable to invest in loans that will aid them with their finances.

Access to loans is important to SMEs, especially those just starting up, and many of them need this option to survive in the market. Many SMEs require money from loans to invest in new machinery and technology to become more efficient, stay competitive and make a profit.

SMEs struggle to stay competitive not only because of credit access in Vietnam, but also because of well-funded, larger businesses. This is where one of the issues with access to credit comes into play. Large enterprises are not only preferred by foreign investors, but also by local banks. With a better guarantee to make a profit, banks prefer providing loans to these steadier businesses instead, believing that most SMEs are too much of a risk.

It may come as a surprise that approximately 70 percent of SMEs technically have credit access in Vietnam. The issue arises in the fact that many of the businesses taking out these loans face other difficulties in the access of these funds, and most would prefer not to. SMEs often pay up to 10 percent interest or even higher on loans, while larger enterprises only pay around 5 percent at the highest. Banks also tend to require fixed collateral for the loan, such as land.

Another issue regarding credit access is that of gender. Traditional gender roles in Vietnam often affect a bank’s decision in providing a loan, worrying that women will make less profit than a man would, or simply denying access because they are female. In addition, most females do not own land to provide the fixed collateral. This is an obstacle for females in large businesses, but especially for those in SMEs.

To combat this, some peer to peer platforms, crowdfunding for businesses by investors, have appeared in Vietnam. Although this gets around stricter banks, allowing loans to be given to what the bank would consider high-risk businesses as well as more equal opportunities for both male and female business owners, it still is not enough. Not only do the current platforms not have enough willing investors providing loans to SMEs, but they also still struggle to compete with large enterprises that are well funded by the banks.

There is plenty of potential for SMEs to help improve the country’s economy and GDP, but credit access in Vietnam is preventing this from happening. In the future, the government may possibly enforce better rules to allow more SMEs to flourish, but until then, investment is one of the few ways SMEs can be funded with loans. The country simply needs more interested investors, both local and foreign.

– Keegan Struble

Photo: Flickr

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Better Credit Access in South Africa to Boost Economic Growth

Credit Access in South AfricaBecause poverty has hindered a large portion of South African households from getting access to formal credit sources, informal credit like loan sharks and mashonisa loans has prevailed. Economists believe that better credit access in South Africa provided by financial institutions might help to boost the economy as well as alleviate poverty.

Previous research from the University of Cape Town had already shown the strong relationship between economic growth and credit expansion in South Africa. Recently, economist Roelof Botha from the Gordon Institute of Business Science reiterated the idea that credit expansion – especially by financial institutions lending money to unsecured borrowers – could invigorate the struggling economy.

Though South Africa is experiencing a declining economy, the household debt to income ratio has dropped consistently, from 87.8 percent in 2008 to 73.2 percent in 2017. This ratio appears to be exceptionally low compared to South Africa’s trading partners like Australia, which exceeded 200 percent in 2017 despite its growing economy.

Notwithstanding a high percentage of homeownership (more than 54 percent), Botha argues that the low value of the homes – which disqualifies them as collateral – has become “unnecessary obstacles” for the households to obtain credit from formal channels.

Lowering the bar for obtaining credit allows consumers to purchase more goods or even to start small businesses, which are both beneficial to the overall economy. Furthermore, research from Innovations for Poverty Action shows that better access to credit could not only increase the quality of life of the borrowers, but also give lenders more profit.

In an article published by Boston Consulting Group in April 2017, researchers claimed that though the percentage of South African adults who have borrowed from commercial banks rests at a modest 12 percent, informal credit accounts for a greater portion of the entire credit market.

Compared to formal channels, debts from informal channels are more difficult to regulate and might exacerbate the financial situation of already unsecured borrowers due to the sky-high interest rate.

In addition, the South African informal debit market bears an alarming default rate of an estimated 12 percent – much higher than countries that are risk-averse like China (1 percent) and Germany (2 percent).

The Reserve Bank has already started to lower its repo rate and plans to reduce the rate further to increase credit access in South Africa in 2018, expecting better economic growth. The steady inflation rate, averaging 4.9 percent through most of 2017, also provides households with better credit affordability.

From a long-term perspective, Botha said, the number of households with a buying power of R120,000 or higher per year experienced a dramatic increase from 200,000 in 2002 to 2.7 million in 2016, making the average real growth 15 percent, which is much greater than the average economic growth rate. Therefore, credit expansion should have the potential to further this growth.

Expanding credit access in South Africa provided by regulated financial institutions has the potential to increase purchase power, lower unemployment rates and eventually boost economic growth while removing the financial barriers imposed by unregulated informal credit, helping people to exit poverty.

– Chaorong Wang

Photo: Flickr

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Growing Businesses in the Congo

Growing Businesses in the CongoThe Democratic Republic of the Congo (DRC), located in central Africa, has long been an area of conflict, particularly in the eastern part of the country. Emerging coups and unstable governments have been a source of invasive wars and high taxes. The DRC is still ranked only 176th out of 188 countries for human development as listed by the U.N., but this is still an improvement, having moved up 11 places between 2013 and 2014. The Congolese people are making an effort to turn their country around by becoming more autonomous and growing businesses in the Congo to provide themselves with a living wage. This change is also turning foreign investors’ heads as they look abroad for growing economies.

The wars and conflict can generally be traced to political contentions which have then impacted education and business. Many have disagreed on the best path for the country to take, which combined with greed for power has created corrupt governments in the past. While there is still a ways to go before the country will be able to host fair elections, steps have been made to ensure they happen. In December 2016, an agreement was signed stating that President Kabila would not run for a third term (he has been president since 2001) and that time would be allotted for elections to be set up. Originally the new election was supposed to be held in late 2017, but voting was pushed back to December 2018. Although there is fear and frustration related to the delays, the fact that conversation is occurring rather than war is a positive step in the right direction and has in itself created more stability for the country.

Growth in the political sector has equaled, if not been exceeded by growth in the business sector as well. In the past, much of the difficulty of growing businesses in the Congo has been related to unreliable taxes. Jason Stearns, the author of Dancing in the Glory of Monsters, writes in his book, “If you paid all your taxes in the Congo…you would be dishing out 230 percent of your profits.” In other words, the only way to operate a business is to not pay all your taxes. Unfortunately, according to Stearns, the taxes were created by an unhealthy state who used taxes as a means of bribery. Even with government reforms, these taxes are often forgotten about until someone decides to use them take money from a business.

Even with the risk of unknown taxes. there are still growing businesses in the Congo, particularly in the micro-business realm, which does not necessarily require a brick and mortar shop. Now, if someone wants to start a business, they might just need a pan, oil, flour and a box to cook hotcakes and make a living wage as a street vendor. This flexibility helps keep these entrepreneurs from being charged excess taxes and is the cornerstone for turning these micro-businesses into larger businesses in the future.

Investing foreigners might be at higher risk because they will be perceived as having money to spend on taxes. However, foreign investors bring jobs and oftentimes roads to the country, which in the past may have slowed down investors before, but now increasing knowledge of and access to the DRC’s rich mining resources are creating businesses in the Congo, which has brought many Congolese around to accepting involvement in mining.

Changing and simplifying tax laws is a long-term goal that will be one of the keys to creating a stable and growing economy for the DRC. This will reduce the risk of being charged an unforeseen tax or fee and will continue to create growing businesses in the Congo.

– Natasha Komen

Photo: Flickr

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How Credit Access in Bosnia and Herzegovina Impacts the Economy

Credit Access in Bosnia and HerzegovinaPeople often sing the praises of microfinance as a means of encouraging entrepreneurship and growth in developing countries. Without a doubt, microloans are a resourceful tool. With the encouragement of the international community, they have been used rather extensively to help improve the ease of credit access in Bosnia and Herzegovina. That being said, it is important to view microloans not as an economic panacea, but as a component of the overall financial sector that can and does affect other aspects of the developing economy.

The economic crisis that began in 2008 continues to affect credit access in Bosnia and Herzegovina. In addition to causing extended deflation, which hurts small businesses, it also left lending institutions very risk-averse, especially where small and medium-sized enterprises are concerned.

The situation is not all bad. There is an unusually large number of financial institutions in the country and the demand for credit is beginning to increase as the economy grows. This increase in demand is also caused by the growth of many small businesses. Unfortunately, conservative lending practices mean that while it would appear that would-be borrowers have plenty of options, it can still be difficult to get a loan. Additionally, high taxes and complicated regulations mean that there is a large informal sector in the country, further complicating the small business environment. Some of these informal operations are able to undercut their formal counterparts, making competition difficult and hampering people’s ability to get a loan.

The U.S. Agency for International Development (USAID) is attempting to bring about change. Its Development Credit Authority Loan Guarantee facility backs up to 50 percent of the loan principal for borrowers deemed too risky for a regular loan. USAID is improving credit access in Bosnia and Herzegovina by enabling borrowers to secure financing who would otherwise be rejected.

However, it is important to consider how improving credit access in Bosnia and Herzegovina might have unintended impacts. This growth in access to microloans without broader changes in the macroeconomy has meant that while it is easier to secure financing to start a business, the same cannot be said for securing financing to grow an existing business.

While the international community has stepped in to encourage microloans, they have not done the same to encourage banks to make larger loans available to medium-sized enterprises seeking to grow. While many banks claim to offer this kind of financing, the reality is that many will only lend to the most exceptionally qualified applicants, and even then the rates and terms offered may simply not be feasible for the borrower.

This means that there is an ever-growing cohort of businesses in the country that are too large to benefit from microloans but too small or still too risky to borrow from domestic banks. This is a major hurdle to clear before credit access in Bosnia and Herzegovina can really be said to have improved.

It is also important to consider the impact that improved credit access in Bosnia and Herzegovina may have on education. One recent study found that 16 to 19-year-olds in Bosnia and Herzegovina whose parents received microfinancing for their family businesses were nine percent less likely to be regularly attending school. This figure jumped to 19 percent when the adults in the household had only a primary school education.

This is not to say that improving credit access in Bosnia and Herzegovina for small businesses isn’t a worthy endeavor. It most certainly is, and it can and does lift people out of poverty. However, it is important to also provide continued support and acknowledge the ways that this issue interacts with Bosnia and Herzegovina’s broader economic circumstances to ensure that this money is able to make a real difference.

– Michaela Downey

Photo: Google

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Credit Access in El Salvador Growing Among Rural Population

Credit Access in El SalvadorThe country of El Salvador is known for being the smallest and most densely populated country in Latin America. It has the twelfth-highest GDP in the Americas. A large portion of its economic growth comes from remittances.

Meanwhile, agriculture, which had fallen off in the 1990s, continues to play an important role in the economy as it employs 25 percent of the country’s labor force. Coffee and sugar, El Salvador’s main exports, account for a significant portion of the agricultural sector. But despite its comfortably high GDP, 32.7 percent of its citizens live in poverty.

A significant obstacle to alleviating poverty is limited credit access in El Salvador. In particular, while banking is common and easy to obtain in larger cities like San Salvador and Santa Ana, the poor, especially in rural areas, have the most difficulty. Of the 40 percent of the population with low income, only 6 percent have accounts at financial institutions. And while access has grown, most banks do not have branches outside of the major cities.

To combat this, in 2013 the World Bank funded and developed a program that, through technical assistance, supported the Salvadoran authorities in developing legal frameworks and financial services. The World Bank team provided a framework for financial correspondents (third parties such as grocery stores and pharmacies) that authorized them to provide basic financial services. As well, the World Bank provided feedback on models of regulation for mobile banking and electronic banking.

Through these efforts, the World Bank was able to legally enact a framework that allowed for those third-party groups to carry out basic financial services. And between December 2013 and May 2014, basic banking transactions through third parties totaled nearly US $45 million. By utilizing technical channels outside of banks themselves, the World Bank has been able to provide credit access in El Salvador for all its citizens.

And in 2010, the International Finance Corporation, which is a part of the World Bank, financed a $30 million project specifically for micro-financing. Based on remittance flow, which accounts for more than $2.8 billion of El Salvador’s GDP, this project will establish a new funding platform for Fedecredito, a cooperative of 55 El Salvador credit unions and banks. Through support from the World Bank, which will grow Fedecredito’s portfolio by up to 25 percent, Fedecredito hopes to use this new structure to give credit to over 30,000 micro-entrepreneurs.

Through these programs, credit access in El Salvador has improved, especially for the rural poor. As these projects continue and El Salvador gains more stability, hopefully, their citizens will have more economic freedom.

– Nick McGuire

Photo: Flickr

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Credit Access in Sri Lanka

Credit Access in Sri LankaSri Lanka and its citizens can benefit greatly from credit access. As an island country in South Asia of many languages and ethnicities, it has, of course, been a product of dispute for many years. A democratic republic, political unrest and ethnic divide have been a main source of disarray as noted by its thirty-year civil war which ended in 2009. But besides political issues, Sri Lanka is an economically stable country in South Asia, with a high Human Development Index rating and a per capita income that ranks highest among South Asian countries. Its main economic sectors are tourism, textiles, rice products, and tea, of which it is the second-largest exporter in the world. Similar to most countries, however, while there is certainly stability, Sri Lanka does have its issues.

Sri Lanka still has a large number of citizens who live in poverty. While only 1.8 percent of Sri Lankans live in abject poverty, nearly 45 percent live on $5 or less a day. It is difficult to maintain a stable income, especially in rural areas. It is even more difficult to achieve personal growth when income covers expenses and there is little left over.

Credit Access in Sri Lanka

That’s why credit access in Sri Lanka, especially in rural communities, is an important stage in its continued development. In a report from 2005, the World Bank Group discusses the best methods of increased access for the rural poor. For example, enhanced remittances and payment services, and long-term saving instruments are highly useful for the poor and can be implemented in small and rural enterprises.

 

Remittances

Remittances, particularly, have grown rapidly in Sri Lanka. As the report states, Sri Lanka should move from an informal, unsafe network to a formal financial institution with better services, such as savings and insurance. This improvement in credit access in Sri Lanka will allow citizens to manage their financials with lower risks.

 

Loan Access

A 2011 assessment by the World Bank concluded that only 35 of Sri Lankan small firms can access a loan or a line of credit. Then, in 2013, Sri Lanka’s Credit Information Bureau (CRIB) and the World Bank agreed to boost credit access by making it easier to use movable assets as collateral. The World Bank will help CRIB to develop a legal framework that allows small businesses to mortgage inventory and equipment to bypass the traditional loan agreements.

 

Loans to Boost Credit Access

And in 2016, the Asian Development Bank (ADB) and LOMC (the nation’s leading microfinance institution) inked a $25 million loan agreement to boost credit access in Sri Lanka, specifically for small businesses and individuals. Under the agreement, LOMC will use the loan as funds for lending to micro-businesses and will improve financial products and outreach to remote farmers. LOMC hopes to improve access to banking, as 70 percent of citizens do not have any access, and, because the deal lasts five years, have the sources for long-term loans.

Sri Lanka continues to grow, and with these credit-based programs and findings, it will do so in a stable and financially viable direction. Hopefully, within the next decade, a majority of the population will have access to banking, and credit will allow for the rural poor to lead more economically independent lives.

– Nick McGuire

Photo: Flickr

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Credit Access in Nicaragua

Credit Access in NicaraguaAs the largest country in the Central American isthmus, Nicaragua has also struggled for decades as the poorest country in the Americas. After suffering hereditary military dictatorship by the Somoza family that unevenly distributed the already meager national wealth, the country has taken steps to redistribute wealth as a democratic republic. However, 48 percent of its citizens live below the poverty line, with 79.9 percent surviving on $2 a day. Credit access in Nicaragua is deemed one way to a better economic future.

Need for Strong Credit 

Currently, agriculture and tourism are the largest industrial sources in Nicaragua. Agriculture makes up about 60 percent of its total annual exports with crops such as coffee and tobacco. While the stability of these industries helps with economic growth, one of the most important aspects of economic autonomy is improved credit access in Nicaragua. A stable financial system contributes to a country’s growth, and an inadequate credit system weakens it.

The civil war of the 1970s and hyperinflation in the 1980s severely hampered credit access in Nicaragua and the development of credit unions. For farmers, the civil war and land reform caused uncertainty regarding property rights in the legal system and many poor farmers cannot use property titles to support loans.

Purchase for Progress

These are the reasons why the World Food Program set up the Purchase for Progress (P4P) program. With this program, farmers can receive higher loans than those offered by banks. Since 2008, P4P has set up a revolving fund of over $400,000 with interests considerably lower than private bank rates. Through this program, it’s much easier for farmers to make a profit with better inputs and higher yields.

Microcredit

The previously mentioned program also highlights a significant style of credit access in Nicaragua: microcredit. The microcredit movement which focuses on small loans and access for those who do not have much to support loans, like farmers, began in the 1990s. The Winds for Peace Foundation (WPF) is another organization that provides a framework for increased access to credit for small-scale farmers through its Local Development Fund, which was founded under NITLAPAN, a research institute in Nicaragua.

Originally, WPF invested in multinational microcredit groups that provided capital and low-rate loans across Central American countries. Soon after it began to support Nicaraguan groups because of their reach into the agricultural sector. By placing the support in Nicaraguans, this program allows for both credit access and for a Nicaraguan institute to autonomously control the path of money and support.

World Bank Improvements

In 2008 the World Bank enacted a plan to provide more financial services and credit across Nicaragua. Through technical support, the World Bank focused on major needs such as

  • improvement of regulations for microlenders;
  • reduction of commercial risks for state-supported banks;
  • and enhanced support services for microlenders.

Through these actions, the World Bank was able to expand the number of deposit and loan accounts in a four-year period by 68 percent.

By developing more stable forms of credit, these programs have created a more stable Nicaragua. For a small farmer with little to his or her name, credit access, even in microcredit form, allows for more stability and more consistency. Through credit access, Nicaragua will gradually diminish its poverty.

– Nick McGuire

Photo: Flickr

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How Credit Access in South Africa Can Change Lives

credit access in South Africa
In order to have a stable and profitable economy, a country must rely on instilling credit options for its citizens. This comes with some downfalls, such as the ability to spend more than one earns, and can lead to debt.Credit access in South Africa became a struggle for its citizens, and in 2001, about 57 percent of the country lived below the poverty line. More often than not, it’s poor people that lack credit for loans and other ways to get funds.

 

Accessing Financial Services

During apartheid, many South Africans were denied access to simple financial services like being able to establish credit. Whether caused by social barriers or policies, the people living in the country strived for change once the divisive political system came to an end.

South Africans were able to pass the National Credit Act in 2005, an act that allows for the promotion and advancement of “the social and economic welfare of South Africans, and also promotes a fair and transparent credit market and industry to protect consumers,”  according to the Banking Association of South Africa. 

 

A Decade of Results

In the decade after the law was passed, there has been a significant increase in job retention, income and even the quality of food being grown and purchased. South Africans’ lives were affected in positive ways as a direct result of having a credit score. Credit access in South Africa also helped people feel that they still had ways to support their families, even during times of job insecurity.

 

Lulalend

Lulalend is a South African based lending company that aims to help small businesses reach their potential growth levels and caters to what they call small and medium enterprises (SMEs). Founded in 2014, the organization aims to make a difference for businesses “too small to receive credit from traditional commercial banks, yet too large to receive credit from micro-financing businesses.”

Lulalend helped with credit access in South Africa in a major way because the application and review process is so quick. However, it has come with some drawbacks: in a 2015 World Bank report, South Africans were the world’s biggest borrowers and also managing their debt poorly.

 

A Brighter Future

As long as credit providers are willing to work with the borrowers, the economy may become stable enough to support the country without a large market crash. Efforts such as improved credit access are the crucial routes necessary to changing this region’s economic status.

– Nikki Moylan

Photo: Wikimedia Commons