1. 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

2. 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).

3. 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.

4. 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.

5. “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 StatesLatin America (average) Occupational Structure in Latin America? CAF 2013

6. 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.

7. The Latin American Approach: A Commercial Orientation (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

8. This commercial orientation and the increase in the average loan size of MFIs in Latin America has not necessarily meant neglecting the poorest. Does The Commercial approach lead to the abandonment of the poorest?

9. Important development of MFIs But…… 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.

10. Informal lending still a pervasive phenomenon (% surveyed micro-entreprenures) 41% has a loan form informal sources. Fuente: elaboración propia con base en USAID-MIDAS (2007). 26 % combines formal and informal sources 30 % of those having a loan from formal sources has also a loan from informal ones.

11. 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: CAF (2011).

12. 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.

13. 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 to salaried 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

14. 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.