Microenterprises and Microfinance in Ecuador

Topic :

This extensive report summarises the findings and conclusions of a 2004 study of microenterprises and microfinance in Ecuador. It provides the baseline information needed to orient strategies, policies, and resources toward the development of financial and non-financial services for microenterprises so that they can expand their contribution to employment generation and stability and improve the income of the vulnerable poor in rural and urban areas. The results of the study are also intended to help institutions that provide microfinance and non-financial support to microenterprises to identify geographic concentrations of microenterprises and potential demand for services and to better understand the characteristics, problems, and capacity of existing and potential clients.

The main sections of the report cover the following topics:

  • Underlying characteristics of the microenterprise sector;
  • Employment;
  • Sales and income;
  • Perceptions and reality for microenterprises in Ecuador;
  • Major business problems and needs;
  • Financing the microenterprise;
  • Access to and use of financial services;
  • Non-financial services and support;
  • Conclusions: Opportunities for expanding microfinance services in Ecuador

The authors summarise some of their key findings as follows:

The study is based on a survey of more than 17,000 randomly selected microenterprises so it has a high degree of reliability. The report focuses on major issues concerning microenterprises and their financing. Based on the survey and other sources, it is estimated that there are a total of 650,000 to 700,000 urban microenterprises in the country. Over half are estimated to operate in the commerce sector, about a quarter in services, and about 20% in production. Fifty percent of the enterprises were started in the past 5 years.

The small percentage of microentrepreneurs who had been unemployed contradicts the hypothesis that they were forced to start businesses because of job losses during the economic crisis of 1999-2000. A desire to be independent and to earn more than in a salaried position were the most frequent reasons given for starting businesses, thus reflecting an attraction or “pull” motivation rather than being “pushed” into microenterprises because of a lack of better opportunities. Moreover, most microentrepreneurs are happy with their businesses and are optimistic about future prospects even though they reported many problems, have grown little, and have made few major changes in the business in the past year.

The importance of microenterprises is reflected in several results. Total annual sales equaled about one quarter of GDP, and net income from these enterprises accounted for about 10 percent of GDP. Most enterprises did not have hired employees nor did they grow in number of employees over time; however total employment in microenterprises (consisting of owners and employees) represented about a quarter of the country’s urban workforce.

The results of the study also raise questions about assumptions often used in discussing the demand for credit. In spite of the major expansion in microfinance loans in the country, less than 16% of the microentrepreneurs reported applying for loans during the past twelve months, almost always from just one institution. Application rates varied widely by level of poverty, ranging from more than 24% of those in the wealthiest decile to less than 10% for those in the poorest decile. Almost all of those who applied actually received loans, suggesting that the promotion and screening practices of microfinance institutions serves to filter out those who would be ineligible before they apply for a loan. Generally women entrepreneurs applied for and received loans at approximately the same rate as their male counterparts, except in the poorest two deciles where women applied and received loans at about twice the rate of men. The authors hypothesize that this is due to the active targeting of poor women by the country’s microfinance NGOs.

Generally, more than 80% of the applicants received the amounts applied for, which again suggests that the promotion and screening practices of the MFIs steer borrows toward applying for a loan amount that the MFI is willing to approve. Loan size rationing was most severe for applicants of public banks, and less severe for applicants of credit unions and NGOs.

One of the more interesting findings of the study was that 40% of those who had not applied for a loan during the past year did not want loans under any terms. They did not want to become indebted and did not see a positive benefit from borrowing for their business. The remaining 60% disliked characteristics of the loan products or the lending procedures of the MFIs. This suggests that the credit market in Ecuador might be expanded by redesigning products and procedures. Similarly, nearly half of the sample was not interested in a hypothetical loan with a 20% interest rate. Many thought the rate was too high, but more than 40 percent did not want to be indebted or did not need a loan.

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