Download MicroFinance A Good Strategy for the Economy of Latin America

By
Rene Gonzalez
Contents
 Background
 What is Microenterprises
 Why Microfinance and Microenterprises as a Solution
 Benefits & Costs
 Why microenterprises Fail
 Actions for success
Background
 Worldwide:
 more than 1 billion people live on less than $1 a day, and
 3 billion are estimated to live on $2 a day.
 Furthermore, poverty has increased in the last generation
 The income gap continues to widen, with countries like
Brazil leading
 40% of Latin Americans live in poverty
 Access to credit is the fourth most important development
need, exceeded only by food, health, and education.
Everyone has heard of ‘health’ and agrees that it is a core
development need, few people have heard of microfinance.
Microenterprises
 Some economist believe that:
 One of the most effective strategies in the global fight
against poverty is loaning people money to start small
businesses. (Not give)
 Others believe differently…
What is a Microenterprise?
 Is an economic business which is:
 operated and managed by one or two people,
 usually based within a family, and
 usually functions within the informal sector of the
society outside of bureaucratic regulations and
government controls.
Micro Loans
 Micro loans tend to be loans in the range of 50 dollars
to 1,500.
 Microfinance institutions (MFIS) make the loans to
those who request them.
 U.S investors are the ones typically funding such
institutions.
 565 microfinance institutions in Latin America
financing around nine million microenterprises,
 with an outstanding loan portfolio of 9.2 billion dollars,
Micro Loans
 Those investors who fund MFIS, do it not for the
return but for ethical purposes.
 Make individuals independent
 Government Aid as in Handouts
 Promote dependence
 Provide a solution for hunger
 Default rates on MFI loans run about 4%, which is less than half the
rate on subprime loans made by U.S. lenders
Why Microenterprises?
 Self-employment opportunities among the poor;
 Employment which is labor intensive rather
than capital and education intensive;
 Economic growth based on small scale business
initiatives;
 An economic base from which to foster business
expansion;
Why Microenterprises?
 Economic development opportunities for
indigenous populations as opposed to "alien
minorities" within a developing country's social
and economic structure;
 Poverty alleviation through new sources of
income;
 Technology adaption to indigenous resources; and
 Development of entrepreneurial skills and talents
Microenterprises
 In developed countries, microenterprises comprise
the smallest end of the small business sector.
 In developing countries, microenterprises comprise
the vast majority of the small business sector—a result
of the relative lack of formal sector jobs available for
the poor. These microentrepreneurs operate
microenterprises not by choice, but out of necessity.
Benefits
 Microenterprises add value to a country's economy
by :
 creating jobs
 enhancing income (income distribution)
 strengthening purchasing power
 lowering costs
 Poverty alleviations
 Technology familiarity
Disadvantages
 Low Labor Productivity
 Low Wages
 Goods are Inferior Goods
 Little Potential for Exports and Foreign Exchange
 Overall – Society’s welfare is Diminished
 No reinvestments to their business
 Miss use of funds
Why Microenterprises Fail
 WHAT INHIBITS MICROENTERPRISE GROWTH?
 Policies
 Improved business regulations,
 tax regimes,
 licensing requirements,
 financial sector reform
 bank supervision will promote better conditions for
microenterprise development.
Why Microenterprises Fail
 Lack access to services such as
 marketing,
 training in basic business skills, and
 technology transfer
 Overall Uneducated
 Remittances
In Latin America
 Types of Microenterprises:
 Street venders, carpenters, machine shop operators.
seamstresses and peasant farmers.
 Many of these men and women and their employees are
poor and have limited access to services.
 More than 80 percent of the businesses in Latin America
have l0 employees or less,
 Numbered at some 50 million, these microenterprises
can no longer be considered marginal. They are the
heart of the region's economy.
In Latin America
 An average repayment rate of more than 90 percent,
 Loan funds are used over and over again without requiring
additional money for overhead.
 Since industries need suppliers of raw materials,
transporters for goods, advertisers, there are often spin-off
effects, which can begin to reverse the decline of state-run
towns. People gain confidence.
 People refurbish churches, roads and recreational area.
Alcoholism and family abuse are declining.
Women
 Women-owned businesses make up one of the fastest
growing segments of microenterprise. In Latin
America , women own and operate 30-60 percent of
such companies.
 Increased income in the hands of women is invested
in:
 health, education and housing for their families
 women not only make a huge contribution to national
income, but they also create reliable social safety nets for
their families and communities.
Reducing Poverty
 Microenterprises contribute significantly to economic
growth, social stability and equity.
 Important vehicles through which people can escape
poverty. With limited skills and education to compete
for formal sector jobs, these men and women find
economic opportunities in microenterprise as business
owners and employees.
 In Chile, a Banco del Desarrollo evaluation found that
88 percent of the bank's microenterprise clients, who
represent the poorest groups, improved their standard
of living after receiving a loan.
In Peru
 In Peru, the impact of the global crisis has led to a plunge
in exports, spending cuts and a rise in social tension,
especially among the poor.
 Microfinance takes on a special importance because it
channels funds into keeping afloat small businesses, which
are a lifeline for the lowest income sectors
In Peru, which has an economically active population of
10.6 million people, there are an estimated three million
micro-businesses.
Development
 Microenterprise itself and the improvement of its
business in the future. (Not certain/ Possible)
 Home and the improvement of living conditions for
the micro-business owner’s family,
 like health and education for the children
Measurements
 The majority of microenterprises in developing
countries do not keep financial records,
 Inputs may be purchased in one period and sold in
another, and production can be highly seasonal.
 Individuals may be sensitive about revealing how
much they earn, and
 Concerned about the information being used for tax
purposes.
Measurements
 Business goods and materials used for home
consumption, but recorded as business expenses
 Firm inputs which were given as gifts by nonhousehold members, but which were recorded as
business expenses.
 Firm owners who paid themselves a salary, but failed
to include this when reporting profits
 Business revenues used to pay for household expenses,
but not included as profits (unreported drawings).
Poverty Cycle
Henry Paulson
 “Lack of finance may mean the difference between
success and failure, growth or stagnation. These
entrepreneurs need capital to expand into bigger
space, purchase additional inventory to serve growing
demand and markets, to buy capital equipment. We
see evidence in economies around the world that
greater availability of finance not only enhances
growth, it reduces poverty and inequality. ”
 United States is committed to helping Latin America
reduce poverty, fight corruption, build the middle
class
Road to Success
 Loan recipients need more than capital to succeed.
They need training.
 Business training, including bookkeeping, marketing,
and managing of resources.
 Treating employees fairly and producing high quality
products in an ethical manner.
 Government Regulations
 Minimize Government Aid as Handouts
Supporting Microenterprises in Latin
America
 Microsoft Support through Technology