Transcript Experiences with Microfinance in Paraguay by Matt Hoge, KU

Thanks to:
Kansas-Paraguay
Partners
Fundación
Paraguaya
Professor Melissa
Birch
Poverty in Paraguay
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Various poverty estimates suggest that between 1/3 (World Bank
Poverty Assessment ) to 1/2 of Paraguay’s population is poor
(2003 Census Bureau Household Survey).
41.2% of rural and 27.6% of urban individuals lack a monthly
income to cover basic necessities
The top 10% of the population holds 43.8% of the national
income, while the lowest 10% has only 0.5%.
Land concentration in the Paraguayan countryside is one of the
highest in the world: 10% of the population controls 66% of the
land, while 30% of the rural people are landless.
Mario, Estanislao Gacitua, Silva-Leander, Annika, and Carter, Miguel.. “Paraguay: Social Development Issues for Poverty Alleviation- Country
Social Analysis. Social Development Department World Bank. Paper No. 63 (January 2004) pg. vi.
Fundación Paraguaya is an NGO
founded in 1985 by Martin Burt
 Fundación Paraguaya works
throughout the entire country,
covering more than 136 cities
 17 regional offices
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Mission:
“To promote the development of
micro- and small enterprises and
low-income people through the
creation, growth and
strengthening of sustainable
microfinance services.”
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*Financial services to the poor
(fewer than 18% of the world’s poorest households have
access to financial services) (1)
*Typically associated with credit provided to small
business owners
(In the developing world, the self-employed make up over
1/2 of the labor force) (2)
*Especially important for female empowerment
*Known for high repayment rates (usually over 95%)
*Relatively high interest rates (sometimes well over 50%)
*No collateral is usually necessary
*Several different lending methodologies
Meehan, Jennifer. “Tapping Financial Markets for Microfinance: Grameen Foundation USA Fostering This Emerging Trend.”
Grameen Foundation USA. February 2005, pg. 2.
2. Woller, Gary M. and Woodworth, Warner. “Microcredit as a Grass-Roots Policy for International Development,” Policy Studies
Journal 29.2 (2001): 267-282, pg. 271.
1.
 Microfinance
has been hailed as
one of the most effective,
innovative tools in economic
development
 Is this the most recent
development fad or will it provide
widespread long-lasting,
meaningful social and economic
development?
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Increasing attention from development
thinkers
Commercialization
 NGOs becoming financial institutions and
commercial banks ‘downscaling’ into
microfinance operations
 Increasingly including not only credit but
also savings, insurance, housing
improvement loans, remittance services,
etc.
 Utilizing financial markets to expand
operations
Kiva, Microplace
Source: Heather Montgomery and John Weiss. “Modalities of Microfinance Delivery in Asia and Latin America: Lessons for
China.” China and World Economy. 14.1 (2006); 30-43, pg. 34.
Berger, Marguerite, Otero, Maria, and Schor, Gabriel. “Pioneers in the Commercialization of Microfinance: The Significance and
Future of Upgraded Microfinance Institutions.” from An Inside View of Latin American Microfinance. Inter-American Development
Bank: New York, NY 2006, pg. 47.
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New incentive system in Grameen II
encourages staff members for reaching
certain goals:
 100% repayment,
 Earning profit,
 Generating surplus of deposits over
loans outstanding
 Ensuring education for 100% of
children
 Taking 100% of borrowers’ families
over poverty line
Fundación Paraguaya
Microfinance Operations
Individual lending
Comité de Mujeres
Rural microfinance
Number of Personnel
181
Number of Active
Borrowers
24,896
Average Loan Balance per
Borrower
$377
Woman Borrowers
67.2%
Gross Loan Portfolio
$9,395,999
*as of 12/31/2007
Source- The Mix Market
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55% of Paraguay’s poor and close to 76% of the
extremely poor live in rural areas
Together, people living in the northern and central
regions account for 54% of the extreme poor, despite
the fact they only represent 22% of the national
population.
Mario, Estanislao Gcitua, Silva-Leander, Annika, and Carter, Miguel.. “Paraguay: Social Development Issues for Poverty
Alleviation- Country Social Analysis. Social Development Department World Bank. Paper No. 63 (January 2004) pgs. 8-9
In Paraguay, as in the rest of the world, rural areas are typically the poorest and
the least served by microfinance
These individuals are often those that most need access to financial services
such as credit and savings
Providing financial services for people in rural areas poses unique and difficult
to overcome problems
Fundación Paraguaya’s rural microfinance division consists of 1 person serving
around 300 clients
Program is operated with revenues from individual lending operations and
support from the Inter-American Development Bank
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The average loan provided by Fundación
Paraguaya is less than $450 ($40
minimum)
The average loan provided by the
competition is around $600
Statistics suggest that approximately
23,000 jobs have been created, at a ratio
of 1.3 jobs per microenterprise
supported for over a year
www.fundacionparaguay.org.py
 60%
of Paraguay’s labor
supply resides in urban areas.
 Almost 70% of this is
informal work. (1)
 Informal labor arrangements
account for roughly half of
the national workforce.
1. Aguilera, Nelson. (May 2004). Paraguay: El Mercado Laboral Durante el Periodo 1999-2002. Internacional Labour Organization,
Chile.
2. Mario, Estanislao Gcitua, Silva-Leander, Annika, and Carter, Miguel.. “Paraguay: Social Development Issues for Poverty
Alleviation- Country Social Analysis. Social Development Department World Bank. Paper No. 63 (January 2004) pg. V.
Unregistered labor contracts by private enterprises
in the Mercosur area represent:
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24% of total wage labor in Uruguay
32% of total wage labor in Argentina
38% of total wage labor in Brazil
68% of total wage labor in Paraguay
Tokman, Victor E. “Integrating the Informal Sector into the Modernization Process.” SAIS Review. Vol. XXI No. 1 (Winter-Spring 2001): 45-60,
pg. 51. (ILO statistics)
Despite its diversity, the informal economy can be categorized by
employment status into two broad groups:
*self-employed who run small unregistered enterprises
*wage workers who work in insecure and unprotected jobs
*(others, such as homeworkers, do not fit neatly into either
category) (1)
“Informality is generally correlated with illegality, low wages, high
labor supply, restricted access to financial markets, limited legal
protection, insecure or non-existent property rights, payment of bribes,
limited access to public services, absence of labor legislation/protection,
and general employment insecurity, among other things.” (2)
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1. Chen, Martha Alter. “Rethinking the Informal Economy: Linkages with the Formal Economy and the Formal Regulatory
Environment.” UNU-WIDER/Research Paper No. 2005/10. April 2005.
2. Davis, Robyn. “Social Capital among Small Urban Enterprise in Asunción.” Employment Policy in an Open Economy: Paraguay.
Joint Project CIS/CADEP Working Paper No. 10 Sept. 2006.
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Between 1980 and 2000, approximately 8 out of
every 10 new jobs created in Latin America
were informal.
Between 1950 and 1980, approximately 4 out of
every 10 new jobs created were in the informal
sector.
Out of every 8 new workers informally
employed, 1/2 work in microenterprises. (1)
1. Tokman, Victor E. “Integrating the Informal Sector into the Modernization Process,” SAIS Review. Vol. XXI No. 1 (Winter-Spring 2001): 45-60,
pg. 47.
How can these small
businesses grow and become
more competitive, allowing
more people to climb out of
poverty?
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Consistently replenishing stock with
loan money is not only not going to
bring a population out of poverty, it
can keep people dependent on
expensive credit
High risk to innovate when earnings
are so small, what if new product or
businesses strategy doesn’t work?
Receive
Loan
Purchase
Items or
Inputs
Sell Products
Many microentrepreneurs go to the market several times
a week to restock their inventory, purchasing only a few
items at a time.
 Many clients shop at Mercado 4 or Mercado de Abasto.
 Microentrepreneurs often simply purchase items at a
grocery store, then resell them for a higher price.
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Could Fundación Paraguaya set up
a program so that their clients
could purchase their products or
inputs in bulk in order to receive
better prices?
 Could Fundación Paraguaya
organize a program so its own
clients know the best places to
purchase business necessities, and
perhaps receive discounts from one
another?
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Mennonite groups have
organized their communities
into co-ops, working
together to achieve
economies of scale.
These groups have
substantially higher incomes
than other groups in
Paraguay.
Smaller firms are less likely than larger firms to collaborate with other
businesses
Larger businesses have greater access to formal support—therefore they
face less risk in entering into anonymous agreements
State needs to provide greater protection for smaller businesses that enter
into anonymous contracts
Inter-firm cooperation brings reduction in costs and risks, in addition to
opportunity to pool knowledge and resources
Davis, Robyn. “Social Capital Among Small Urban Enterprise in Asunción.” Employment Policy in an Open Economy: Paraguay. Joint
Project CIS/CADEP Working Paper No. 10 Sept. 2006. pg. 10.
Paraguayan society is characterized by very low levels of
anonymous trust, and alternatively high levels of specific trust
(family, friends, neighbors).
A 2004 Country Social Analysis suggests interpersonal trust in
Paraguay is the 2nd lowest in Latin America and the Caribbean
While regionally 20% of people on average indicated having trust
in most people, only 6% of Paraguayans claimed to have such
trust
93% of Paraguayans feel they can trust those in their social
networks (this is significantly higher than in other countries)
Davis, Robyn. “Social Capital among Small Urban Enterprise in Asunción.” Employment Policy in an Open Economy: Paraguay. Joint Project
CIS/CADEP Working Paper No. 10 Sept. 2006, pg. 11.
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Does Paraguay need more informal microenterprises?
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In the long run, which is more effective in eliminating
poverty, 100 self-employed individuals working in the
informal market, without benefits or wage security, or one
company employing 100 workers, able to large
investments, achieve economies of scale, and offer job
security and benefits?
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Are microfinance organizations and advocates sustaining
and encouraging informal, subsistence
entrepreneurialism by promoting credit for
microbusinesses?
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Are funds being diverted from other, possibly more
effective, long-term development strategies such as
investment in infrastructure or technology?
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Or are microfinance organizations empowering
entrepreneurs with credit in an environment with few
other choices but self-employment?
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“Microenterprises are proliferating because, for decades, the informal
sector has been a depository for victims of the failed formal sector in
developing countries. It is common knowledge that people barred from
mainstream economy for lack of education and job skills are likely to turn
to self-employment. As long as the microenterprise lending model is
offered as a substitute for meaningful social development, employment
that offers real security, viable enterprise production, empowerment of the
poor and bringing about fundamental changes in the economic policies
prescribed by multilateral donors, it will only impede progress towards
finding real answers to the real problems of poverty in developing
countries.”
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Onyuma, Samuel. “Assumptions About Microenterprise Lending as a Precondition for Development: A Critical Review.”
EASSRR. Vol. XXIV No. 1 (Jan. 2008) 109-134, pgs. 128-129.
“Money, says the proverb, makes money. When you have got a little, it is often easy to get more .
The great difficulty is to get that little.”
--Adam Smith