Building up Business Microenterprise Demand for Credit in the Caribbean

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1 Building up Business Microenterprise Demand for Credit in the Caribbean January 28, 2014 Barbara Magnoni, Derek Poulton and Danielle Sobol EA Consultants

2 Outline 2 1. Study Objectives 2. Methodology 3. Qualitative Profiles 4. Potential Demand 5. Major Themes 1. Savings Orientation 2. Risk Aversion 3. Preferences and Perceptions Trust 4. Supply-Side Constraints 1. Country Trends 2. Conclusions & Recommendations

3 Study Objectives 3 Objective To understand the reasons behind limited uptake of microcredit in the Caribbean. Research Questions: 1. What role do formal and informal savings and credit mechanisms play in the financial lives of microentrepreneurs in the region? 2. Why do some microentrepreneurs still turn to informal mechanisms instead of formal microcredit to finance their business? 3. What characteristics of financing are most important to microentrepreneurs in the region?

4 Methodology 4 Desk review of major trends in the Caribbean Field visits to Suriname, Guyana, Jamaica, and Belize 656 quantitative surveys with microentrepreneurs 37 in-depth qualitative interviews with microentrepreneurs Statistical Analysis Descriptive statistics Two sample t-tests Simple Credit Evaluation segmentation Return on Investment analysis 18 in depth qualitative interviews with financial institutions

5 Listening to Business Owners: Themes 5 Savings Orientation Risk Aversion Supply Side Constraints Information Asymmetries

6 Jacq s Story: Financing Business with Earnings 6 Jacq, a butcher in Paramaribo, Suriname, saves in a commercial bank, with a ROSCA, and at home. Jacq is 49 years old. He has run a butchering business in the market for 5 years and hopes to grow his business a lot. He restocks his business weekly with the previous week s earnings. Jacq has saved with the same ROSCA for 26 years, and insists that he would never trust another, as most people are jokers and thieves. He also saves at home He saved at a commercial bank until he was able to make a down payment on and take out a loan for a house. He expressed interest in microcredit, which he had not heard of before. According to our analysis, Jacq is not credit eligible, and he would not benefit from a loan.

7 Karen s Story: Risk Averse Business Karen owns a beauty salon in Berbice, Guyana, and prides herself on having never accessed credit to finance her business. 7 Karen and her sons have run a salon for 10 years. She reinvests nearly all of her USD 365 monthly profit into the business. She explains that there is no reason to grow her business since demand is stagnant and highly seasonal. Getting a bank loan is as hard as getting an American visa She believes that her small, irregular income would make it impossible for her to make loan payments. ROI analysis reveals that Karen would benefit from a microloan, though she may not be eligible for a loan.

8 Hyacinths s Story: A Loyal Bank Customer 8 Hyacinth runs a grocery in the front of her home in Kingston, Jamaica, and has been an active borrower for many years Hyacinth has run a grocery out of her home for the past 40 years. Her business is more profitable than that of the average respondent, bringing in USD 799 each month in profits. She received a home loan from Jamaica National Bank (JNB) 40 years ago and has been a loyal customer, utilizing their credit and savings services, ever since. She currently has a small business loan, and she always makes payments on time, in addition to being a member of a small business association through JNB.

9 Market Size and Demand 9

10 Have we Overestimated Demand? Informal sector (4 countries) is 569,044 Potential demand: 122, , , ,044 Eligible 53% Interested 68% Would Benefit 68% 25% 12% in our sample have a formal business loan 122,792

11 Savings Orientation 11 Of the 656 micro entrepreneurs interviewed: Preference for savings (90%) over borrowing (37%) Formal savings is more prevalent than informal savings Borrowing uses are split: business (25%) and consumer (19%) BORROWING (37%) SAVING (90%) Business 25% Household 19% Formally 15% Informally 11% Formally 9% Informally 11% Formally 66% Informally 50% Savings is less risky, more accessible, and lower-cost compared to borrowing. However, its size is limited in terms of potential.

12 Comparison with LAC 12 FINDEX Data (NOTE: not microentrepreneurs) Much lower prevalence of savings (26%) Formal savings is also more prevalent than informal savings Informal borrowing is more prevalent than formal borrowing LAC BORROWING (25%) Eg. Mexico (30%) Eg. Bolivia (44%) LAC SAVING (26%) Eg. Mexico (27%) Eg. Bolivia (26%) Formally (7.9%) Formally (39%)

13 Preferences and Perceptions 13

14 No Specific Bias against Formal Sector Respondents valued lenience/flexibility* and cheapness. Thought ROSCAs and friends/family most closely matched those preferences. Moneylenders, pawnshops, banks, and MFI s ranked low on these traits. 14 Actual usage did not always reflect these preferences and perceptions. WHY? Primary source of Trusts Thinks is Cheap Thinks is Flexible Business Loans Savings A formal Institution A ROSCA Formal Institution ROSCA Formal Institution ROSCA Belize Suppliers Bank X X X Guyana MFI Bank X X X Jamaica Bank Bank X X X Suriname Bank Bank X = =

15 Trust: Formal Institutions Fare Well 15 Country Trustworthy Not Trustworthy Belize Credit Unions, Friends/Family, Banks Pawnshops, ROSCA s, MFI s Guyana Banks, Store Credit, ROSCAS Moneylenders, Credit Unions, Pawnshops Jamaica ROSCAS, Friends/Family, Store Credit Banks, Pawnshops, MFIs Suriname Banks, ROSCAS, Moneylenders Pawnshops Higher levels of trust may be driving uptake of formal credit despite higher costs and less flexibility.

16 Risk Aversion Slow economic growth in Jamaica and parts of other countries Business often cautious or pessimistic about prospects Of those who were not interested in microcredit: 44% said they were afraid of debt 23% said they did not need a loan 6% didn t know enough about it Business financing through retained earnings and savings most common 16

17 Segmenting the Upper Levels 17

18 Potential in MSMEs 18 Higher end VSEs have more potential- more would benefit from a loan Challenged by collateral requirements of banks Face many of the same perceptions and information asymmetries as the rest of the sample Jamaica 53% of whole sample would benefit 77% of higher end would benefit Guyana 73% of whole sample would benefit 85% of the higher end would benefit

19 Supply Side Constraints 19

20 Supply Side Constraints 20 Multiple supply-side constraints inhibit the expansion of microcredit. These are just as important if not more so than the demand factors. Systemic Institution Front-line Staff Inappropriate or nonexistent regulations Minimal or inefficient gov t support No credit bureau Lack of resources for marketing and lending Low knowledge of microcredit methods Inappropriate systems Lack of experience with target market Insufficient resources for marketing, outreach and financial education

21 Country Trends 21

22 Country Trends

23 Country Trends BELIZE Strong formal savings culture and preference for formal institutions. Weak informal credit sector and underdeveloped formal microcredit sector 92% of respondents would benefit from a loan GUYANA Few microlenders, but high overall awareness of microcredit Preference for informal saving as a financing mechanism JAMAICA Preference for savings, formal and informal, as a financing mechanism Highest rates of borrowing, lowest rates of credit eligibility Blurred lines between microfinance and consumer lending SURINAME Strong preference for both formal and Informal savings, which are are highly complimentary, as a financing mechanism Microcredit awareness and visibility are very low

24 Summing Up 24

25 Conclusions & Recommendations 25 Cover Broad Segments to Reach Biggest Numbers Heterogeneous segments with different needs, capacity, and collateral Appropriate MIS, credit, and risk analysis to segment and identify needs of each group and manage risk (TA, learning visits) Strengthen providers ability to lend to VSEs and even SMEs (banks) Use block savings as collateral (examples from Carib-Cap) for smaller loans Expand the Market Responsibly Information about providers, products and uses is often poor or non existent Risk aversion is high Savings is a good alternative to credit for many Credit culture born from informal mechanisms that are more permissive Support industry-wide efforts to educate and protect consumers Foster credit bureaus Leverage existing groups or group dynamics to build confidence and credit culture

26 Conclusions & Recommendations 26 Reduce the Costs of Servicing Small Markets This is not a scale play, so costs must be low Reducing PAR is critical Cross-subsidize smaller loans with larger ones Introduce branchless/mobile solutions Reduce the Business Uncertainty Many business are cautious about their outlook/borrowing Some don t see room to expand their market Foster linkages between providers and training centers (or internal training) Value chain approach

27 27 Thank You

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