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Experience With Microfinance In Paraguay


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Matt Hoge, a KU graduate student in Latin American Studies, gave a comprehensive overview of his experiences, observations and some conclusions about the usage of microfinance in Paraguay to participants in the 2009 Annual meeting of the Kansas Paraguay Partners. Matt was selected for the 2008-2009 KPP Scholarship and worked as an intern with Fundación Paraguaya, studying microfinance as a strategy for economic development in Paraguay.

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Experience With Microfinance In Paraguay

  1. 2. Thanks to: Kansas-Paraguay Partners Fundación Paraguaya Professor Melissa Birch
  2. 3. <ul><li>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). </li></ul><ul><li>41.2% of rural and 27.6% of urban individuals lack a monthly income to cover basic necessities </li></ul><ul><li>The top 10% of the population holds 43.8% of the national income, while the lowest 10% has only 0.5%. </li></ul><ul><li>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 . </li></ul>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. Poverty in Paraguay
  3. 5. <ul><li>Fundaci ó n Paraguaya is an NGO founded in 1985 by Martin Burt </li></ul><ul><li>Fundaci ó n Paraguaya works throughout the entire country, covering more than 136 cities </li></ul><ul><li>17 regional offices </li></ul>
  4. 6. <ul><li>Mission: </li></ul><ul><li>“ To promote the development of micro- and small enterprises and low-income people through the creation, growth and strengthening of sustainable microfinance services.” </li></ul>
  5. 7. Junior Achievement Escuela Agricola Microfinance
  6. 8. <ul><li>*Financial services to the poor </li></ul><ul><li>(fewer than 18% of the world’s poorest households have access to financial services) (1) </li></ul><ul><li>*Typically associated with credit provided to small business owners </li></ul><ul><li>(In the developing world, the self-employed make up over 1/2 of the labor force) (2) </li></ul><ul><li>*Especially important for female empowerment </li></ul><ul><li>*Known for high repayment rates (usually over 95%) </li></ul><ul><li>*Relatively high interest rates (sometimes well over 50%) </li></ul><ul><li>*No collateral is usually necessary </li></ul><ul><li>*Several different lending methodologies </li></ul><ul><li>Meehan, Jennifer. “Tapping Financial Markets for Microfinance: Grameen Foundation USA Fostering This Emerging Trend.” Grameen Foundation USA . February 2005, pg. 2. </li></ul><ul><li>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. </li></ul>What is microfinance?
  7. 9. <ul><li>Microfinance has been hailed as one of the most effective, innovative tools in economic development </li></ul><ul><li>Is this the most recent development fad or will it provide widespread long-lasting, meaningful social and economic development? </li></ul>
  8. 10. <ul><li>Increasing attention from development thinkers </li></ul><ul><li>Commercialization </li></ul><ul><ul><li>NGOs becoming financial institutions and commercial banks ‘downscaling’ into microfinance operations </li></ul></ul><ul><ul><li>Increasingly including not only credit but also savings, insurance, housing improvement loans, remittance services, etc. </li></ul></ul><ul><ul><li>Utilizing financial markets to expand operations </li></ul></ul><ul><li>Kiva, Microplace </li></ul>
  9. 11. 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.
  10. 12. <ul><li>New incentive system in Grameen II encourages staff members for reaching certain goals: </li></ul><ul><ul><li>100% repayment, </li></ul></ul><ul><ul><li>Earning profit, </li></ul></ul><ul><ul><li>Generating surplus of deposits over loans outstanding </li></ul></ul><ul><ul><li>Ensuring education for 100% of children </li></ul></ul><ul><ul><li>Taking 100% of borrowers’ families over poverty line </li></ul></ul>
  11. 14. <ul><li>Individual lending </li></ul><ul><li>Comité de Mujeres </li></ul><ul><li>Rural microfinance </li></ul>*as of 12/31/2007 Source- The Mix Market Fundación Paraguaya Microfinance Operations 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
  12. 15. Rural Microfinance
  13. 16. <ul><li>55% of Paraguay’s poor and close to 76% of the extremely poor live in rural areas </li></ul><ul><li>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. </li></ul>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
  14. 17. 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 Fundaci ó n 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
  15. 19. <ul><li>The average loan provided by Fundación Paraguaya is less than $450 ($40 minimum) </li></ul><ul><li>The average loan provided by the competition is around $600 </li></ul><ul><li>Statistics suggest that approximately 23,000 jobs have been created, at a ratio of 1.3 jobs per microenterprise supported for over a year </li></ul><ul><ul><li> </li></ul></ul>
  16. 20. <ul><li>60% of Paraguay’s labor supply resides in urban areas. </li></ul><ul><li>Almost 70% of this is informal work. (1) </li></ul><ul><li>Informal labor arrangements account for roughly half of the national workforce. </li></ul>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.
  17. 21. <ul><ul><ul><ul><li>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) </li></ul></ul></ul></ul><ul><li>Unregistered labor contracts by private enterprises in the Mercosur area represent: </li></ul><ul><ul><ul><ul><li>24% of total wage labor in Uruguay </li></ul></ul></ul></ul><ul><ul><ul><ul><li>32% of total wage labor in Argentina </li></ul></ul></ul></ul><ul><ul><ul><ul><li>38% of total wage labor in Brazil </li></ul></ul></ul></ul><ul><ul><ul><ul><li>68% of total wage labor in Paraguay </li></ul></ul></ul></ul>
  18. 22. <ul><li>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. </li></ul><ul><li>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. </li></ul>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)
  19. 23. <ul><li>Between 1980 and 2000, approximately 8 out of every 10 new jobs created in Latin America were informal. </li></ul><ul><li>Between 1950 and 1980, approximately 4 out of every 10 new jobs created were in the informal sector. </li></ul><ul><li>Out of every 8 new workers informally employed, 1/2 work in microenterprises. (1) </li></ul>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.
  20. 25. <ul><li>How can these small businesses grow and become more competitive, allowing more people to climb out of poverty? </li></ul>
  21. 26. <ul><li>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 </li></ul><ul><li>High risk to innovate when earnings are so small, what if new product or businesses strategy doesn’t work? </li></ul>
  22. 28. <ul><li>Many microentrepreneurs go to the market several times a week to restock their inventory, purchasing only a few items at a time. </li></ul><ul><li>Many clients shop at Mercado 4 or Mercado de Abasto. </li></ul><ul><li>Microentrepreneurs often simply purchase items at a grocery store, then resell them for a higher price. </li></ul>
  23. 29. <ul><li>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? </li></ul><ul><li>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? </li></ul>? ? ? ? ? ? ? ?
  24. 30. <ul><li>Mennonite groups have organized their communities into co-ops, working together to achieve economies of scale. </li></ul><ul><li>These groups have substantially higher incomes than other groups in Paraguay. </li></ul>
  25. 31. 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.
  26. 32. 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 2 nd 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.
  27. 33. <ul><li>Does Paraguay need more informal microenterprises? </li></ul><ul><li>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? </li></ul><ul><li>Are microfinance organizations and advocates sustaining and encouraging informal, subsistence entrepreneurialism by promoting credit for microbusinesses? </li></ul><ul><li>Are funds being diverted from other, possibly more effective, long-term development strategies such as investment in infrastructure or technology? </li></ul><ul><li>Or are microfinance organizations empowering entrepreneurs with credit in an environment with few other choices but self-employment? </li></ul>
  28. 34. <ul><li>“ 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.” </li></ul><ul><li>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. </li></ul>
  29. 35. “ 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