Despite efforts from microfinance practitioners and donors to develop microfinance in the Caribbean, uptake of formal microcredit has lagged behind expectations in some cases. Meanwhile, anecdotal evidence indicates that many microentrepreneurs continue to use informal financing alternatives, such as rotating savings and credit associations (ROSCAs), moneylenders, and supplier credit. This raises important questions about the potential for microfinance in the Caribbean. Why do some microentrepreneurs still turn to informal mechanisms instead of formal microcredit to finance their business? What characteristics of financing are most important to Caribbean microentrepreneurs?
On January 28th Barbara Magnoni, Derek Poulton and Danielle Sobol from EA Consultants visited the IDB headquarters and shared their answers to these questions, based on their forthcoming study: Building Up Business: Microenterprise Demand for Credit in the Caribbean . Their work explored the nature of demand for microfinance in four Caribbean countries—Belize, Guyana, Jamaica, and Suriname—and was distinct in that its investigation included informal credit. The study was funded by the Caribbean Microfinance Capacity Building Program II, a regional microfinance development program funded by the MIF, the Caribbean Development Bank, Citi Foundation and the European Commission.
Findings Strikingly, the research carried out by Barbara and her team revealed that instead of borrowing, many microentrepreneurs typically finance their businesses through both formal and informal savings. Additionally, they found that the relationships between formal and informal finance are often complementary rather than competitive.
Their investigation yielded five major themes:
- Savings orientation. Nearly all microentrepreneurs surveyed saved, and business needs were the most common reason for saving. A majority saved in formal accounts, while ROSCAs were used to varying degrees in each country. Saving and borrowing are not mutually exclusive and most borrowers also saved. This strong savings culture may create less incentive for seeking loans for business investment. This contrasts strongly with many Latin American countries, where low-income people typically save at low rates and often borrow instead to finance their needs.
- Preference for low-cost, flexible financing. In every country, low costs and flexibility were respondents’ top priorities for financing. They wanted low interest and fees, repayment schedules that match their cash flows, and some lenience for late payments.
- Risk aversion. Many microentrepreneurs were cautious or pessimistic about business prospects and have experienced slow sales since the global economic crisis of 2008, particularly in Jamaica. Even where economic growth has been more buoyant, microentrepreneurs were cautious, perhaps due to their own lack of enterprise skills. This attitude bolstered reliance on savings (for those who can) and discouraged borrowing for fear of difficulty with repayment, even among respondents whom EA estimated would benefit from a microloan.
- Information asymmetries. Many microentrepreneurs were unfamiliar with microcredit products or providers, or did not even know what microcredit was. Others held mistaken beliefs and generalizations about products and providers that prevented them from pursuing microcredit.
- Supply-side constraints. While microentrepreneurs’ preferences and perceptions are important factors in uptake, major supply-side constraints also hinder outreach. The cost per loan is high, populations are dispersed, and some institutions are unwilling to risk capital on expansion and outreach.
Reaching the Caribbean market
Overall, according to the study there are approximately 560,000 self-employed informal workers in the four countries and, excluding the 12% that already have formal loans, roughly 123,000 individuals would be eligible for and benefit from microcredit.
EA Consultants applied a rough analysis of the expected return on a business loan on each survey participant and found that 71% of businesses would see positive net gains from borrowing at typical market rates in their home country. Low levels of leverage and a strong savings discipline, often with substantial savings balances contribute to the “math” and highlight the complementarily between credit and savings.
EA Consultants also found high levels of untapped potential among the tiniest microenterprises as well as larger microenterprises, or “Very Small Enterprises” (VSEs). To reach this underserved market, microfinance service providers must develop innovative products and processes to reduce costs and more closely match preferences. Adapted group and savings-led methodologies, along with branchless banking such as mobile banking or rural kiosks, could be part of the solution, particularly for the lower and middle range of microenterprises. VSEs could be better served by strengthening financial analysis and broadening product offers to allow for loans for investment with longer tenors. The need for differentiated strategies for serving upper and lower niches may require Microfinance Service Providers to specialize or train separate teams by target market.
Given the high levels of savings in the Caribbean as compared to Latin America, there is a promising opportunity for microentrepreneur savings to be combined with borrowing in order to increase access to finance. This research has given important insights into how microfinance practitioners and donors can better serve Caribbean microentrepreneurs and foster economic development in Caribbean communities.