A New Paradigm to Include: Increasing Formal Credit Access for MSEs in Peru ---Katia Huayta & Julio Flores ---
The challenge:
Findings: Main factors
• MSEs are key for Peru,s development,
• Not enough credit supply in some regions and economic sectors. • Lack of information increase credit cost. • People,s perceptions lead MSEs to self-exclusion. • Low technology usage reduces the capacity to reach MSEs.
but their productivity is low. • Credit access is one of, the top three constraints for MSE s productivity. • Ironically, just 6% have access to formal credit. • The target population is more than 2 million MSEs.
, Findings: MSE s profile
Recommendations
Four Clusters: • Cluster 1: Most vulnerable microenterprises (30%) • Cluster 2: Financially sound and self-excluded microenterprises (33%) • Cluster 3: Highly informally indebted microenterprises (MSE:19%) • Cluster 4: Mostly banked small enterprises (MSE: 28%)
• An informational wallet to collect MSEs, data to be shared with formal financial providers. • A behavioral game to address self-exclusion biases and connect demand with supply. • A regulatory space and funds to promote fintechs’ development.
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Julio Flores Salvatierra julioflores@hks.harvard.edu Katia Huayta Zapata khuaytazapata@hks.harvard.edu
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The challenge: Increase formal credit access for Peruvian MSEs MSEs are key for Peru,s development…. 99
60
… but MSEs, low productivity limits Peru,s growth 35
40
Productivity index % (Large enterprises=100) Export companies (% of each category)
13
18 5
3 MEDIUM ENTERPRISE
Enterprises (% of total)
Employment (%)
GDP (%)
Credit access is an important factor , that determines MSE s growth… 30 25 20
11.5
8.7
7.4
(N0 of enterprises)
2,711
79,143
2,130,127
Credit access to formal enterprises (%)
40
28%
High Informal competition
High tax barriers
Low Infrastructure and institutions
86% of MSEs are in commerce and service activities
20 0
-60
27
National Average Commerce Restaurants Other minor services
9
9%
0 MICROENTERPRISE
SMALL ENTERPRISE
MEDIUM ENTERPRISE
… and increase the urgency to take inmediate actions
The COVID-19, pandemic has worsened MSE s conditions…
-40
27%
10
Low financial conditions
47%
45%
20
5
-20
Average interest rate (%)
41%
30
10
0
Average age (years)
6% of access (considering informal companies) 50
15
MICROENTERPRISE
… Ironically, formal credit access for MSEs is extremely low
Increase in the likelihood to be a microenterprises
Low access to credits restricts MSEs’ growth in UK, Germany, and Poland
SMALL ENTERPRISE
0
“MSEs need effective Government,s actions to help increase credit access (...)” DALILA
(President at the National Society of Industries)
-80 -100
J-19 S-19 N-19 J-20 M-20 M-20 J-20 S-20 N-20 J-21
Target: Include MSEs in the short-term
2 MILLION MSEs IN URBAN AREAS, WITH MORE THAN ONE EMPLOYEE.
Goal: Increase access to foster productivity and ultimately opportunities
Increase credit access
Improve MSE ,s opportun it & produc ies tivity
Give le sustainabs for itie oportun vian Peru lds househo
Other sources: INEI, Produce (2019), Nolazco et al. (2017), Czarnitzki (2006), De Moor et al. (2016), Hernández-Cánovas and Martínez-Solano (2010), and Roland (2020), Produce (2019)
Findings: Determinants for credit access and relevant profiles OBJECTIVE 1: DETERMINANTS OF CREDIT ACCESS FINDING 1: Not enough credit supply in some regions and economic sectors “[…] It was discouraging that financial institutions rejected credit to even formal MSEs, a common practice in each Peruvian region”
0.60 0.47
S. Manufacture S. Commerce S. Construction R. South
-0.01
S. Services S. Transport
(Dalila, President at the National Society of Industries)
R. Center R. Lima & Callao
-0.37
-0.05 -0.06
0.54
Insurance Liquidity constraints Property rights (collateral) Record sales (information) Use informal credit
-0.18
0.15 0.13 0.08 0.06
It is likely to reduce credit access
0.10 0.00
FINDING 3: People s perceptions and recommendations lead MSEs to self-exclusion
FINDING 2: Lack of information and collaterals increase credit cost and decrease quality of credit appraisal
Nearby financial branches
It is likely to increase credit access
“To give you an idea of the cost, delivering a PEN 500 microcredit could cost PEN 1,000 […]” (Gustavo, Manager at one of the biggest Peruvian Microfinance Institution)
Microentrepreurs have the misconception that being informal prevent them from accessing to credit […]”
C. Speed to approve credits
0.39 0.04
C. Interest rate
-0.03
C. Grace period
-0.25 -0.28
C. Collaterals C. People’s recomm.
(César, Senior Credit Officer at one of the biggest Peruvian Microfinance Institution)
C. Other
-0.52
FINDING 4: Low technology usage reduces the capacity to reach MSEs and MSEs repayment capacity Purchases and sales on the internet Asociation Sales to the Government High school Internet Sex (male) Number of employees MSE’ age Age2
0.00
0.01 0.00 0.00
0.13 0.01
0.25 0.24 0.20
“Fintech is an interesting alternative to generate information cheaply and rapidly, as well as to digitalize the financial industry” (Paul, Manager at the Central Bank)
, OBJECTIVE 2: MICROENTERPRISES PROFILES CLUSTER 1: Most vulnerable microenterprises (MSE: 20%)
Why are they vulnerable? Microenterprises with the lowest sales and belong to commerce and transport, Located in non-urban areas, Low education, High technological barriers.
54%
high school
30%
cellphone or computer
4% liquidity constraints 64% self-excluded (need but do not apply)
CLUSTER 4: Mostly banked small enterprises (MSE: 28%)
What do they need? Small enterprises with technology and access to the financial system. Need alternatives adjusted to their business.
CLUSTER 2: Financially sound and self-excluded MSEs (MSE: 33%)
90%
small enterprises
76%
access to formal credit
CLUSTER 3: Highly informally indebted microenterprises (MSE:19%)
46%
informal credit
A policy target (1) Good structural conditions: access to technology, high education, and without liquidity constraints. High financial needs, but self-excluded because they believe it is too expensive
A policy target (2) Microenterprises with high financial needs and access to technology. However, they are captured by informal lenders.
Policy Recommendations: Three interventions to create a new paradigm PARADIGM: CONNECT DEMAND AND SUPPLY THROUGH AN EASY, FAST, AND DIGITAL SYSTEM BARRIER Information
Not enough Credit supply in some segments (Region & economic sectors)
Banks
Receiving bid
Little use of technology (by finantial institutions and MSEs)
Lack of information and of collaterals limit credit expansion
Self-exclusion biases
POLICY PROPOSAL Environment and Funds to enhance Fintech alternatives
Fintechs
I-wallet
Behavioral game“Urpi: Learn & Finance”
1° PROPOSAL: AN INFORMATIONAL WALLET TO CAPTURE MSEs INFORMATION OBJECTIVE
ADMINISTRATIVE CAPABILITIES
Capture digital daily transactions.
Experience with MSEs.
Allow MSEs to self-report information for credit appraisal.
Develop capacities on digital consumer protection & information sharing among public institutions
Provide information to financial institutions and fintechs.
POLITICAL FEASIBILITY Take advantage of new Government’s political capital.
2° PROPOSAL: A BEHAVIORAL GAME TO FIGHT SELF-EXCLUSION BIASES OBJECTIVE TWO MODULES:
Learn: Increase financial education using behavioral nudges and rewards.
ADMINISTRATIVE CAPABILITIES Experience with procurements
POLITICAL FEASIBILITY Take advantage of the new Government’s political capital. Politicians might see it innocuous.
Finance: Connect MSEs credit needs with credit supply.
3° PROPOSAL: A REGULATORY FRAMEWORK AND FUND FOR FINTECH S DEVELOPMENT OBJECTIVE
Innovation Hub and fund to increase Fintech Alternatives
TWO COMPONENTS:
Innovation hub: space to understand, test and regulate fintechs. Public fund: enhance competition to innovate in credit products for MSEs.
ADMINISTRATIVE CAPABILITIES Experience creating funds. Experience leading innovation Need to build experience in Fintechs
POLITICAL FEASIBILITY Take advantage of new the Government’s political capital. Need to build understading about the measure
Source: University of Cambridge