- The Inter-American Development Bank views microenterprise as a key instrument for reducing poverty in Latin America and the Caribbean. These tiny businesses generate jobs, stoke economic growth, improve income distribution, foster entrepreneurship, boost productivity and diminish gender inequity.
- The IDB was a pioneer in supporting microenterprise and microfinance in the region. Since 1978 it has invested over $800 million in more than 500 microenterprise-related projects.
- The IDB’s support for microenterprise goes beyond providing financial resources. Through the Micro, Small and Medium Enterprise Division of its Sustainable Development Department and the Multilateral Investment Fund, the IDB supports legal and regulatory reforms, supplies technical assistance and disseminates best practices to help create the right conditions for microenterprise to flourish.
Microenterprise, which in Latin America and the Caribbean is usually understood to encompass non-professional businesses that employ less than 10 people, is the single biggest source of jobs in the region. It is particularly relevant for the most vulnerable segments of the population, such as women heads of household and youths in low-income communities, who make a living through microenterprise during economic crises. There are some 65 million of these tiny businesses in the region, which provide employment to nearly half its labor force.
From the standpoint of development, support for microenterprise not only helps alleviate poverty and stokes economic activity; it also offers opportunities to increase productivity among low-income businesspeople that generally lack access to formal financial services and training that would allow them to reap greater rewards through their efforts.
In that sense, the growth experienced by microfinance in the region over the past decade shows how the scarcity of credit — the obstacle mentioned most frequently in opinion polls of Latin American entrepreneurs — can be overcome.
Microenterprise and microloans have also proven effective in providing economic opportunities to low-income women. Some of the region’s most successful microfinance institutions work almost entirely with female borrowers.
Despite its significant economic contributions and its crucial social role, microenterprise tends to be overlooked by policymakers, who largely to pay more attention to macroeconomic issues and big business. Nevertheless, microenterprise plays a key role during crises. The social networks formed by these tiny businesses constitute a line of defense for the poor in the face of the region’s economic vulnerability.
A Pioneer in Microfinance
The IDB was a pioneer in supporting microfinance in Latin America and the Caribbean. Since 1978 it has invested more than $800 million to finance over 500 projects involving microenterprise. This support has been provided in a variety of ways, ranging from large loans to second-tier banks to improve credit access for microentrepreneurs to small grants to help microfinance institutions strengthen their management and improve their services.
Over the past decade the IDB and the MIF have focused on supporting reforms and innovations to benefit microenterprises and developing microfinance services in the region. These investments have yielded outstanding results. Many ideas sketched just five years ago have become reality. Some MIF investments in microfinance institutions have achieved a double impact: on one hand they have yielded returns averaging 20 percent on the capital invested; on the other hand, institutions that received investments have seen their loan portfolios grow tenfold.
The fledgling microfinance industry has already adopted and adapted many methods and practices from commercial banking, including risk assessment, credit scoring and capital markets funding, weaning itself off grants, which are harder and harder to come by. Some microlenders are becoming formal financial institutions that can be supervised by banking regulators, a transformation that allows them to diversify and expand their services. Some are even introducing new technologies such as "smart cards" to bring down costs and provide more flexible, responsive service to their clients.
The IDB and MIF foster such innovations. In 2000 they launched an $8 million program based on a competitive selection process that awards grants to projects that break new ground in microenterprise development. The IDB and MIF evaluate the projects and make the selection. In October 2001 the winners of the first round of competition were announced and grants totaling $2.6 million were awarded to five projects involving international networks of microfinance institutions and microenterprise development agencies. The results of a second round are due to be announced later this year.
Besides financing, the IDB uses other instruments to support microenterprise development. The annual fora organized by the IDB’s Micro, Small and Medium Enterprise Division bring together hundreds of experts and practitioners from NGOs, banks, credit unions, community-based organizations, consulting firms, foundations, investment funds, aid agencies and government institutions involved in microenterprise development. The meetings allow the IDB to disseminate lessons learned and best practices distilled from its projects and research. The IDB also grants annual prizes that recognize outstanding contributions of institutions and individuals who support microenterprise development in Latin America and the Caribbean.
Projects in 2001
Last year the IDB approved nearly $1 billion in financing for projects that supported micro, small and medium enterprise development. Most of those resources involved two loans to Brazil to improve credit access for smaller businesses and hone their competitive edge. Smaller loans supported projects in several Central American countries, Ecuador and Paraguay.
The MIF approved financing, grants and investments worth some $18.4 million last year to support microenterprise- and microfinance-related projects. Among them was a $2.5 million investment in a trust fund managed by ACCION International that will provide capital and loans to microfinance institutions in the region. Other projects supported microfinance institutions affected by natural disasters, management and labor training for microentrepreneurs and their workers, access to new technologies, competitiveness and risk assessment.