Market Analysis of Ecuadorian Microentrepreneurs

Ecuador has the largest growing microfinance industry in South America. According to the Superintendence of Banks and Insurance, the purse size of MFIs grew 148% between August of 2004 and 2005. These numbers are extremely encouraging for a new MFI that is entering the market when it is potentially approaching a peak in growth, especially when you consider that a market study conducted in Ecuador by USAID��s Proyecto SALTO estimates that only 27.2% of microentrepreneurs have received loans. Also encouraging is the fact that the growth of microfinance has been concentrated by regions, particularly around large urban areas. The Highlands region (mountainous area to the North) represents the most competitive market and according to many local experts is nearing the point of saturation. The coast is the next largest market available for expansion.

Although the microfinance industry is showing great signs of health the USAID market study did reveal various issues that represent a concern for most MFIs.

The first of these issues involves estimating the potential demand for finance amongst microentrepreneurs. Although nearly ¾ of the market seems to be available the USAID study concluded that a large portion of these leftover entrepreneurs are not interested in receiving a loan from a financial institution. When they need capital, entrepreneurs are likely to access their savings and revenue generated by their businesses rather taking out a loan. In cases when they do need credit they prefer to receive advances from their suppliers and customers or borrow from family and friends.

The problem is that these are very limited sources of capital as the study also found that microenterprises do not generate large amounts of cash flow. Hence the growth of these businesses is restricted by their inability (or unwillingness) to access credit necessary for investment. The USAID study asserts:

"These answers do not mean that the respondents do not use credit, but rather that they do not consider credit as a primary tool for financing their businesses. The responses do suggest that business growth is largely constrained to what the businesses can generate through sales."

The issue begs the question: "Why are microentrepreneurs uninterested in attaining credit?" USAID sought to answer this question in their study through a focus group:

The table clearly shows that there is at least an interest in credit, as only 14% stated they did not need a loan. It also shows that over 1/3 of microentrepreneurs fear becoming indebted. Over 70% do not think they qualify for the credit or perceive it to be inaccessible because of cost and procedural difficulty.

Therefore, most microentrepreneurs do not avoid credit because they do not think they need it; instead their perceptions of formal finance discourage them from seeking the loans.

In order to resolve these issues MFIs must adjust their products to fit the needs of potential borrowers. They must make greater efforts in making their products accessible to clients by simplifying the process, offering competitive interest rates and developing new methods of securing loans besides using collateral. For Mifex this represents a large potential market of entrepreneurs who are seeking improved products and services from MFIs. Due to our source of capital, we will be able to provide entrepreneurs with lower interest rates and flexible loan offerings.

Business Development Services

More importantly, there is an ever growing need to inform and educate these clients about microfinance. Many of the responses generated by the USAID study may not represent actual problems with the products that are being provided by MFIs, but instead can be linked to opinions of uninformed microentrepreneurs. These potential clients do not recognize the value of credit as a source for business expansion due to their limited education and management skills. A large part of their negative perceptions is due to their risk aversion caused by uncertain economic environments. This is reflected in the amount of entrepreneurs who responded that a fear of indebtedness was the most important factor in deterring them from credit. Misinformed and risk averse customers do not perceive the positive benefit from being in debt and have difficulties incorporating credit into their business strategy.

Even more disconcerting are the USAID findings that the microenterprises may not be able to improve with the influx of capital. The study found that the main obstacles mentioned by entrepreneurs deal with their highly competitive environments and slow growth in demand, not financial problems. Therefore, increasing investment capital may not result in an increase in sales if the microenterprises are operating in already saturated market. What are necessary are services that can improve the business management of the entrepreneurs:

"In highly competitive situations, improving product design, producing or selling in different market segments, and better marketing are often more appropriate measures for improving income than producing more or having more goods to sell. Credit alone, therefore, may not result in improving livelihoods for lower-income people." ��USAID, Proyecto Salto

The implications of these findings are serious for the microfinance industry in Ecuador. MFIs cannot simply venture into struggling communities and infuse capital to spur development. There must be an organized and strategic effort to provide training and technical assistance that will have lasting effects on the productivity and management skills of the entrepreneurs. Currently very few entrepreneurs receive these services, especially on the Coast:

Mifex's services are designed to confront these issues affecting entrepreneurs. Not only are our loan officers trained to provide financial and management advice in their visits to the borrowers, we will also hold seminars and workshops that can provide training and technical assistance for these individuals. Incentives for participating in these courses are in the form of lower interest rates and higher loan amounts.

Furthermore, when a high volume of small and inefficient businesses operate in saturated markets there should be a movement toward consolidation of the most efficient businesses. Our effort to support the emergence of mid-size enterprises and small corporations is aimed toward resolving this issue.

Perhaps these market signals are most important in terms of their impact on society. Microfinance cannot fulfill its potential to alleviate poverty if it is not linked to other services that are in need in developing communities. As mentioned previously, capital alone cannot raise many of these business owners above the poverty level. Therefore, the philanthropic community that supports microfinance should also realize that it is imperative to add value to the loans they are providing by linking them with services that can teach and guide entrepreneurs to maximize their business potential.