How can microcredit be more effective for Latin American entrepreneurs?

The need for more financing is one of the biggest barriers to small- and medium-sized enterprises’ growth. Microcredit programs can help entrepreneurs overcome financial constraints, providing access to resources to boost the growth of small businesses and alleviate poverty by increasing income-generating opportunities. However, microcredit programs do not always generate positive results, highlighting the need to understand them more deeply.

Microcredit is the focus of the third publication in the series “Evidence on Labor Market Policies and Implications for Brazil,” produced by Jobs and Opportunity Initiative (JOI) Brazil at J-PAL Latin America and the Caribbean—and coauthored by the Inter-American Development Bank. Comprising six analyses, the series highlights the most relevant findings in the labor market literature. The goal is to gather robust evidence on policies that address the most pressing challenges for public policies, enriching the debate through the broad dissemination of acquired knowledge. 

Microcredit programs: What works?

After an in-depth analysis of several programs, this new publication highlights the characteristics most associated with microcredit programs’ success. Based on an extensive review of rigorous evidence, the publication seeks to identify which practices can be employed and adapted to improve the efficiency and effectiveness of microcredit in Brazil.

For example, randomized evaluations have shown that offering payment flexibility to beneficiaries can lead to increased investments and profitability. In India and Bangladesh, it was found that granting clients a two-month grace period before beginning loan repayments allowed them to invest more in their businesses. This resulted in increased profits for their companies and improved earnings for loan recipients in the medium term. Other promising characteristics include a deep understanding of client management skills, using machines and equipment as debt collateral, adopting strategies to encourage repayment, and aligning programs with the business production cycle.

Specifically in LAC, data from the Microfinance Barometer highlight the region as an important microcredit market, accounting for 44 percent of the global portfolio. Research has shown that expanding microcredit Brazilian can be a important strategy for the country's economic development. Furthermore, increasing the use of microcredit is one of the objectives of the Central Bank of Brazil’s strategic agenda for strengthening the financial system.

The publication also reports findings from evaluations in the LAC that may serve as inspiration for Brazil. One standout case is a study conducted with Fondo Esperanza, Chile's largest microfinance institution, with over twenty years of experience. The organization offers two main types of loans: joint liability loans for groups and individual loans for clients with a good track record who have been recommended by credit agents. An evaluation found that the incentive structure for credit agents discouraged recommending clients for more advantageous individual loans, as this negatively affected their performance metrics and compensation. To address this, the research team suggested changing the incentives for agents, rewarding those who referred good clients for these loans. This resulted in more clients being referred for better credit conditions and increased profits for the institution.

Considering gender and racial inequalities in policy design

Many microcredit programs focus on women. This trend is partly linked to evidence that women-led businesses face greater barriers in accessing financing. For example, a study conducted in Argentina found that only 20.5 percent of women-led businesses use bank credit to finance their investments, compared to 42.9 percent of those led by men.

Studies have also shown that women may face additional challenges in managing their businesses, which tends to impact the effectiveness of microcredit programs. For instance, a study that revisited evaluations in India, Ghana, and Sri Lanka found that microcredit increased business profits for women-led companies when they were the sole entrepreneurs in their households. However, when they lived in a household with other entrepreneurs, which tends to increase pressure to share resources, microcredit had no effect.

In this context, the publication reflects on how to make microcredit programs more effective for women. For example, technological advancements and reducing cash disbursements seem to be a promising path. One study found that access to credit through a digital account tends to increase the impact of microcredit on women-led businesses' profits, even when sharing resources with others in their household.

JOI Brazil: Generating evidence to address challenges in the Brazilian labor market.

Learning from evidence is crucial to building more efficient public policies. This is the main goal of this series—which seeks to disseminate scientific knowledge from randomized evaluations generated in recent years in an accessible and objective language for all interested parties. The next publications will address job search assistance, the future of work and new technologies, entrepreneurship training, and informality. You can read the first publication about job training programs on the JOI Brazil web page. Lastly, to contribute with more evidence on designing and improving public policies, JOI Brazil also funds randomized evaluations to provide new and original insights to inform the debate on the challenges in the Brazilian labor market.