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SUMMIT CONFERENCE ON SUSTAINABLE DEVELOPMENT
SANTA CRUZ, BOLIVIA, 1996

MICROENTERPRISE AS A SOURCE OF EMPLOYMENT
Technical Document

September 13, 1996


CONTENTS


Introduction

Improvement of the circumstances in which microentrepreneurs operate is an essential requirement for the sustainable and equitable development of the countries of the Americas. Productivity increases in the microenterprise sector will provide for better protection of the environment and will cause a flourishing of creativity that will improve the human condition and the participation of poor people, among whom are large numbers of women and indigenous groups, in the fruits of growth. Temporary programs to relieve poverty do not, however, constitute permanent solutions to problems of low productivity, nor are they sustainable, given the high cost and requirements of fiscal support. Productivity increases depend to a larger extent on greater access to productive assets, including human capital, as information, markets, and appropriate technologies. Governments can contribute to this increase by facilitating access to financial services (deposits and loans), training, infrastructure, and institutions.

There are priorities for action in three fields that will require coordinated efforts to improve the rendering of financial and non-financial services. First, in the case of financial services, the transformation of microfinancial organizations into established intermediaries and the improvement of microentrepreneurs' access to savings and credit services are both important. This can be accomplished by revising the regulatory framework, strengthening microfinancial organizations, and providing for exchanges of information through a system coordinated by the multilateral organizations involved in this area (e.g., The Inter-American Development Bank (IDB), The Andean Development Corporation (CAF), The Caribbean Development Bank (CDB), and The Central American Bank for Economic Intergration (CABEI)).

Second, greater institutional efficiency of non-financial services must be achieved. Programs of nonfinancial supporting services for the microenterprise sector must be transformed by strengthening both governmental and nongovernmental organizations and providing for the exchange of information.

Third, it is important to have a regulatory framework that will foster equality of market conditions and the adoption of environmentally sound technologies. For the operation of microenterprises, an enabling environment must be created that will lead to environmentally responsible decision-making.

Background

According to the Action Plan adopted at the Summit of the Americas, held in Miami in 1994, the governments granted priority status to the development of small-scale businesses and microenterprises and undertook to carry out deregulation and administrative simplification programs, along with dissemination of information on markets, management systems and appropriate and environmentally sound technology. They further undertook to strengthen the financial system that serves the microenterprise sector, to provide training and technical assistance programs, and to coordinate supporting activities. The governments have taken numerous actions to meet these commitments, but progress has not been uniform in all areas and countries.

The actions of governments, multilateral and bilateral organizations, and nongovernmental organizations have not yielded uniform results. Organizations that furnish microfinancial services have made greater advances in some countries by adopting low-cost methodologies suited to the requirements of their customers and carried out through policies and procedures that enable them to cover the cost of lending and to obtain repayment. This has been essential to achieve broad coverage of the sector, a capacity for institutional permanence, and sustainability in the rendering of financial services.

Although financial services are important for taking advantage of productive opportunities, loans do not constitute an appropriate medium of support in the absence of such opportunities. Instead, access to markets, human capital formation, the collection of information, and the transfer of technology are essential for the creation of new opportunities. However, organizations that support microenterprise with nonfinancial services have not made as much progress as the microfinancial organizations. Their mission and strategy are not clearly defined, technologies for rendering services at reasonable cost have not been developed, and the need for and means of achieving institutional sustainability have not been established. Hence it is essential that efforts be made to transform nonfinancial services for microenterprises. But must be achieved without disregarding the elements of support that are essential to the sustainability of the financial services. Action is required to consolidate and complement the nonfinancial services and expand their coverage, and include innovations to facilitate the financing of enterprises that will protect biodiversity and assure the sustainability of the organizations that provide those services.

Initiatives

Professor Claudio González-Vega, of Ohio State University was contracted by the CAF to develop initiatives in this field. After consulting with multilateral, bilateral, governmental and non-governmental organizations associated with the subject of microenterprises, he has developed the following initiatives:

1. Improvement of Financial Services.

Considering the progress of microfinancing in some countries of the Americas, the commitment of regional financial institutions to these efforts, and the challenges to achieving sustainability in the rendering of financial services to the microenterprise sector, coordinated actions by the governments and the international agencies must support (1) the transformation of the more advanced microfinancial organizations into financial intermediaries, by assisting efforts to strengthen them institutionally and develop an appropriate legal and regulatory framework; (2) the efforts of regulated financial intermediaries -- commercial banks, finance companies, credit unions, and municipal savings associations -- to enlarge the scope of their services to microenterprises through the transfer of new financial technologies and reforms to the legal and regulatory framework that will make such operations possible; (3) the banking authorities of financial institutions in the countries, so as to grant them legal power to regulate and prudently supervise microfinancial organizations and adopt appropriate methods for rating and supervising these organizations; (4) the efforts of microfinancial organizations to develop financial relationships with banks and sources of medium-term funds, on market terms and conditions, so that they can develop an adequate capital structure, including efforts to attract private venture-capital investors whose participation will consolidate adequate internal controls; (5) professional training of upper-level and middle management of the microfinancial organizations, and the development of adequate information and supervision systems to protect the quality of the organizational portfolio; and (6) the efforts of microfinancial organizations that, though less advanced, have nevertheless developed financial technologies that enable them to serve the microenterprise sector at reasonable cost and are seeking to become viable to that, in a reasonable period of time, they will be capable of unsubsidized and self-sufficient operations according to preset indicators.

To achieve all this, the Governments of the Americas support the efforts of the IDB, the CAF, the CDB, and the CABEI to afford microentrepreneurs access to efficient and sustainable financial intermediation. In order to enhance and coordinate these efforts, the creation of a support system for microfinancial organizations, operating under the leadership of these three agencies is proposed, to promote policy changes and technological innovation. The system would assist the governments in the conduct of national actions to enhance sustainable financial intermediation for the microenterprise sector. This coordination would make it possible to revise the terms and conditions of lending operations so that transactions with customers took place on market terms and conditions and disbursements did not discourage the mobilization of national savings. Furthermore, the system would promote the transfer of appropriate financial technologies for microenterprises and sustainable organizational designs for the institutions that render the services. These activities should include workshops and seminars, traineeships for officials, consultations that draw on the experience of professionals associated with advanced programs, observation visits, and the dissemination of the successes of some outstanding microfinancial programs in the Americas.

2. Transformation of Nonfinancial services.

In riew of the less developed state of non-financial services for microenterprises both in scope and in sustainability, the coordinated actions of governments and international agencies should support (1) efforts to transform governmental and nongovernmental organizations that render nonfinancial support services to the microenterprise sector so that they can gradually reach the same levels of clientele, cost coverage, and institutional self-sufficiency as the microfinancial programs; and (2) experimentation with and the design and development of training and technical assistance models that will reduce the costs of providing these services to microenterprises without the need for any linkage with the credit programs. These models should minimize the need for subsidies while meeting the demands of clients and establishing transparent mechanisms for monitoring the use of funds.

To achieve all this, the Governments of the Americas should seek to coordinate efforts and foster the exchange of information and experience. At least at the outset, it is proposed that the responsibility for coordinating these actions be vested in the Support System for Microfinancial Organizations to be created. These efforts would seek to raise the levels of efficiency and sustainability of programs of nonfinancial services for the microenterprise sector through workshops and seminars to discuss strategies and designs; intensive interaction with representatives of the more advanced financial programs; experimentation with new models of service delivery and widespread dissemination of the experiences of more successful programs so as to create a favorable climate of opinion about the feasibility of these efforts.

3. Development of an Enabling Environment.

The microenterprise sector will make no progress in the absence of an environment conducive to the conduct of its activities. The governments should continue their efforts to develop a regulatory framework that offers incentives for greater productivity and environmental responsibility. For this purpose, the coordinated action of governments and international agencies should (1) remove obstacles in the way of access to inputs and consumer markets, facilitate commercial mechanisms that will support greater microentrepreneurial participation in the market, and reform legal structures to encourage vertical integration and subcontracting and promote competitiveness among microenterprises; (2) establish efficient and effective mechanisms for the development and dissemination of useful information and transfers of appropriate environmentally sound technologies, besides promoting a precise definition of property rights in environmental assets; and (3) support associations of microentrepreneurs and other representative groups so as to place at their disposal better technical and conceptual tools to guide their efforts in response to the demands of a macroeconomic and regulatory framework that allows microenterprises to operate on equal market conditions.

Improvement of the circumstances in which microentrepreneurs operate is an essential requirement for sustainable and equitable development of the countries of the Americas.

Without increases in productivity and improvement of the living conditions of the broad segments of the population whose employment and income depend on microenterpreneurial activities, the prospects for protecting biodiversity, ecosystems, and the environment will be severely diminished. Without greater participation by microentrepreneurs, among whom are large numbers of women and the poorest of the poor, in the fruits of economic growth, it will be impossible to secure the participation of larger segments of the population in processes of responsible decision-making. In the absence of actions to improve the conditions in which microentrepreneurs operate, in a framework of sounder macroeconomic policies and more competitive commercial relationships, sustainable and equitable development will not be achieved.

If the microenterprise sector of the countries of the Americas contains and nourishes a substantial measure of creativity and the desire to excel -- on which the improvement of human existence depends -- then governments must set priorities and coordinate actions designed to improve the circumstances in which microentrepreneurs operate. This improvement requires, among other things, access to such financial services as loans and savings facilities that contribute to the formation of capital assets. Also required are better programs of training and technical assistance that will enhance the human capital of microenterprises; the strengthening of infrastructure and the establishment of a regulatory framework to enable greater access to markets and information; and the transfer of environmentally sound technologies that will enhance the competitive position of microenterprises.

The governments of the countries of the Americas and the international agencies have shown growing interest in actions, both local and regional, to support the microenterprise sector, mainly through the provision of better financial services.

Among the activities to promote sustainable and equitable development that have grown most rapidly in the last decade are programs of support for microenterprise. In part, this expansion has revealed how the governments of the countries of the Americas and the multilateral and bilateral organizations that engage in support for development have turned away from regarding microenterprise as an anomaly and are now supporting it as a productive sector that offers substantial opportunities to relieve problems of unemployment, underemployment, and poverty. This political concern is an acknowledgement of the fact that employment and income generated by microenterprises has increased considerably in many countries, particularly in the urban informal sector. This has enabled millions of poor households to earn income from market-oriented, small-scale private activities. Improvement in the conditions in which such microenterprises operate holds the potential to achieve growth with equity.

The growing concern of governments with improving the conditions in which microenterprises operate was expressed in Miami by the presidents at the 1994 Summit of the Americas, and in the technical discussions of the group of microenterprise experts appointed to follop up the resolutions adopted at the Summit. Similar considerations have emerged at subregional meetings, such as the Declaration of the Presidents of Central America at the 1993 Tegucigalpa Summit and the statements made by several presidents at the Bolivar Forum on Latin American Enterprise in November 1995, sponsored by the Inter-American Development Bank (IDB).

The promotion of microenterprise will require action to improve the provision of both financial and non-financial services. The provision of financial services will entail the transformation of microfinancial institutions into regulated intermediaries, and also greater attention to the sector by established intermediaries. The provision of nonfinancial services will entail the pursuit of greater institutional efficiency. A regulatory framework that provides for equal market conditions and promotes the adoption of sound environmental technologies will be required as well.

It is proposed that the Governments of the Americas, in order to relieve poverty, increase competitiveness in the economy, and promote environmentally sound productive activity in the field of microenterprise, carry out the following actions through a cooperative partnership:

a. Improving the access of microenterpreurs to savings and credit facilities by reforming the regulatory framework, strengthening microfinancial institutions, and providing for the exchange of information and experiences.

b. Supporting the transformation of nonfinancial services programs for microenterprises by strengthening governmental and nongovernmental organizations and providing for the exchange of information and experiences.

c. Creating a more enabling environment for the operation of microenterprises that will also lead to environmentally responsible decisions, by the harmonizing of regulatory frameworks.

 

1. Improvement of Financial Services

Background

In the process of transforming the activities aimed at promoting microenterprises -- turning from welfare-type, temporary assistance and distortive, fiscally unsustainable government protectionism, to the achievement of greater competitiveness in real terms creating viable and permanent institutions by increasing productivity, competitiveness, and environmental responsibility -- it is the organizations that provide financial services to the microenterprise sector that have made the greatest progress.

These institutions have started by recognizing that among the microentrepreneurs are many with attractive production opportunities and the ability to save and repay loans on market terms and conditions but without sufficient assets of their own to avail themselves fully of these opportunities, and whose access to formal financial services is limited by problems associated with information, risk, and contract enforcement. For microentrepreneurs, however, improvements in access to credit, deposit facilities, and other financial services constitute means of raising their competitive position and earnings.

In some countries of the Americas, the success achieved by microfinancial organizations in rendering services to microenterprises reflects the adoption of low-cost financial technologies suited to the requirements of their clientele and carried out through policies and procedures that enable them to cover the costs of lending. This has been essential in achieving the measure of financial feasibility required for success in the mission of attaining broad coverage of the microenterprise sector with a capacity for sustainability and institutional permanence in the provision of financial services. In spite of significant achievements in some countries, however, the microfinancial sector still needs to be strengthened by substantial public inputs, wihtout which the growth and sustainability of the sector could not be assured.

Several international organizations have played and continue to play a key role in support of the financial programs of microenterprises. The IDB has exercised its regional leadership to do an innovative work in this field. For the same purpose the Inter-American Investment Corporation (IIC), has employed funds for investment and lending through national financial intermediaries. In addition, the Multilateral Investment Fund (MIF) was created to support the development of small business and microenterprise.

Other subregional financial institutions have also given priority to the microenterprise sector. This year, the CAF, a leading institution in the Andean Community that has been expanding to the rest of South America, created the Microenterprise Development Management Office (GDM) in its area of current operations in order to enhance and consolidate the financial system that serves the microenterprise sector by supporting such institutions that are in the process of being chartered and regulated by the banking authorities so as to ensure permanent and sustainable savings and credit services for microentrepreneurs. The CAF channels its financial support to the financial intermediary institutions of the microenterprise sector by strengthening equity and lines of credit to expand their coverage and enlarge their lending portfolios. It also provides technical support for the institutional strengthening of these national microfinancial institutions.

In the Caribbean, the Caribbean Development Bank (CDB) contributes to the development of microenterprises through its lines of credit to banks and other development institutions and through its technical cooperation programs.

Similarly, the Central American Bank for Economic Integration (CABEI) exercises leadership in the Central American Community by allocating funds to the sector through the Program of Support for Micro and Small Industry (PROMIPE).

Initiatives

The Governments of the Americas support the efforts of the IDB, the CAF, the CDB, and CABEI to provide microentrepreneurs with access to efficient and sustainable financial intermediation.

To strengthen and coordinate such efforts, the creation of a support system for microfinancial organizations is proposed. The system would operate under the leadership of the four agencies to promote policy changes and technological innovations and to assist governments in implementing national actions to strengthen sustainable financial intermediation for microenterprises. This system would coordinate efforts with the Consultative Group to Assist the Poorest (CGAP), which is based at the World Bank.

The efforts are designed:

  • To expand and adapt the processes of financial reform so that the regulatory framework will enable credit and deposit transactions to take place on such terms and conditions as will ensure the viability and sustainability of the microfinancial organizations.

  • Revise the framework of regulation and prudent supervision so as to facilitate the transformation of advanced microfinancial organizations into regulated financial intermediaries. In some cases this will require the creation of special types of intermediaries; in others, the revision of conditions for operating in the financial market.

  • To help the banking authorities that govern the financial institutions of the countries to acquire the technical tools they need to provide for the sound operation of a microfinancial sector, while diligently protecting the solvency and liquidity of the system.

  • To revise the conditionality of the financial operations conducted by international organizations so that transactions with customers take place on market terms and conditions, without distortions that would weaken the viability of the programs, and so that the disbursements will not become disincentives to the mobilization of domestic savings. Instead of supplanting them, public funds should support the participation of private venture capital investors.

  • To promote the transfer among the countries of appropriate financial technologies for microenterprise transactions and of sustainable organizational designs for the institutions that render such services. These activities should include workshops and seminars, traineeships for officials, consultations with professionals from advanced programs, observation visits, and dissemination of the progress made by some microfinancial programs in the Americas. The purpose is to draw on the experience and the lessons learned by others to quicken the progress of the less advanced organizations, so that they can adopt the better practices developed by the leading organizations. These programs should also be made available to government officials and officials of international agencies that make decisions concerning this sector.

2. Transformation of Non-Financial Services

Background

Even though financial services are important in making it possible to take advantage of productive opportunities, if such opportunities are unavailable loans do not constitute an appropriate medium of support nor can they yield profit where none exists. Instead, access to markets, human capital formation, the collection of information, and technology transfer are essential to create these opportunities. The role of governments and international organizations in these areas is crucial. However, the organizations that employ non-financial services to support the microenterprise sector have not managed to achieve a measure of progress similar to that of the microfinancial organizations. Their mission and strategy are less clearly defined, the technologies for providing nonfinancial services at reasonable cost are less developed, the role of prices and subsidies has not yet been made clear enough, and the prospects for achieving viability and institutional sustainability, and the determining factors, have not been correctly identified.

It is therefore essential to exert efforts to transform and develop nonfinancial services for the microenterprise sector. However, this should be done without overlooking the contribution of additional supporting elements, which are essential for the sustainability of the financial services being delivered. Additional innovations are needed to devise sustainable mechanisms for the financing of enterprises that protect biodiversity. In the case or nonfinancial services, experimentation and the design and transformation of the existing organizational structures are needed to bring them in line with the standards adopted by the microfinancial programs. In the case or financial services, actions to achieve consolidation and complementarity are needed to enlarge their range of coverage and assure their sustainability.

Initiatives

It is proposed that the Governments of the Americas coordinate efforts and foster the exchange of information and experience to facilitate the transformation of nonfinancial supporting services for the microenterprise sector so that they may achieve levels of sustainability similar to those of the microfinancial programs. It is proposed that responsibility for the coordination of these actions, be vested at least at the outset, in the support system for microfinancial organizations recommended in the preceding initiative.

This system would work in coordination with other multilateral and bilateral agencies and with governmental and nongovernmental organizations to:

  • Engage in substantial efforts to raise the levels of efficiency and sustainability of non-financial services programs for the microenterprise sector to bring them into line with the standards attained by the financial programs, duly adjusted for the special charasteristics of the nonfinancial services.

  • Promote workshops and seminars for the discussion of strategies and designs, in intensive interaction with representatives of the advanced financial programs, and experimentation with new models of services delivery.

  • Disseminate widely the experiences of successful programs in this area in order to create a climate of opinion that will make these efforts more feasible.

3. Creation of an Enabling Environment

Background

In addition to viable and sustainable support organizations, progress in the microenterprise sector requires an enabling regulatory environment and favorable policies that afford opportunities for growth without discriminating against small-scale activities. It is necessary in some countries to revise the systems of taxation and operating licenses. Changes are also required in pricing, labor, and public spending policies that discriminate against small business. At the same time, however, the regulatory framework must create incentives for the adoption of environmentally sound technologies.

Initiatives

The microenterprise sector will be unable to make progress without an enabling environment for the conduct of its activities. In particular, it is necessary to develop a neutral environment and regulatory framework that does not discriminate, as it has in the past, against small-scale activities.

This environment and regulatory framework should create incentives for increases in productivity, competitiveness and environmental responsibility. For that purpose, the coordinated action of the Governments of the Americas and the international agencies should endeavor:

  • To remove restrictions on admission that preclude access to markets for goods and inputs; facilitate the establishment of commercial mechanisms that support greater participation in the market by microentrepreneurs; reform the legal structures to encourage vertical integration and subcontracting and, in general, to promote the access of microenterprises to markets where they can develop competitiveness.

  • To establish efficient and effective mechanisms for the generation and dissemination of useful information for microentrepreneurs.

  • To promote the transfer of appropriate new, environmentally sound technologies to microenterprises.

  • To support associations of microentrepreneurs and other representative groups so as to place at their disposal technical and conceptual tools to guide their efforts in response to the demands of a macroeconomic and regulatory framework that will allow microenterprises to operate on equal market conditions and of an institutional infrastructure that will foster human capital formation and increase productivity.

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