Experiences of microfinance institutions serving very small to small enterprises in Latin America

Abstract

Very small enterprises (VSEs) in Latin America and the Caribbean (LAC) represent a broad and heterogeneous segment, often underserved by formal financial institutions. To respond to this gap, many microfinance institutions (MFIs) are starting to move upmarket to serve small and medium enterprises, and in particular, VSEs. However, there has been little research or documentation of their experiences to date. This article presents the results of a recent study of the existing practices in Latin America of MFIs serving VSEs. The keys to entering the VSE market effectively, are that an MFI has appropriate infrastructure to expand upmarket and that it strikes an appropriate balance between risk management and an institution's commercial goals. This can be difficult, particularly if MFIs underestimate the need to adapt their commercial strategy, credit methodology, hiring and training practices, risk management, and financing strategies. Further, the interviewed institutions are recent entrants to the VSE space and the macroeconomic context in most of their countries has been favourable to microenterprise and VSE growth, which may buffer VSEs and the institutions that serve them. As such, their models have not really been fully tested and the lessons drawn from their experiences are evolving.