Responsible Finance Forum

Factors Influencing Poverty Outreach Among Microfinance Institutions: Ecuador

guatemala-case-studyEcuador has exhibited impressive resilience to the effects of the global financial crisis of 2008, given that two of its main sources of foreign earnings were simultaneously hit and that it is a dolarized economy and thus has constrained access to macroeconomic tools.

 

Download Full Report

 

Background

Ecuador has exhibited impressive resilience to the effects of the global financial crisis of 2008, given that two of its main sources of foreign earnings were simultaneously hit—petroleum and remittances from abroad—and that it is a dollarized economy and thus has constrained access to macroeconomic tools. Ecuador is an example of a country in which a multitude of reforms were implemented in recent times which directly or indirectly impact poverty. Indeed the administration of President Rafael Correa undertook countercyclical fiscal stimulus and measures as close to monetary policy stimulation as possible. In terms of monetary policy, in 2009 the central bank raised the reserve requirement to 3% of their deposits and required private banks to hold 45% of their reserves domestically (Banco Central de Ecuador, 2014).

In terms of fiscal policy, between 2006 and 2009 government spending on education as a percentage of GDP doubled, from 2.6% to 5.3%, and spending on social welfare more than doubled—from 0.7% to 1.8% (Ministerio de Finanzas del Ecuador, 2014). It expanded its main cash transfer program, the Bono de Desarrollo Humano (BDH), by almost 25% through targeted outreach to eligible families who were not yet enrolled. Impact evaluations exploiting the randomized phase-in nature of BDH, such as Fernald and Hidrobo (2011) and Edmonds and Schady (2012), found that this unconditional cash transfer led to improvements in child development including statistically significant increases in school enrolment and significant decreases in child labor. This is relevant to this report as it affects the landscape of poverty in Ecuador and as such affects the poverty outreach MFIs can achieve.

This conjuncture of explicit effort to improve welfare of the most vulnerable through monetary and fiscal measures is the one in which our data must be situated. These efforts may lead to lower poverty incidences across regions, microfinance disbursements held equal, which would mean less poor households in aggregate and could entail more competition from formal banks as demand for credit would increase. We shall investigate our hypothesis that in areas with higher competition for clients, microfinance organizations which do not directly target the poor may be more likely to provide loans to the poorest than they would in areas in which more affluent unbanked require credit.

In 2011 the Superintendencia de la Economía Popular y Solidaria (SEPS) was created to regulate co-operatives, communal banks, non-governmental organizations and other entities that provide financial services within the solidarity economy. According to the World Bank’s Global Financial Inclusion Index, in 2011 37% of adults had an account at a formal financial institution (Ecuador – Global Financial Inclusion (Global Findex) Database 2011, 2014). In 2014 the Banco Central del Ecuador signed an agreement with a mobile operator that had 1/3 of the market in a bid to promote mobile-payment systems amongst unbanked rural residents in particular. The Inter- American Development Bank (IDB) provided a US$50 million loan in 2011, aimed at expanding employment opportunities and reducing poverty among low-income women particularly. The program was intended to result in a 60% increase in credit available in districts with high levels of poverty, of which at least 54% would benefit women entrepreneurs.

Conclusions

  • MFI R operates in collaboration with World Vision and targets markets in areas with poverty incidences below the national poverty line. This MFI focuses the largest proportion of its operations in Manabí, the region of Ecuador which has the highest poverty incidence and one of the largest indigenous populations. Three of the four regions with highest concentrations have some of the highest incidence levels in the country.
  • Concern for operational sustainability arose once again during discussion of the areas of lowest concentration. On the one hand, the three regions in which the MFI disburses the largest loans are Tungurahua, Bolivar, and Chimborazo, which each have the second highest poverty incidence (39%). On the other hand, the MFI has its largest scale of operations in Imbabura where it has a significant market of non-poor clients which balance its portfolio. The picture painted by this MFI is one of successfully balancing financial sustainability and targeted outreach to the poorest. Thus, World Vision’s explicit poverty focus seems to have led to a high poverty outreach with its affiliate in Ecuador, as it did in Bolivia.
  • The regression output shows that on average women receive slightly smaller loans, individuals in the agricultural sector receive the largest loans, and individuals with a lower likelihood of living in poverty receive larger loans.
  • Thus, MFIs which work with World Vision prioritize serving women – in Ecuador 67% of clients are women and in Bolivia they received the largest number of loans. Thus if investors seek poverty outreach with a gender perspective, funding World Vision affiliates appears to provide results.

Download Full Report