Development Challenge
Micro, Small, and Medium Enterprises (MSMEs) account for 99 percent of firms and about 60 percent of formal employment (1.8 million employees) in Ecuador. MSMEs have faced persistent financing gaps and repeated shocks, such as political turmoil and energy crisis, which have strained credit provision. The financial system in Ecuador has limited financial instruments for MSMEs within broader context of financial repression, where interest-rate caps preclude efficient capital allocation necessary for economic growth. Historically, lending programs that lacked robust design and oversight led to ineffectiveness and vulnerability of development banks.
Results
The project is in its fifth year of implementation and two more years until its completion. The project has already shown significant progress:
- The project provided financial access to 24,522 MSMEs (315 percent of the target), enhancing their growth in terms of employment, sales, and assets.
- An impact evaluation revealed that the project created an average of 1.5 new jobs per beneficiary firm.
- The project significantly impacted firms without previous access to credit: these firms doubled their sales and created 2.5 jobs on average.
- Reduced the gender gap, similar growth in jobs and sales occurred both on female- and male-led firms.
- Notably, 59 percent of beneficiary firms are women-led or women-owned.
- CFN issued 26,169 loans to 24,522 MSMEs. A substantial increase from the 3,000 firms that received credit when the project started in 2020.
- CFN was awarded a AAA- credit rating by the top bank rating agency, placing it at the same level of the largest commercial banks in Ecuador.
- CFN's mandate shifted to focus solely on second-tier operations, enabling a change in its statutes and staffing structure.
- Modernization of regulations on partial credit guarantees has enabled large banks to join the scheme, underscoring the drive for private capital mobilization to the productive sector.
The impact of the project on employment
WBG Approach
This project supported the institutional strengthening and financial turnaround of the National Finance Corporation (CFN) -- a development bank in Ecuador-- which is now a key driver of MSME credit provision and job creation.
- Institutional and regulatory changes are pivotal to the sustainability and replicability of results. The project created a second-tier credit line for MSMEs while supporting CFN in the transition to a fully second-tier lender. Under the project, CFN has completed an Asset Quality Review and has suspended all its first-tier lending operations. CFN's statute has been amended by Executive Decree to confirm the development bank's status as second-tier lender. The change in operations is reflected in a balance sheet that continues to consolidate with sustainable second-tier intermediation and increasing private capital mobilization.
Contribution to WBG Targets and Jobs
- Gender Equality target: the project benefited 14,410 women-led/owned firms (59% of all beneficiaries). Thanks to the project, these firms grew in terms of sales, assets and employees.
- Jobs agenda: The project created on average 1.5 new jobs for each beneficiary and 2.5 new jobs among firms that had no previous access to finance. Similar impact for female and male led firms. The project benefited 24,522 MSMEs.
