Ecuador: Microenterprises want to create a new story of growth and success

“We started in a tiny kitchen, with a small bag and a defective motorcycle, but we had to reach customers any way we could,” says Verónica Cevallos, owner of Sushi Friends, a sushi business launched four years ago.

Today, Verónica tells her story in a modern space decorated with professional photos of appetizing sushi rolls. The kitchen is more comfortable, the uniformed waiters are friendly, and the tables are ready for diners.

This is the story of more than 3,500 micro, small and medium-sized enterprises (MSMEs) that received loans from the Corporación Financiera Nacional (CFN) through private banks. These funds are part of the project Promoting Access to Finance for Productive Purposes for MSMEs, an investment project that the World Bank supports in the country.

Between December 2020 and December 2022, the project disbursed USD 213 million, of which USD 99.1 million were lent to MSMEs. That figure is expected to continue to increase as banks finish disbursing all the funds from the credit line among new MSMEs.

"In Ecuador, MSMEs were identified as an opportunity to support the country's development because they are a key source of employment and can have a trickle-down effect on a family’s economy," says Federico Diaz Kalan, World Bank financial specialist and project co-manager.

Moving up to the second tier

The World Bank loan to the CFN included several conditions that were key to the success of the initiative. One was to convert the CFN into a second-tier bank, that is, to encourage development through credit lines to private financial institutions to expand geographic coverage and therefore reach more MSMEs.

The results are very good; comparing what CFN did as a first-tier bank with what it does now, the amount of credit disbursed was tripled and this model of operation has allowed it to reach more places; commercial banking is already there, it already operates there, it already has infrastructure, it knows its customers and it reaches small towns and remote rural areas.

This transformation strengthened the institution and led to the cleaning of the balance sheet through an asset quality review (AQR). In other words, the loan portfolio was reviewed to improve it. Additionally, coverage was expanded to enable more MSMEs to access more credit.

This project has also encouraged the financial system, including the CFN and private banks, to incorporate environmental and social monitoring criteria into their programs. This helps ensure that the financed projects use sustainable practices and technology that meet climate change adaptation and mitigation criteria.

Financial inclusion

A major benefit of this initiative is that half of the loans were granted to small and medium-sized enterprises that obtained a loan for the first time. Normally, banks do not lend to productive initiatives they are not familiar with or to entrepreneurs who have not previously used their banking services. This project provided loans and specialized financial products to small companies seeking development and growth. It is a win-win-win relationship where the entrepreneur wins, the bank that makes the loan wins and, finally, the country wins through job creation, tax revenue and the generation of foreign capital.

Most of the SMEs that have accessed credit are managed or owned by women, for which reason the project is also contributing to closing the gender gap.

“We are growing a hectare every month or month and a half. That means that we have work for lots of people. Since the project began, we have increased our direct employment from 12 to 32 people and around 100 with indirect employment,” says Giovanny Estrada, smiling. He has been planting dragon fruit in Montecristi, Manabí since 2018. He started with two hectares and now has 12.