Microfinance extends microcredit and financial services to the estimated 2 billion working-age people at the BOP who are unbanked or who have no credit history. Affordable credit opportunities offer low-risk microloans that can be combined with support from trusted loan advisors to enable the BOP to make informed financial decisions. Such programs make financial products and services more affordable for the BOP and help consumers build credit history. They can also empower BOP entrepreneurs, smallholder farmers, and producers by providing them with the financial services necessary to run a successful business.
Governments can encourage responsible microfinance programs and services by involving the private sector in the process of developing poverty reduction strategies, maintaining macroeconomic stability, and aligning the regulatory framework. The impact of these interventions will indeed depend on country-specific factors, such as market structure and maturity, governmental capacity, customer demand, and supervisory committees. It is critical that the BOP’s financing needs are properly understood and that existing market penetration is effectively measured. Governments can leverage the existing network of regulatory agencies to expand coverage to low-income markets and to provide a more comprehensive assessment of the market and its risks. This can help policymakers avoid duplicative regulations and increase interoperability among market actors.
El Salvador: Launching a national lending program for affordable housing
The affordable housing market in El Salvador is traditionally been underserved by large, formal banks. As a result, this segment of the market comprises a large portion of the nation’s overall housing deficit.
Fondo Nacional de Vivienda Popular (FONAPIVO), part of a larger national lending program for affordable housing options in El Salvador, is a state-owned, national low-income housing fund. Actors from both the public and private sectors, including multilateral institutions and commercial banks, mobilize resources and channel them to microfinance institutions that provide services to low-income borrowers who otherwise do not have access to credit.
With an initial five-year, $7 million loan from the Inter-American Development Bank, FONAVIPO provided financing to 55 microfinance institutions around the country. These institutions subsequently provided loans to 2,300 low-income families in need of housing. In contrast to traditional commercial banks, these microfinance institutions operate under a unique set of rules and regulations in order to serve the needs and interests of the low-income market.
In addition to its role as a second-tier financial lender, FONAVIPO administers a government subsidy program that offers grants of up to $3,000 for low-income customers to purchase homes. Through its information and advisory center, the program also provides technical assistance to assist homeowners manage bureaucratic processes associated with homeownership.
- Duflos, E. & Imboden, K. (2004, June). The Role of Governments in Microfinance. Consultative Group to Assist the Poor (CGAP) Donor Brief No. 19. Washington, DC: CGAP.
- Ehrbeck, T.; Pickens, M.; & Tarazi, M. (2012,15 February). Financially Inclusive Ecosystems : The Roles of Goverment Today. Consultative Group to Assist the Poor (CGAP) Focus Note No. 76. Washington, DC: CGAP.
- Faz, X.; Mazer, R.; Araujo, R.; & Navajas, S. (2013, 23 May). Consumer Lending and Financial Inclusion in Latin America. Consultative Group to Assist the Poor blog.
- Inter-American Development Bank (IADB). Public-Private Partnership for Low-Cost Housing Investments. IADB Fact Sheet.