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By Rene Gonzalez. Contents Background What is Microenterprises Why Microfinance and Microenterprises as a Solution Benefits & Costs Why microenterprises.

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Presentation on theme: "By Rene Gonzalez. Contents Background What is Microenterprises Why Microfinance and Microenterprises as a Solution Benefits & Costs Why microenterprises."— Presentation transcript:

1 By Rene Gonzalez

2 Contents Background What is Microenterprises Why Microfinance and Microenterprises as a Solution Benefits & Costs Why microenterprises Fail Actions for success

3 Background Worldwide: more than 1 billion people live on less than $1 a day, and 3 billion are estimated to live on $2 a day. Furthermore, poverty has increased in the last generation The income gap continues to widen, with countries like Brazil leading 40% of Latin Americans live in poverty Access to credit is the fourth most important development need, exceeded only by food, health, and education. Everyone has heard of ‘health’ and agrees that it is a core development need, few people have heard of microfinance.

4 Microenterprises Some economist believe that: One of the most effective strategies in the global fight against poverty is loaning people money to start small businesses. (Not give) Others believe differently…

5 What is a Microenterprise? Is an economic business which is: operated and managed by one or two people, usually based within a family, and usually functions within the informal sector of the society outside of bureaucratic regulations and government controls.

6 Micro Loans Micro loans tend to be loans in the range of 50 dollars to 1,500. Microfinance institutions (MFIS) make the loans to those who request them. U.S investors are the ones typically funding such institutions. 565 microfinance institutions in Latin America financing around nine million microenterprises, with an outstanding loan portfolio of 9.2 billion dollars,

7 Micro Loans Those investors who fund MFIS, do it not for the return but for ethical purposes. Make individuals independent Government Aid as in Handouts Promote dependence Provide a solution for hunger Default rates on MFI loans run about 4%, which is less than half the rate on subprime loans made by U.S. lenders

8 Why Microenterprises? Self-employment opportunities among the poor; Employment which is labor intensive rather than capital and education intensive; Economic growth based on small scale business initiatives; An economic base from which to foster business expansion;

9 Why Microenterprises? Economic development opportunities for indigenous populations as opposed to "alien minorities" within a developing country's social and economic structure; Poverty alleviation through new sources of income; Technology adaption to indigenous resources; and Development of entrepreneurial skills and talents

10 Microenterprises In developed countries, microenterprises comprise the smallest end of the small business sector. In developing countries, microenterprises comprise the vast majority of the small business sector—a result of the relative lack of formal sector jobs available for the poor. These microentrepreneurs operate microenterprises not by choice, but out of necessity.

11 Benefits Microenterprises add value to a country's economy by : creating jobs enhancing income (income distribution) strengthening purchasing power lowering costs Poverty alleviations Technology familiarity

12 Disadvantages Low Labor Productivity Low Wages Goods are Inferior Goods Little Potential for Exports and Foreign Exchange Overall – Society’s welfare is Diminished No reinvestments to their business Miss use of funds

13 Why Microenterprises Fail WHAT INHIBITS MICROENTERPRISE GROWTH? Policies Improved business regulations, tax regimes, licensing requirements, financial sector reform bank supervision will promote better conditions for microenterprise development.

14 Why Microenterprises Fail Lack access to services such as marketing, training in basic business skills, and technology transfer Overall Uneducated Remittances

15 In Latin America Types of Microenterprises: Street venders, carpenters, machine shop operators. seamstresses and peasant farmers. Many of these men and women and their employees are poor and have limited access to services. More than 80 percent of the businesses in Latin America have l0 employees or less, Numbered at some 50 million, these microenterprises can no longer be considered marginal. They are the heart of the region's economy.

16 In Latin America An average repayment rate of more than 90 percent, Loan funds are used over and over again without requiring additional money for overhead. Since industries need suppliers of raw materials, transporters for goods, advertisers, there are often spin-off effects, which can begin to reverse the decline of state-run towns. People gain confidence. People refurbish churches, roads and recreational area. Alcoholism and family abuse are declining.

17 Women Women-owned businesses make up one of the fastest growing segments of microenterprise. In Latin America, women own and operate 30-60 percent of such companies. Increased income in the hands of women is invested in: health, education and housing for their families women not only make a huge contribution to national income, but they also create reliable social safety nets for their families and communities.

18 Reducing Poverty Microenterprises contribute significantly to economic growth, social stability and equity. Important vehicles through which people can escape poverty. With limited skills and education to compete for formal sector jobs, these men and women find economic opportunities in microenterprise as business owners and employees. In Chile, a Banco del Desarrollo evaluation found that 88 percent of the bank's microenterprise clients, who represent the poorest groups, improved their standard of living after receiving a loan.

19 In Peru In Peru, the impact of the global crisis has led to a plunge in exports, spending cuts and a rise in social tension, especially among the poor. Microfinance takes on a special importance because it channels funds into keeping afloat small businesses, which are a lifeline for the lowest income sectors In Peru, which has an economically active population of 10.6 million people, there are an estimated three million micro-businesses.

20 Development Microenterprise itself and the improvement of its business in the future. (Not certain/ Possible) Home and the improvement of living conditions for the micro-business owner’s family, like health and education for the children

21 Measurements The majority of microenterprises in developing countries do not keep financial records, Inputs may be purchased in one period and sold in another, and production can be highly seasonal. Individuals may be sensitive about revealing how much they earn, and Concerned about the information being used for tax purposes.

22 Measurements Business goods and materials used for home consumption, but recorded as business expenses Firm inputs which were given as gifts by non- household members, but which were recorded as business expenses. Firm owners who paid themselves a salary, but failed to include this when reporting profits Business revenues used to pay for household expenses, but not included as profits (unreported drawings).

23 Poverty Cycle

24 Henry Paulson “Lack of finance may mean the difference between success and failure, growth or stagnation. These entrepreneurs need capital to expand into bigger space, purchase additional inventory to serve growing demand and markets, to buy capital equipment. We see evidence in economies around the world that greater availability of finance not only enhances growth, it reduces poverty and inequality. ” United States is committed to helping Latin America reduce poverty, fight corruption, build the middle class

25 Road to Success Loan recipients need more than capital to succeed. They need training. Business training, including bookkeeping, marketing, and managing of resources. Treating employees fairly and producing high quality products in an ethical manner. Government Regulations Minimize Government Aid as Handouts

26 Supporting Microenterprises in Latin America Microsoft Support through Technology Microsoft

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