By Ana Idalia Portillo Cueva, Public Policy and Financial Innovation Analyst at Banco Central de Reserva de El Salvador
Micro and small enterprises (MSEs) form a significant part of El Salvador’s economy and provide the basis for a major part of the population’s household income. This article provides a general overview of the MSE sector in El Salvador and outlines the two main public policy instruments implemented to help support the country’s MSEs: the National Financial Inclusion Policy (NFIP) and the National Financial Education Strategy (NFES).
El Salvador’s MSE sector explained
According to the National Survey of Micro and Small Enterprises for 2017¹, there are 317,795 Micro and Small Enterprises (MSEs) in El Salvador, 60.76% of which are classified as microenterprises, 33.92% as entrepreneurship, and 5.32% as small business enterprises. The MSE sector employs a total of 854,732 people, 54.16% of which are women and 45.84% men. According to these results, the National Commission for Micro and Small Enterprises (CONAMYPE) estimates that the MSE segment generates 31.3% of all jobs in El Salvador.
MSEs, therefore, play a crucial role in generating employment for a large proportion of the country’s population and are key to ensuring the economic well-being of many Salvadoran households. However, the sector also faces many challenges – particularly a lack of access to financing – which negatively impacts their initial development and potential for growth.
The limited access to credit, especially for small ventures, is mainly due to their lack of formal documentation, concrete credit histories, and official guarantors or debtors to vouch for credibility. Additionally, not all MSEs carry out official registration and formalization processes, resulting in many remaining informal.
The National Survey of Micro and Small Enterprises for 2017 revealed that in El Salvador, 67.5 percent of enterprises use their own resources to jumpstart their business operations; 10.7 percent make use of private bank financing; 9.3 percent ask family and friends for funding support; 3.2 percent turn to informal lenders for credit, 2.8 percent obtain financing through the Federation of Worker’s Credit Unions and Worker’s Banks (Fedecrédito), while 6.7 percent are financed by public banks and financial entities, cooperatives, NGOs, or donations. A more in-depth analysis of these results indicated that the larger the enterprise, the greater the possibility of access to formal bank financing.
El Salvador has developed several public policy instruments aimed at overcoming the challenges posed to MSE owners and entrepreneurs by the country’s financial system. Below we take a more in-depth look at two of these policy developments, the National Financial Inclusion Policy (NFIP) and the National Financial Education Strategy (NSFE).
How a National Financial Inclusion Policy can help boost MSEs
On March 15, 2021, the National Council for Financial Inclusion and Education (CNIEF)² officially launched the National Financial Inclusion Policy (NFIP)³ as approved by the President of the Republic of El Salvador. The policy seeks to ease access to financial products and services for people with lower incomes, women, and MSEs.
The NFIP has four strategic areas: The first focuses on expanding access and usage of financial products and services to the Salvadoran population; the second advocates for the digitization of financial services through FinTech innovation and the promotion of the Fintech environment; the third addresses financing for MSEs, mainly focusing on the creation of a more favorable environment for MSE formalization and credit access as well as promoting a broader selection of financial products available to MSEs; finally, the fourth is centered on mechanisms to protect and empower the financial consumer. Additionally, the NFIP helps to articulate problematic aspects within the MSE sector – such as informality and low levels of productivity – as well as identifies public and private entities prepared to direct resources to the development of MSEs.
The CNIEF is made up of support groups for issues related to financial inclusion and financial education. The Support Group on Financial Inclusion Issues (GATIF) developed an action plan for 2022 where it outlined specific steps toward effective MSE development. These steps include, among others:
The above activities are led and overseen by the Development Bank of the Republic of El Salvador (BANDESAL), the National Commission for Micro and Small Enterprises (CONAMYPE), Banco de Fomento Agropecuario, Banco Hipotecario and the Ministry of Economy – all of which are member entities of the CNIEF.
Why financial education is key to MSE development
In addition to the NFIP, the CNIEF launched the National Financial Education Strategy (NFES) in October 2022 – a country-level initiative managed and supported by various government institutions and aimed at improving the financial well-being of the population.
At the center of the NSFE’s raison d’être is the intention to promote the capacity of MSE entrepreneurs and business owners, providing them with the knowledge and skills to start, and strengthen their business ventures. In addition, it seeks to promote the use of digital and other financial products and services, with an emphasis on financing for MSE. The CNIEF’s Support Group on Financial Education Issues (GATEF) is responsible for designing proposals and monitoring the implementation of NFES development initiatives.
The NFES is implemented through a CNIEF-developed action plan aimed at priority segments like MSE entrepreneurs. Led by the National Commission for Micro and Small Enterprises (CONAMYPE), the Development Bank of the Republic of El Salvador (BANDESAL), the Ministry of Economy (MINEC), the Superintendence of the Financial System (SSF), and the Banco Hipotecario, the action plan includes, among others:
In addition, the Central Reserve Bank of El Salvador offers workshops called “Know your Numbers” that allow entrepreneurs to develop knowledge and decision-making skills to support them in business planning and development.
These financial inclusion initiatives illustrate El Salvador’s commitment to developing public policies that can instill confidence among entrepreneurs and investors alike to help the MSE sector thrive. Combined with the support of public and private entities, these policies aim to improve the overall socio-economic well-being of the Salvadoran population by valuing one of the country’s most vital sectors.