Accessible financing for the family agricultural sector and MSMEs
Accessible financing for the family agricultural sector and MSMEs
Business Model Description
Enhance the financial support for family-owned farms and small to medium-sized enterprises (SMEs) by employing Business-to-Consumer (B2C) strategies, where companies offer products or services directly to customers. This involves utilizing mobile and online platforms for extending credit, such as: Digital Credit Services, Peer-to-Peer (P2P) Lending and other potential fintech methodologies.
Expected Impact
Increase financing alternatives to improve agricultural outputs, reduce poverty and ensure food security
How is this information gathered?
Investment opportunities with potential to contribute to sustainable development are based on country-level SDG Investor Maps.
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Country & Regions
- Paraguay: Cordillera
- Paraguay: Guairá
- Paraguay: Misiones
- Paraguay: Paraguarí
- Paraguay: Alto Paraná
Sector Classification
Financials
Development need
Paraguay has the highest financial vulnerability index in Latin America due primarily to a lack of income, which, in turn, stems from economic and social vulnerabilities. Furthermore, its extensive territory and low population density result in limited or non-existent financial penetration in remote areas (I).
Policy priority
The National Financial Inclusion Strategy represents a policy priority for Paraguay, as it lays out the country's strategic guidelines for enhancing financial inclusion. This document outlines key indicators, quick achievements, and specific actions across seven thematic areas (II).
Gender inequalities and marginalization issues
According to the 2020 World Economic Forum's Global Gender Gap Index, Paraguay holds the 100th position out of 153 countries, ranking third to last in Latin America and last in South America. The most substantial disparities exist in economic and political participation, with women earning 53.8% less than men for performing equivalent task (III).
Investment opportunities introduction
Paraguay's success with electronic money stems from factors such as low population density in underserved areas where mobile phone usage is widespread. This sector offers an attractive investment opportunity, as it has demonstrated strong growth and shows potential for further expansion (I).
Key bottlenecks introduction
Despite progress in physical access through electronic money, Paraguay, like the rest of Latin America and the Caribbean (ALC), still faces challenges in providing economic access to formal financial products. Notably, Paraguay has the highest costs and fees for savings, credit, and payment services (I).
Corporate and Retail Banking
Development need
In Paraguay, the productive sector, especially Micro, Small, and Medium Enterprises (MSMEs), faces significant challenges as only 7% have bank accounts. This low rate of financial inclusion limits their growth and ability to scale operations (IV).
Policy priority
The 2018-2023 national plan for MSMEs sets up financing lines to provide MSMEs with essential capital. Also, it promotes legislative changes to develop alternative financing sources. Finally, the plan focuses on implementing policies, programs, and tools to enhance the financing of MSMEs, aiming to bolster their financial stability and growth (IV).
Gender inequalities and marginalization issues
Rural districts face challenges in financial inclusion, particularly for women in rural communities. As of 2021, the gender gap in financial access shows a mixed trend: women lead slightly in overall financial inclusion with 55.3%, compared to 53.5% for men, but they still struggle to access emergency funds (V).
Investment opportunities introduction
Seven out of ten adults in Paraguay do not have bank accounts, highlighting a significant opportunity for growth in the financial sector. Many Paraguayans turn to alternative methods for saving and transferring money. In recent years, the use of e-wallets has significantly increased to bridge this financial gap (VI).
Key bottlenecks introduction
Efforts to enhance financial inclusion in Paraguay through digital means are ongoing, but they face substantial challenges. These challenges stem from a general lack of trust and inadequate digital skills among potential users, a heavy dependence on non-bank financial actors, and the necessity to refine and streamline digital financial services (VII).
Pipeline Opportunity
Accessible financing for the family agricultural sector and MSMEs
Enhance the financial support for family-owned farms and small to medium-sized enterprises (SMEs) by employing Business-to-Consumer (B2C) strategies, where companies offer products or services directly to customers. This involves utilizing mobile and online platforms for extending credit, such as: Digital Credit Services, Peer-to-Peer (P2P) Lending and other potential fintech methodologies.
Business Case
Market Size and Environment
30% MSMEs are formalized (263,106)
The number of MSMEs (from different sectors including agriculture) is 900,000 (2020), of which only 30% are formalized (263,106) (1).
In 2019, the MIC, in collaboration with other multilateral organizations, extended financial support to 200 formally established companies in the MSMEs sector (2).
Interest rates for loans in this sector vary from 7% to 18% annually, including grace periods (3).
Indicative Return
10% - 15%
According to the evaluation of a microcredit financing project between 3,000 and 5,000 USD at 28% in Ecuador, the resulting IRR is 33% in a project evaluation period of 5 years (4).
The estimated rate of return for an investor would be 10.53%. The rate provided is a benchmark calculated as a cost of capital with the country risk premium that translates into an average return required by active investors in the subsector (3).
Investment Timeframe
Short Term (0–5 years)
The evaluation of a microcredit financing project between $3,000 and $5,000 to 28% in Ecuador, the recovery period is approximately 3 years (4)
Market Risks & Scale Obstacles
Market - Highly Regulated
Impact Case
Sustainable Development Need
The percentage of adults with an account at a bank or in a formal financial institution in 2021 was 32% (5).
There are still challenges in Paraguay to achieve SDG 9, especially in the existence of significant digital gaps in Paraguay depending on the socioeconomic, cultural, academic level, among others (5).
Paraguayan productive units, including MSMEs, encounter a significant challenge, primarily the lack of access to financing. This issue affects all strata of these units, with MSMEs being particularly impacted (6).
Gender & Marginalisation
The proportion of agricultural production units served with credit fell from 33.6% in 1991 to 17.7% in 2008 (7).
41.7% of the employed population in rural areas is dedicated to family farming. Half of the population employed in family farming is in a situation of poverty (49.4%), with a higher incidence among women (8).
Poverty affects 34.6% of the total rural population, while in the case of residents in urban areas the percentage affected is 17.8% (9).
Expected Development Outcome
Encourage small-scale growers to improve their production capacity
Boost the percentage of small businesses that have secured loans or lines of credit, thereby offering financial liquidity to SMEs, farmers, and direct recipients.
Lower the capital costs and streamline its acquisition, while expanding access to the financial market.
Gender & Marginalisation
Decreasing rural poverty and addressing disparities in rural populations, particularly among women, regarding access to credit.
Primary SDGs addressed
2.3.2 Average income of small-scale food producers, by sex and indigenous status
2.3.1 Volume of production per labour unit by classes of farming/pastoral/forestry enterprise size
9.3.2 Proportion of small-scale industries with a loan or line of credit
8.10.2 Proportion of adults (15 years and older) with an account at a bank or other financial institution or with a mobile-money-service provider
Secondary SDGs addressed
Directly impacted stakeholders
People
Gender inequality and/or marginalization
Corporates
Indirectly impacted stakeholders
Public sector
Corporates
Outcome Risks
Providing higher lines of microcredit carries increased risks associated with the abuse of the system and non-repayment. These risks include amplified financial losses for lenders, heightened borrower vulnerability, the potential intensification of a debt cycle, elevated portfolio risk, and sustainability concerns for microcredit programs (10).
Microentrepreneurs may become over-indebted if they borrow beyond their repayment capacity, leading to financial distress and a cycle of debt (10).
The absence of a credit history and the necessity for upfront information raise the financing risk and result in an elevated required return, prompting the request for collateral (10).
Impact Risks
Execution risks: The lack of awareness and absence of regulation of Fintech solutions pose risks related to consumer protection, financial stability, data privacy, market integrity, financial crime, investor risk, and innovation.
Stakeholders: High interest rate volatility creates uncertainty for investors, increases borrowing costs for borrowers, presents risk management challenges for financial institutions, reduces investment returns, contributes to market instability, and can have adverse economic effects.
Drop off: High credit risk and low rate of return on investment can lead to potential financial losses, reduced profitability, weakened financial positions for lenders, investor dissatisfaction, limited investment options, and potentially slower economic growth.
Unexpected risks: Regulations hindering operational scalability can result in restricted growth, a competitive disadvantage, heightened expenditures, innovation constraints, entry barriers to markets, potential economic consequences, and legal and reputational vulnerabilities.
Impact Classification
What
Providing microcredits with a focus on agriculture and MSMEs can have a positive impact by helping them maintain liquidity and enhance their productivity.
Who
MSMEs and farmers experiencing liquidity challenges, along with the potential risk of employee layoffs, require support for their growth and development.
Risk
There is a risk of underutilization of funds due to the limited knowledge and management capacity of MSME and small farmer owners.
Impact Thesis
Increase financing alternatives to improve agricultural outputs, reduce poverty and ensure food security
Enabling Environment
Policy Environment
The National Development Plan 2030 aims to achieve goals such as enhancing the productivity of family farming and increasing the household income share (11).
Agrarian Strategic Framework 2013 - The general objective of Axis 2 of the Agrarian Strategic Framework includes contributing to the process aimed at improving the quality of life with substantive reduction of poverty in Family Farming (12).
National Financial Inclusion Strategy 2014 - The final objective of the ENIF is to reduce poverty and boost economic growth in Paraguay. Likewise, the Strategy seeks to promote greater financial services in a competitive and safe market. (13)
Financial Environment
Financial Development Agency (AFD) -PROPYMES - Financing for small and medium-sized companies- It is intended for those interested who qualify as subjects of credit (17).
Financial Development Agency (AFD) Mi Crédito - Financing for micro and small companies for operating capital, fixed assets, and productive housing, in terms of up to 5 and 12 years (17).
Development Finance Agency (AFD) Fimagro- Financing for the purchase of agricultural machinery with terms of up to 6 years (17).
Regulatory Environment
Law No. 4,457 / 12 establishes benefits for MSMEs. Among them, Art. 34, 35, 36 and 37: Special conditions for access to credits, financing and technical cooperation of MSMEs (14).
Law N ° 5,628 - Which creates the guarantee fund for micro, small and medium-sized enterprises (15).
Law No. 5,669 / 16 Fostering the Entrepreneurial Culture - Fostering the entrepreneurial spirit and culture in all educational establishments in the country (16).
Marketplace Participants
Private Sector
Banco Regional (Paraguay), Nexoos (Paraguay), Sudameris Bank (Paraguay), Banco Itaú (Paraguay), Banco Familiar (Paraguay)
Government
Ministry of Agriculture and Livestock, National Development Bank, Development Finance Agency, Agricultural Habilitation Credit (CAH), FOGAPY, Central Bank of Paraguay (BCP)
Multilaterals
IDB, European Union (EU), World Bank
Non-Profit
Fundación Paraguaya
Target Locations
Paraguay: Cordillera
Paraguay: Guairá
Paraguay: Misiones
Paraguay: Paraguarí
Paraguay: Alto Paraná
References
- (I) CAF - Banco de desarrollo de Latinoamérica. 2021. Capacidades, inclusión y vulnerabilidad financieras en Paraguay. https://scioteca.caf.com/bitstream/handle/123456789/1871/Capacidades_inclusi%C3%B3n%20y%20vulnerabilidad%20financieras%20en%20Paraguay.pdf?sequence=4&isAllowed=y (II) Gobierno del Paraguay. 2014. Estrategia Nacional de Inclusión Financiera. https://enif.paraguay.gov.py/storage/app/uploads/public/59e/10f/126/59e10f12678f7631648286.pdf (III) Datos Macro. 2020. La brecha de género se estrecha en Paraguay. https://datosmacro.expansion.com/demografia/indice-brecha-genero-global/paraguay?anio=2020 (IV) Ministerio de Industria y Comercio. 2019. Plan Estratégico de Promoción y Formalización para la Competitividad y Desarrollo de las MIPYMES 2018 – 2023. https://www.mipymes.gov.py/wp-content/uploads/2020/05/PLAN-NACIONAL-DE-MIPYMES.pdf.pdf (V) Alliance for Financial Inclusion. 2023. Women’s Financial Inclusion, Digital Financial Services, and COVID-19 Policy Response: Case of Paraguay. https://www.afi-global.org/wp-content/uploads/2023/03/Womens-Financial-Inclusion-Digital-Financial-Services-and-COVID-19-Policy-Response-Case-of-Paraguay.pdf (VI) International Trade Administration U.S. Department of Commerce. 2022. Paraguay - Country Commercial Guide. https://www.trade.gov/country-commercial-guides/paraguay-trade-financing (VII) Alliance for Financial Inclusion. 2017. The Paraguayan experience with digital financial services. https://www.afi-global.org/newsroom/blogs/the-paraguayan-experience-with-digital-financial-services/
- (1) Market Data. 2021. Solo el 26% de las Mipymes están formalizadas, según el MIC. https://marketdata.com.py/noticias/nacionales/solo-el-26-de-las-mipymes-estan-formalizadas-segun-el-mic-54264/
- (2) Ministerio de Industria y Comercio. 2019. MIC Y CAH firman convenio con miras a potenciar a las MIPYMES, con producto financiero para el sector. https://www.mic.gov.py/mic/w/contenido.php?pagina=1&id=1102
- (3) Aswath Damodaran. 2021. Current Data. https://pages.stern.nyu.edu/~adamodar/
- (4) FOGAPY. 2021.
- (5) CAF - Banco de desarrollo de Latinoamérica. 2021. Capacidades, inclusión y vulnerabilidad financieras en Paraguay. https://scioteca.caf.com/bitstream/handle/123456789/1871/Capacidades_inclusi%C3%B3n%20y%20vulnerabilidad%20financieras%20en%20Paraguay.pdf?sequence=4&isAllowed=y
- (6) Ministerio de Industria y Comercio. 2019. Plan Estratégico de Promoción y Formalización para la Competitividad y Desarrollo de las MIPYMES 2018 – 2023. https://www.mipymes.gov.py/wp-content/uploads/2020/05/PLAN-NACIONAL-DE-MIPYMES.pdf.pdf
- (7) Ministerio de Agricultura y Ganadería. 2010. Marco Estratégico Agrario: Directrices Básicas 2009 – 2018. https://faolex.fao.org/docs/pdf/par144609.pdf
- (8) ONU. 2020. Examen Periódico Universal – Tercer Ciclo - Paraguay. https://uprdoc.ohchr.org/uprweb/downloadfile.aspx?filename=8456&file=SpanishTranslation
- (9) FAO, 2019. Erradicar la pobreza rural en la región es posible con nuevos enfoques en las políticas y estrategias nacionales. https://www.fao.org/paraguay/noticias/detail-events/es/c/1235196/
- (10) Jessica Schicks and Richard Rosenberg. 2011. Too Much Microcredit? A Survey of the Evidence on Over-Indebtedness. https://documents1.worldbank.org/curated/zh/553421468148522571/pdf/649800NWP00PUBLIC00Box361550B0OP19.pdf
- (11) Gobierno del Paraguay. 2014. Plan Nacional de Desarrollo Paraguay 2030. https://www.stp.gov.py/pnd/wp-content/uploads/2014/12/pnd2030.pdf
- (12) Ministerio de Agricultura y Ganadería. 2013. Marco Estratégico Agrario. https://faolex.fao.org/docs/pdf/par179001.pdf
- (13) Gobierno del Paraguay. 2014. Estrategia Nacional de Inclusión Financiera. https://enif.paraguay.gov.py/storage/app/uploads/public/59e/10f/126/59e10f12678f7631648286.pdf
- (14) Congreso de la nación paraguaya. 2012. Ley No. 4457. https://www.bacn.gov.py/leyes-paraguayas/8272/ley-n-4457-para-las-micro-pequenas-y-medianas-empresas-mipymes#:~:text=La%20presente%20Ley%20tiene%20por,servicios%2C%20y%20darles%20identidad%20jur%C3%ADdica.
- (15) Congreso de la nación paraguaya. 2016. Ley No. 5628. https://www.bacn.gov.py/leyes-paraguayas/5146/ley-n-5628-crea-el-fondo-de-garantia-para-las-micro-pequenas-y-medianas-empresas
- (16) Congreso de la nación paraguaya. 2016. Ley No. 5669. https://www.bacn.gov.py/leyes-paraguayas/5239/de-fomento-de-la-cultura-emprendedora#:~:text=Fomentar%20el%20esp%C3%ADritu%20y%20la,de%20apoyo%2C%20econ%C3%B3micas%20y%20financieras.
- (17) Agencia Financiera de Desarrollo. S.F. Acerca de la AFD. https://www.afd.gov.py/que-es-la-afd