Mype Business Confidence Index

  1. CONFIDENCE INDEX

This study is the starting point on which the quarterly tendency will be established, which will define the business dynamic from the MSE segment in El Salvador. The study was carried out during the last week of June 2020 to a stratified sample per Marketing Segment; it was done through random selection across the entire country of El Salvador.

Figure 1.
Enterprise Confidence of MSEs in El Salvador for the II Trimester of 2020

The second trimester of 2020 has been characterized by the movilization restrictions given to the population due to the inexistence of a treatment or a vaccine s to fight the COVID-19 virus, which has directly affected the production activity of economic segments and sectors by different measures. MSEs have been one of the most affected segments; this has been confirmed by the Pessimistic valuation on Business Confidence that entrepreneurs have transmitted.

The negative atmosphere on the confidence of business owners is the result of the performance of their business during this year in the period from April till June. This gets combined with the Economic Expectation of their businesses that has a neutral qualification which is a synonym for uncertainty and shows what they foresee for the coming trimester (July-September).

In the following figure, the behavior from the sales volume of the last trimester is shown and also the behavior that is expected for the next trimester; other factors that can be seen are the level of employment, the level of investment, and the variance of prices from goods. On the left side of the figure, there are the results of the ending trimester in comparison with the past period, and on the right side of the graphic, you can find the perception that business owners have of the trimester that is starting in concert to the one that is coming to an end.

Figure 2.

Current Situation and Economic Expectations from MSEs in El Salvador

These perception indicators reflect the difference between favorable responses and unfavorable responses, and they can oscillate between -100(everyone has a negative perception) and +100(everyone has a positive perception). If the result is positive, it means that the business owner’s valuation contains more positive opinions than pessimistic opinions.

Sales Volume. Generally speaking, sales made during the second Trimester of 2020 were inferior to the results obtained from the first Trimester of the same year. From every 100 surveyed entrepreneurs, for 76 of them, the second Trimester was worse than the previous one. Also, 24 had a better Sales Volume in comparison to the Trimester I. Finally, the big majority of them consider that the behavior of Sales for the upcoming Trimester will be the same as the ones from the ending Trimester.

  1. The employment rate in MSEs segments is characterized by a loss of occupation, which is expected to behave with the same tendency for the Third Trimester of 2020. From every 100 surveyed entrepreneurs, 73 manifested that they now counted with fewer employees in their businesses. Contrarily, 27 said that they now had a bigger workforce.
  1. Investment Levels. 62 of every 100 entrepreneurs reported making smaller investments in merchandise, machinery, and equipment during the second Trimester of 2020. Also, they expected a similar behavior for the upcoming period.
  1. Price Variance. Both, during the present situation and for the upcoming trimester, MSEs entrepreneurs manifested that there will be stability in the prices of the products they commercialize.



Figure 3.

Business Confidence per Market Segment

Based on figure 3, it can be observed that business results at the end of the Second Trimester go in the same direction for the 4 market segments that make up MSEs; all of them have an unfavorable vision about the business dynamic. This opinion is much stronger for Subsistence Micro-Enterprises which are located at the basis of the pyramid; they have an indicator of -43.4.

Nonetheless, the Expanded Accumulation Microenterprise has an indicator of -36.9, however the Business Confidence is pessimistic. This can be described as the best-prepared segment or the one that has the biggest adaptation capacity to face the crisis generated by COVID-19.

Figure 4.

Business Confidence per Economic Sector

In assessing the confidence of MSEs business owners per Economic Sector, there is also a pessimistic atmosphere. Commerce has received the least negative impact with an indicator of 26.5, followed by Services with a -31.7. Finally, the most affected activities have been the ones related to production with an indicator of -66.8.

In figure 5, when talking about Small Enterprises in the Production Sector the level of Business Confidence behaves clearly without variations at the end of the Second Trimester of 2020. Nonetheless, Micro-enterprises of the same sector have been the economic sector that has suffered the biggest setback.

Small Enterprise

Expanded Accumulation

Figure 5.

Business Confidence per Economic Sector regarding Expanded Accumulation and Small Enterprises

To conclude, it is possible to say that the Business Confidence of MSEs entrepreneurs for the Second Trimester of 2020 is pessimistic, indistinctly of the Market Segment to which MSEs belong or the Economic Sector where they perform. In the immediate future, there are no predictions of a possible change in the Uncertainty Behaviour.

Another important conclusion that can be extracted, are the factors that hinder the good performance of MSEs, with a 39.28% of the interviewees having manifested that they are unable to level up their businesses due to financial difficulties. Another relevant element according to 26.86% of the respondents is the scarcity of merchandise. Finally, for 22.35% of the requestees, an important factor is the government and municipal regulations aimed at containing the pandemic.

Informal SMEs Regain Trust

There was a modest improvement in the II Quarter and the expectations are positive for the IV Quarter of 2020

The perception that informal entrepreneurs have in El Salvador regarding the economic situation of their business units improved by 29.8% during the III Quarter of 2020, according to the results of the SMEs Quarterly Dynamic Survey on Business Opinion, made by FUSAI’s SMEs OBSERVATORY.

SMEs Entrepreneurs, similarly to formal entrepreneurs, make decisions about their business whilst taking into consideration the perspective of their businesses over time. The business confidence index synthesizes the current and future assessments made by entrepreneurs about their companies, regarding the tendencies in sales volume, investment, generated employment, and price-level of the products. This interpretation showcases certain degrees of confidence, and it describes the position of business owners on two possible scenarios, positive and pessimistic.

Entrepreneur’s expectations are a decisive factor when it comes to making decisions regarding investments, employment, prices, etc. At the same time, their perspective has a high level of influence on the economic growth of the country.

The indicators that serve as a reference to evaluate the data on business confidence are carried out quarterly.

The results of the study that correspond to the III Quarter of 2020 are showcased below.

Figure 1

The Business Confidence Index (fig. 1), for the III Quarter of 2020, has recovered by 29.8%, driven by the expectations that informal SMEs have for the IV Quarter and because of the presence of a moderate recovery, when compared to the II Quarter of the year. These results are based on a cut-off indicator established in June 2020. Below this number an assessment is considered to be negative, conversely, if the assessment is above it is marked as positive.

The indicator on the Current Situation (fig. 1-1) measures the difference between favorable and unfavorable responses regarding the performance of business owner’s companies, in comparison to the two quarters. This indicator ranges from – 100% (if all opinions are unfavorable) to + 100% (if all opinions are favorable).

Even though the results continue to be unfavorable, they showcase a significant improvement with regards to the assessment business owners make about the performance of their businesses during the III Trimester, compared to the II Trimester. Their valuation went from -72.9% of unfavorable over favorable to -28.7%.

Just like the Situation Indicator, the Expectation Indicator (fig. 1-2) oscillates between -100% and + 100%, and it synthetizes favorable and unfavorable opinions regarding how entrepreneurs expect their businesses to perform during the upcoming quarter, concerning the former one. (In the case of this study: Quarter IV is compared to Quarter III of 2020). The Expectation indicator shows that at the end of September 2020, 56.9% of entrepreneurs expected a better year-end than the one from the quarter that was just ending. This figure is well above the one that encompasses those who expect an unfavorable last quarter.

Similarly to the previous indicator, the Investment indicator (fig. 1-4) denotes whether it is or isn’t the right moment to invest in businesses. 97.8% out of 100% of entrepreneurs believe that right now is not the time to make additional investments in their companies.

Regarding Employment (fig. 1-5), the indicator showcases a figure of 92.22%. The surveyed employers believe that right now is not the appropriate moment to hire more employees. Therefore, it can be inferred that during the III Quarter the informal SMEs sector continued to lose sources of work.

The last indicator, the Price Index (fig. 1-6), reflects to what level entrepreneurs consider the prices of their products as favorable or unfavorable concerning the growth of their companies. With a figure of 94.8%, the indicator reports that for business owners the prices of the products do not promote growth within their companies.

Figure 3 reflects that all the economic sectors that encompass informal SMEs have regained confidence regarding the good performance of their companies. The best-positioned sector is the one of Production with an index of 162.8%, followed by Services with 133.5%, and Transportation with 130.6 %.

Figure 4 explains how the Production sector went from being the one with the most pessimistic situation indicator -84.6% during Quarter II to being the least unfavored one -20.8% for the III Quarter. Also, it explains how It went from an expectation level of -84.6%, to being the one with the biggest level of expectation with 62.5%, regarding the good performance of businesses during the IV Quarter.

 

 

In this graph, business owners who said they expected a favorable Third Quarter exceeded those who answered that they expected an unfavorable Third Quarter by +26.2%. Hence, the expectation at the end of Quarter II +26.2% was positive in the Commerce Sector, which contrasts with the results of the existing situation throughout the III Quarter. To conclude, it can be inferred that even though the Commerce Sector had a favorable expectation for the Third Quarter, it didn’t end up achieving what it foresaw, and it went under entrepreneur’s expectations by -24.31% generating an unfavorable situation, compared to those who believed that their results were Favorable in the

Figure 5 presents all factors that informal entrepreneurs from micro and small enterprises consider as inhibitors for the good performance of their businesses.

Consecutively, once again for the Second Quarter, financial difficulties are the factor that has affected them the most. Also, it was the most relevant factor this last Quarter; 28% of business owners expressed that they were being affected and compromised by this situation.

Another factor that has proven to be relevant is the increase in competition (from 6.1% to 17.89% during the Third Quarter). Also, this contrasts with the impact that the decrease of demand has generated, which went from 11.1% in the II Quarter to 20.6% in the III Quarter. Namely, at the end of September 2020, SMEs have seen the demand for their business fall, which has affected their businesses with an increase in competition.

Conceptualizing SMEs segments with regard to their net incomes:

  • Subsistence Micro-enterprise: Economic units that generate an annual net income of up to US$ 14,400.
  • Micro-enterprise of Simple Accumulation: Economic units that generate an annual net income of up to US$ 50,000.
  • Micro-enterprise of Amplified Accumulation: Economic units that generate an annual net income of up to $ 100,000.
  • Small Enterprise:Economic Units that have the capacity to generate an annual net income of up to US$ 1,000,000.

Research Technical Sheet

Methodology: (a) 443 informal business owners from Micro and Small Enterprises; (b), The whole Country; (c), Margin of Error: 5% and Confidence level: 95%; (d), Respondents: Business owners; (e), Access to the form: through the web; (f), Processing of the Information: Surveys are coded and entered into a database that is cleaned and controlled from inconsistencies; (g), Timeframe: last week of September 2020. The information is analyzed by using a computerized information processing program.

Outlook on the SME Transport Sector… 6 months after the Pandemic

Outlook on the SME Transport Sector… 6 months after the Pandemic

Challenges and measures for its reactivation or survival

Through this report, we present to you the results of a representative survey that was made among entrepreneurs in the land-transport sector, more specifically in the SME sector. The survey aims to evaluate the opinion and expectations of the sector concerning the economy, since it has been heavily affected by the quarantine measures implemented by the government to control the Pandemic.                                                                                   The survey allows for a better understanding of the complex challenges faced by this sector, which is essential for the reactivation of the economy.

The survey was completed by 243 entrepreneurs of SMEs belonging to the following subsectors: transport, freight transport, private and public transport of passengers, and school transport.

RESULTS

General expectations on the country’s economy

32% of the interviewees believe that the economy will improve in the remainder of 2020, 41% believe that the current conditions will continue, and 27% think that it will retract even further.

52% of the Expanded Accumulation Microenterprises believe that the economy will improve, making it the most optimistic market segment. Contrarily, Microentrepreneurs have a pessimistic view regarding the expectations of the economy in general.

The most optimistic part of the entrepreneurs belong to the transport and freight transport sectors, 51% have a positive opinion. The next sector that conveys a more positive outlook is Taxi Transport, 41% have a positive perspective.

Growth Expectations and Employment within the Sector

The widespread view of those surveyed (36%) is that their sector, the land transport sector, will either retract or contract in the remainder of the year. The expectations balance is negative by -9% (positive expectations minus negative expectations). In the following graph, it can be observed that the Transport of People and its economic activities have a darker outlook than the ones involved with Freight Transport.

Figure 1.

Expectations on the remainder of 2020, per Branch for the Transport Sector as a whole 

Source: Research Department, SAC Integral SA.

Other relevant facts that were discovered by this research relate to the unemployment rate. According to the survey, during the month of March 2020 until now (August 2020), the total number of the interviewed entrepreneurs has reduced their salary and payroll, and they expressed that this reduction could go even further to 52% in the remainder of the year. Nonetheless, regarding inventory, only 3% of entrepreneurs contemplate reducing the number of circulating vehicles.

Survival Measures for Businesses adopted during the quarantine

Not all activities within the transportation sector were kept from operating during the confinement (March to August 2020). However, some activities such as: public transport of passengers, transport for leisure, school transport, and many others were not able to work during this period.

To date, 46% of the entrepreneurs state that they haven’t yet restarted operations. Meanwhile, 2% have decided to change their economic activity.

Of all entrepreneurs that haven’t yet resumed activities, 44% consider that it will take at least 3 months for them to operate again, 16% think it will take one to two months, and 32% estimate that it will be less than a month.

Figure 2.

Adopted Measures to guarantee the continuity of operations

Source: Research Department, SAC Integral SA.

Main measures taken by companies to keep themselves afloat:

  • 56% had to use their savings
  • 36% suspended their payment of debts
  • 29% carried out other commercial activities
  • 22% stopped providing maintenance to transport units
  • 15% laid off staff
  • 7% sold business assets

Factors that have put the continuity of companies at risk

The above measures were adopted to prevent companies from being exposed to definitive closure of their operations. 76% of those interviewed believed that the situation generated by the suspension of operations triggered the following consequences:

  • 47% of the companies suffered a loss of income that puts their business continuity at risk.
  • 23% have been unable to provide preventive and corrective maintenance to their transport units
  • 12% have not been able to access financing
  • 10% have not been able to repair units because their workshops have been out of work
  • 4% have had to face the difficulties caused by getting infected with COVID19 through relatives or employees

In particular, 44% of the sector of public transport of passengers by bus or minibus considers itself vulnerable due to the lack of financial compensation provided by the government.

Main Challenges faced by the Transport Sector in the immediate future

 

The following figure represents the opinion of entrepreneurs regarding the challenges faced by the sector in the upcoming 3 months.

Figure 3

Challenges faced by the Sector during the next 3 months

To summarize, the main challenges that companies in the sector will have to face in order to improve their performance, according to the opinion of those surveyed, are: Complying with the sanitary measures (47%), getting access to financing (44%), promoting a reduction in fuel prices and lubricants (39%), preventing that family and employees get infected with COVID19 (38%), accessing economic compensations from the government (36%), and improving the quality of the services provided (34%).

Last but not least are the following tasks: reducing unfair competition (33%), managing the impact of crime (29%), increasing prices for services provided (28%), reducing operating costs (26%), replacing old vehicles (17%), and training the personal within the context of the new reality (13%).

Expectations

By the month of August, 5 months have gone by of closure or substantial reduction of operations in the sector. As mentioned, during this period employers had to resort to different types of measures, in some cases extreme, such as the dismissal of personnel, suspension of their debt payments, or stopping the repairing of their units. Nonetheless, the sector has shown a lot of resilience: only 2% have resorted to shutting down operations definitely or to changing their economic activity.

We are entering a critical stage for the future of the sector. The next few months will determine what are the most realistic recovery expectations for the sector.

In any case, businessmen in the sector could face two major scenarios:

  1. a) If the demand increases gradually, the sector will enter a slow recovery phase, while it adapts to the required measures regarding the provision of services aimed at mitigating the risks of contagion among the population
  1. b) An aggravation of their situation due to the lack of demand, and therefore, they will have difficulties to operate profitably.

The majority, if not most of them will have to take additional measures, which will probably have to be more drastic in order to survive. As a result, the unemployment rate in the sector will be further affected.

Research Fact Sheet

Methodology:

  1. a) Number of interviewed entrepreneurs of Micro and Small Business: 243
  2. b) Origin: The whole country
  3. c) Margin of Error: 5% and 95% confidence level
  4. d) Surveyed Subjects: Business owners
  5. e) Acces route to the survey: internet/web
  6. f) Information processing: All surveys were coded and entered into a database that gets purified by controlling inconsistencies. Regarding the information, it is processed by an information processing software.


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Special Law to Facilitate Access to Credit

During the wait for a regulation to apply the law, a lot of questions appear

Since May 2020, “The Special Law to Facilitate Acess to Credit» has been in force. With the application of this law, the Government is seeking to modify regulations in order to facilitate the access to credit coming from all financial institutions for all companies that require short-term liquidity due to the impact of the Pandemic.

The law is applicable to both regulated and non-regulated financial institutions. Also, it is determined that these institutions can utilize the methodologies that they consider pertinent in each case to evaluate the credits destined for the productive activities of entrepreneurs, as well as the credits addressed to micro and small entrepreneurs. According to Legislators, this is the sector with more difficulties in accessing credit and it represents approximately 70% of the population.

In the table below, a summary of the most essential content of this Law is presented.

One of the Law’s objectives is to incentivize that Banking Institutions support the MSE sector more effectively. However, the difficulties of Commercial Banking to attend the sector aren’t uniquely related to the asked requirements. The issue is much more complex and several aspects have to be considered: the type of policies and operational processes, the culture and approach to risk management, and the methodologies needed to evaluate the requests from a sector that is informal for the most part.

The real problem lies in the fact that most of the banking sector is not designed to attend the demand for credit from this largely informal sector. According to our estimates, the sector is made up of one million economic units of totally dissimilar sizes and economic activities.

Precisely to serve this informal sector that can’t be covered by traditional banking, cooperatives and microcredit organizations have been developed for the last 30 years. Most of them are grouped under the group Asomi, and they serve this sector with ad-hoc credit methodologies. What stands out and is very specific from their methodologies is that they use the information of the clients’ historic payment paths and they also conduct field visits made by on-site advisors as an alternative method to cover the gap in documentation and requirements, which these clients cannot meet due to their informal status.

Banking institutions will probably be able to partially cover, and with many limitations, the part of this sector that is sufficiently banked. However, very doubtfully will they be able to close the gap and curve the limitations that they intrinsically have to support a sector which by definition lacks for validated documentation to support its income and expenses statements.

The Clients That Will Be Most Affected

After Reading the Decree, it can be deduced that the clients that will have the most problems are those who demand loans greater than US $30.000 and who already have credit references in the financial system or credit bureaus. These clients, a big part of which are already clients of microcredit institutions, will be faced with new requirements as a result of the application of this new Law. They will have to present municipal and tax solvencies, and deposit certificates of their financial statements in the Registers of Commerce.

The implications that this Law has on this type of clients seem very clear: if they want to have access to credit they must report their financial statements and get registered, otherwise, they must go to informal or unregulated institutions that have weak supervision and that operate with much higher loan rates which poses a big risk to them.

Although it seems that a non-explicit objective is to build a base of potential taxpayers for the treasury, the truth is that short term many of these clients won’t be able to fulfill these requirements, since it will be very difficult for them to make and register retroactive statements without the necessary documentation. On the other hand, if some clients do have these financial statements, they will probably be the statements prior to the Pandemic, and probably won’t reflect their real expected sales and profits during this new context caused by the crisis.

To summarize and as a result, many institutions will not be able to approve credits over US $ 30,000 to many of their clients, which according to our estimates, correspond to one of the MSEs segments that generate the most employment. Thus, the results could end up being the opposite of what is expected: preventing the reactivation of one of the most dynamic MSE segments due to the inability to access credit. It is estimated that this segment of small entrepreneurs is composed of approximately 400,000 economic units.

The aim of accomplishing the formalization of this sector is legitimate and very necessary, since a big part of the sector has the capacity to pay taxes. However, the experience from the region and other countries has shown that if there are no real incentives or benefits, and only new costs are represented, the results of such a policy are doubtful. Especially if one considers that the reduction in sales and demand caused by the Pandemic has put more pressure on the profit margins, which also has led many MSE entrepreneurs to operate with a logic of subsistence.

Questions

The following questions remain unanswered:

Will a Law that aims to formalize a big part of the sector so that formal banking Institutions support it be successful? Even when the processes, approach, and operations of the financial system are custom designed to attend formal and not informal sectors?

Is it a convenient Law, given the extraordinary crisis conditions that these businesses are facing?

Will this Law end up provoking that these clients get deviated and start to approach non-regulated and non-supervised organizations, with the consequent credit rate increment that it entails? Could this put a financial burden on these businesses?

Even though the proposal simplifies the requirements for information, at least for the first two segments of stipulated loans, many doubts about the way in which financial institutions will apply the Law arise. Also, there are doubts on whether the microenterprise sector will effectively obtain greater access to credit with the application of the Law.

As for now, financial institutions are on the wait for the Central Reserve Bank to issue the regulation under which the new law will be applied. Hopefully, the regulation gives more flexibility and fixes some of the inaccuracies of the main Law, otherwise, its results could be counterproductive midterm and they could lengthen the reactivation of this very important sector.

The new regulation from the Special Law to Facilitate Access to Credit (LEFAC)

…Problems foreseeable in the near future

 

Recently the Legislature enacted the “Special Law to Facilitate Access to Credit” -LEFAC-, which basically seeks to facilitate access to credit by simplifying documentation requirements for credits below US $ 30,000.

For its third edition, the SMEs Newsletter made a summary of the Law, which at the time was still waiting for the regulation that the Central Reserve Bank (BCR) has now issued.

Analyzing the Provisions of the Law

The regulation was incorporated in August of this year and it modified the regulation for Classifying Credit Risk Assets and for Establishing Sanitation Reserves (NCB-022). The BCR has granted financial institutions a 90 days term that expires on December 2 of this year, so that they can adapt their Policies to the changes required by the new regulation.

The regulation related to the LEFAC, as can be inferred logically, hasn’t gone beyond what the LEFAC had previously established. To summarize it comprises the following provisions:

  • The financial institutions that are obliged to comply with the regulation must establish in their internal credit granting policies clear mechanisms to originate credits, based on simplified requirements and procedures, for all credits destined for the productive that the LEFAC mentions.
  • Each entity will define in its internal policies their own concept of productive activities, taking into consideration the provisions of article 2, literal d) of the LEFAC.
  • The credits that the LEFAC refers to are grouped within the credits for companies indicated in the regulation.
  • The evaluation and classification of credits under the LEFAC will be carried out following the content of the Annexes from the NCB-022 Normative and the information requirements established in the LEFAC.
  • The resulting files for each credit debtor of productive activities under the LEFAC, must contain all the documents related to the request, analysis, approval, and follow-up, taking into consideration the information requirements established by the LEFAC for such credits. Also, these credits must be properly identified.
  • The information that financial institutions send to the SSF each month must contain the portfolio classification of all their credit assets and the respective provisioning reserves referred to the balances at the end of the month. Also, the entities must identify in their registry all the credits granted by the LEFAC.

The LEFAC was issued and based on an essential assumption: that the problem of access to credit is an issue of requirements. In such a way that its focus is based on simplifying the processing of loans under US $ 30,000, and it only increases them for businesses that demand loans above US $ 30,000. For these amounts, it is assumed that because they are businesses with higher sales, they will be able to comply with the new formalization requirements that the new Law demands from them.

However, the essential issue of why informal clients and businesses cannot meet these requirements is precisely a consequence of the informal nature of their operations. They cannot operate as a formal business that complies with the requirements of the Law, due to a series of factors, among which are the low levels of sales, the absence of working capital, the cultural and socio-educational level, the low-profit margins, the market they serve, among other aspects.

For this reason, traditional banks have problems when lending to the informal sector: they do not know how to evaluate businesses that lack documentation and formal billing and accounting processes. Access to credit through a regulated financial institution depends on the ability of their business model to identify and reward good payers, and not on the weight or simplification of the documentation or the existence or not of guarantees.

What truly opens up the access to credit to entrepreneurs is the achievement of a certain level of development of their businesses, which allows them to gradually comply with legal requirements, as he continues to get linked to more formal business chains.

In El Salvador the Law already recognizes the gradual approach of the regulation, which depends on the capacity and development of informal SMEs entrepreneurs.

The table below shows the existing regulation before the LEFAC

LEGAL REQUIREMENTS PRIOR TO LEFAC LAW

As can be seen, in El Salvador we already have a regulation in place that a micro-entrepreneur (individual trader) must comply with according to their level of development, which is measured through sales volume, amount of assets, and total income, among others.

The new requirements that the LEFAC establishes for credits above US $ 30,000, only add new ones, in a context where many microentrepreneurs already have trouble complying with the current Laws. In addition, the Pandemic has diminished the capacities of SMEs and had increased their informal operations’ modalities.

Analyzing a hypothetical case

 

If Mr. Pérez is an informal microentrepreneur and he requests a loan of US $ 32,000, showcases sales of US $ 40,000 per year, and has assets of US $ 35,000; with the application of the LEFAC he wouldn’t be able to access formal banking institutions without first:

Therefore, Mr. Perez who needs financing to develop his business, but doesn’t fulfill the requirements, will be left out with only three options:

  1. Initiating a process to formalize his business, ask for support, get consulting and check his business model. To reach this goal he will need more resources and a timeframe of a few months. If he can do this, he will finally be able to initiate his entrepreneurship venture, and once his business is formalized he will be able to ask for credit.
  2. Looking for a loan shark who will impose an annual interest rate of 80%, and will require a mortgage guarantee from the lender. After that, the loan shark will give him the US$32,000 immediately.
  3. Divide his credit application into two in order to submit two credit applications to two different institutions simultaneously, for an amount that is less than US $ 30,000.

Getting formalized to have access to credit

The LEFAC has an implicit objective which is the formalization of this sector of the economy, which asks for or requires credits that surpass the amount of US $ 30,000.

However, the objective of this analysis is not to discuss the apparent tax implications that are behind this legislation. Whilst it is true that adequating the regulation and promoting regulation can be very positive if it is modified to their level of development and skills, the problem is that the current regulation and the present law lacks flexibility and it is not gradual, because its requirements are something that the majority of SMEs entrepreneurs won’t be able to fulfill during that timeframe.

The result, as we were foreseeing in our previous newsletter, is that many entrepreneurs from informal SMEs, which is also the most dynamic segment and the one that generates the most employment in the country, will have problems to request access to credit.

The business of Mr. Perez, from our previous example, would face many difficulties. He would have to look for solutions “under the rocks”, putting it into “slang” language, in order to find ways to keep his operations going.

This quick analysis showcases the necessity to check the LEFAC and recognize that a a certain level of flexibility and graduality is required, because informal SMEs constitute a complex sector, with multiple size differences, profitability margins, and sociocultural characteristics that makes them unable to quickly adapt to this new regulation without making a continued effort and receiving training, consulting and support.

Depriving them of access to effective financing, after an almost apocalyptic pandemic, seems to be an inappropriate measure, to say the least, especially because of the extraordinary situation that the country is going through.

The need to rethink Laws such as the LEFAC seems the most reasonable path to take in the current context of the country, when the priority is to promote the generation of employment, no matter of what nature: formal, semi-formal, or informal. What Salvadorans need are quick means that can provide them with employment, and livelihood, through the most flexible ways possible.

If the law doesn’t follow such pragmatic logic, it runs the risk of being ineffective.

There is a basic principle that doesn’t cease to be true: the law has to be adapted to the reality of the country and not the other way around. Without question, it is a correct measure if it is to be considered on a mid-term or long-term basis, but it requires time so that the necessary conditions for its application can be created.


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