The Empowering Blog About Social Innovations + STEM

Maria Fernanda Rivera

In 2008, the official unemployment rate in Honduras was 3.5%, lower than the US rate of 5.8% for the same year and more than half of the world average of 7.2%. With such a high percentage of people participating in the labor market, how is it that around three fourths of the Honduran population lives in poverty? The problem lies in the roughly 50% of the employed population working in the informal economy. The informal economy is a low-productivity and low paying sector, with little to no social protections and challenging prospects for growth. Honduras has been unable to significantly reduce its large informal economy during the last 2 decades. One of the problems of operating informally is that most of the participants are not considered credit worthy clients for commercial loans, which feeds the cycle of informality.

In Honduras, the commercial banking sector is relatively strong. The World Bank Doing Business Report 2010 ranked Honduras 30 out of 183 countries in its “Getting Credit” indicator, and the Latin American Banking Federation (FELABAN) ranked Honduras 3^nd in the region in its “Financial Deepening” index. However, these indicators fail to consider the large informal economy which is not eligible for commercial bank loans. During the last decade the microfinance sector in the country has developed into an important financingoption for the excluded population and now plays a large role in providing financial services to the informal sector. So, how are microfinance institutions (MFIs) in Honduras doing in terms of reach and scope? According to the Microfinance Information Exchange (MIX) and the local microfinance network organization (REDMICROH), over the last ten years the country’s MFI portfolio grew by double digit numbers every year for the last decade, with the exception of 2008 and 2009. According to the IADB, MFI competition levels in Honduras are fairly high with a varied range of services provided. Moreover, the Economist Intelligence Unit “Global microscope on the microfinance business environment” ranked Honduras 6^th out of 55 countries on its “Institutional Development” indicator. 

Although MFIs are doing a fair job of providing financial services to those not eligible for commercial loans, there seems to be some exclusion within this excluded sector. Honduras is still a largely rural country, with around half the population living in non-urban areas. Poverty is concentrated in these rural areas, where around three fourths of the population lives under the national poverty line. However, MFIs in Honduras only dedicate around 30% of their portfolio to rural customers. This breach illustrates one of the biggest challenges in the realm of microfinance: providing credit to low-income and dispersed customers in hard-to-reach areas with little human capital.Informal rural entrepreneurs are clearly excluded from engaging in the market. The lack of opportunities is evident in the large and rapidly increasing urbanization rates in the country. Many of these migrants face similarly bad conditions in urban areas, which have a myriad of social and economic repercussions. Public and private efforts must address the exclusion faced by the rural poor, and this includes giving them the option of credit and business development services.