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An Innovative Strategy for Digital SME Lending in Guatemala

According to the International Labor Organization, small- and medium enterprises (SMEs) are responsible for more than two-thirds of all jobs worldwide, along with the majority of new job creation.

In Guatemala, the number is even higher. Nearly 75% of the population in that Central American country is employed through SMEs—accounting for approximately 40% of the national GDP. Investment in these entities is integral to the continued expansion of employment opportunities and enabling the required working capital needed to drive growth. Despite those facts, local laws restrict the credit unions' abilities to provide loans to SMEs, further limiting access to much-needed capital.

La Federación Nacional de Cooperativas de Ahorro y Crédito (FENACOAC), with over two million members from its 25-member credit unions united under the MICOOPE brand, saw an opportunity to help bridge this gap. To support this effort, the World Council of Credit Unions (WOCCU) and its Worldwide Foundation for Credit Unions, enlisted several U.S. credit union CEOs to host a strategic workshop with FENACOAC. During the forum, U.S. credit unions discussed their experience lending to SMEs, helping to develop a strategic plan that prioritizes the development and expansion of SME-lending by Guatemalan credit unions.

Marking an important next step to achieve this plan, FENACOAC hosted a November event to present the details of an operational plan to the member credit union managers and their representatives. They detailed the innovative decision to create an entirely new entity — termed a credit union service organization (CUSO) that will develop a refined methodology to begin lending to the SMEs in Guatemala. The CUSO will be owned and operated by the FENACOAC member credit unions but operate as a separate entity under the MICOOPE brand. For the first time in Guatemala, credit unions will now begin to reach out to SMEs and ask about their financing needs, knowing they will be able to meet them (and more) through the newly established CUSO.

To complement the lending strategy led by the CUSO, FENACOAC also plans to incorporate two additional aspects that will strengthen credit unions in Guatemala: a new digital strategy and linkages to business development service (BDS) providers.

Digital Strategy
While described as a “transitioner” country in terms of its current mobile connectivity, Guatemala still faces a robust set of barriers to mobile adoption and usage, including an especially large mobile gender divide. However, deemed a “fast grower” by GSMA – and with over 20.8M connections—a digital strategy that will expand the credit union suite of services and reach is an opportune initiative that is well-timed to coincide with this growth. Through the development of their digital strategy, credit unions in Guatemala are searching for cost-effective solutions to expand their products to members in a more efficient, transparent, and timesaving manner. Beginning with its online banking platform, FENACOAC intends to continue its digital strategy with the CUSO in order to digitize its loan application process and risk analysis. The goal is to enable their loan officers to visit local SMEs and discuss financing needs while collecting basic financial information. From this information, loan officers will be able to provide a pre-approval to the applicants, ask about additional gaps in coverage, and establish foundational relationships with the SMEs.

Complementing Financial Resources with Non-Financial Linkages
While credit unions already offer a variety of services in Guatemala (including insurance, guarantees, savings, credit for consumption, and remittance payments), many have not been able to reach the financial and non-financial needs of SMEs. This is largely because they are legally restricted in serving their credit needs and thus cannot establish a relationship with these entities in order to offer complementary services. But it is also because they are often ill-equipped to meet the needs of the SMEs. Through the CUSO, FENACOAC seeks to develop and refine an adequate and appropriate methodology to analyze the needs and risks of SME lending. It will then transfer this methodology to its network of credit unions. While the CUSO will function to meet the needs of formal SMEs, individual credit unions can continue to serve the informal SME market. Equipped with the right methodology and capacity, these credit unions will be able to accurately evaluate the needs and risks of lending to these entities. They’ll also be able to apply the right terms and requirements in order to mitigate risk while continuing to serve this underserved sector of the economy.

Expanding Credit Union Capacity
Finally, complementing the development of an adequate methodology, FENACOAC’s strategic plan incorporates linkages to non-financial service providers that provide professional support to SMEs through business development services. These partnerships with BDS providers will expand credit unions' reach and service offerings to SMEs, in addition to ensuring adequate development of new products to meet the needs of SMEs. Coupled with the access to financial resources through the credit unions, these partnerships can link SMEs to new sources of information specifically targeted towards SME growth.

With a large market demand and an innovative solution to meet that demand, FENACOAC’s strategic plan is one worth following. Over thirty years, WOCCU is proud to have supported FENACOAC and their network of credit unions to build capacity, expand membership and services, and to develop and test demand-driven products. We have been supportive during the formation of this plan and we look forward to continuing our work with FENACOAC as they begin to implement their strategy. Finding innovative solutions to meet the needs of the market is challenging. Be sure to follow the story and stay up-to-date as WOCCU’s network of global credit unions continues to meet this challenge.

Conor Farrell has been working in international development for five years, bringing a passion for finding and supporting innovative solutions to address global issues. At the World Council of Credit Unions, he works as Program Officer on the Technology and Innovation for Financial Inclusion (TIFI) project that seeks to foster sustainable cooperative systems that deliver value to their members and serve their communities through innovative means. Prior to joining WOCCU, Conor worked on the Mobile Solutions and Technical Assistance and Research (mSTAR) project at FHI 360 and as a Community Economic Development volunteer with the Peace Corps in Costa Rica, supporting grassroots efforts to increase economic participation and opportunity in the Caribbean town of Linea Vieja.