Financial Inclusion, a problem that affects many Salvadorans and businesses

By Eddie Galdamez  |  Jul 2nd, 2022
Financial Inclusion in El Salvador
Image by @PrensaAMSS

Financial Inclusion in El Salvador is a problem that affects over 70% of the population and most micro and small businesses, especially those that operate informally. Financial exclusion in El Salvador prevents many people and enterprises from accessing essential inexpensive financial products or services.

Individuals who face this financial exclusion problem don’t have access to bank account services or proper credit at lower interest rates. If needed, cash loans from individuals or informal businesses that charge interest rates from 3% to 10% per month or even higher (36% to 120% annual percentage rate).

Micro and Small businesses facing the financial inclusion problem can’t access low-cost working capital or other services that could help them grow their business.

The following table shows a typical loan available in El Salvador to individuals or businesses willing to pay high-interest rates. Individuals or companies that offer these loans are well-known in impoverished communities and local markets.

1-month loan at a 5% interest rate paid back weekly.
Principal Interest Payment Balance
$300 $15 $315
Week 1 $75.00 $3.75 $78.75 $236.25
Week 2 $75.00 $3.75 $78.75 $157.50
Week 3 $75.00 $3.75 $78.75 $78.75
Week 4 $75.00 $3.75 $78.75 $0

The above sample loan has a 60% annual percentage rate; it could be higher considering that a week after getting the loan, you need to pay back 25% of the principal plus interest.

Why would anyone agree to get this type of loan? The short answer is necessity. Some people need this money to survive the month, and many businesses need the funds to purchase goods to continue to operate.

The good news is that when needed, these loans are easier to obtain; depending on the amount requested, most borrowers only need to provide a copy of their DUI (Salvadoran Unique Identification Card) to acquire the funds.

If the loan amount solicited exceeds the Salvadoran monthly minimum wage, the creditor (individual or business) might ask for a guarantee such as appliances, cars, land, or other substantial assets.

Financial Inclusion in El Salvador, why does this problem exist?

The financial inclusion problem in El Salvador is not new; it has been around since before the Civil War of the 1980s.

There are many reasons why financial inclusion is a big problem in El Salvador; two of the most prominent reasons why this happens are the financial institution’s requirements and doing business or working in the informal sector.

Financial Institutions Requirements

One of the biggest obstacles Salvadorans and businesses face when trying to get regular financial products or services is the financial institution’s requirements.

The requirements are why most Salvadorans and micro to small businesses don’t qualify for these products or services.

Now, in all fairness to these financial institutions, the requirements they have for Salvadoran clients are what they would require of clients in more developed countries. The principal requirements include proof of income, savings, and residence.

The problem is that Salvadorans that face this financial inclusion problem work or do business in the informal sector; consequently, they can’t show proper income verification required by financial institutions.

Also, over 70% of the Salvadoran population does not have a bank account; therefore, showing a saving history is impossible.

Lastly, documenting residence for many Salvadorans is complicated; most people rent from private owners that can’t give them a valid rental contract or other rental verification.

The informal sector

The informal sector in El Salvador is of great importance to the country’s economy; it generates jobs and income for a large percentage of Salvadoran households. However, this sector is the one that is affected the most by the financial inclusion problem.

The informal sector closes the doors to the tax system to businesses and individuals that work and operate in it; therefore, they can’t access social protection in health or pensions; also, they get excluded from services in the supervised financial system.

An example of how the informal sector excludes individuals and businesses and affects poverty in El Salvador occurred during the COVID-19 pandemic.

During the pandemic, the Salvadoran economy closed; but employees who worked in formal businesses were able to apply for some benefits from the government or their employers.

Also, during the pandemic, formal businesses got benefits from the government to pay their employees or get new working capital.

On the other hand, employees, businesses, and self-employees in the informal sector didn’t have access to the benefits offered by the government.

If needed, they had to get financial help from informal lending companies or individuals at higher interest rates. Paying high interest rates helps keep the poverty cycle in El Salvador alive.

The informal sector is the main generator of the financial inclusion problem in El Salvador; however, this sector provides income for the majority of Salvadorans.

Paul Steiner, the president of CONAMYPE (National micro and small business commission), said during the First National Forum for Financial Inclusion conducted in June that 97% of the companies in the country are micro and small businesses, and 3% are medium and large companies.

Steiner stated that this 97% becomes 1.5 million entrepreneurs or small businesses that provide employment and feed 4.7 million people in the country. “Those with the lowest income (97%) feed the vast majority of the population,” said Steiner.

What has been done to eradicate the financial inclusion problem in El Salvador?

The government is well aware of the financial inclusion problem in El Salvador and is creating laws and projects to end it.

For example, in June 2022, the Salvadoran Legislative Assembly approved reforms to simplify the requirements for opening a bank account; this will surely help with financial inclusion.

Also, in June 2022, CONAMYPE and the Development Bank of the Republic of El Salvador (BANDESAL) created a program to help finance micro and small businesses.

These two actions by the Bukele Administration will help many people and businesses leave behind the financial inclusion problem they face. However, this is not enough; more has to be done to erradicate this problem.

Financial Inclusion in El alvador

The Salvadoran financial inclusion problem does not have an easy solution; it will take time to eradicate it.

Moving businesses from the informal to the formal sector could be a step in the right direction; however, this will not be easy to accomplish!