Latin America is the region hardest hit by the pandemic, and in the Northern Triangle — El Salvador, Guatemala, and Honduras — a vicious combination of poverty and violence is driving mass migration to the United States. All three countries fall near or in the bottom third of the UN’s 2020 Human Development Index. The share of people earning less than $5.50 per day ranges from 22 percent in El Salvador to nearly 50 percent in Honduras. In those two countries, remittances accounted for more than 20 percent of GDP in 2019—and these vital flows took a major hit from the pandemic.
As thousands of migrants continue to flee their home countries, the Biden Administration is ramping-up efforts to address the root causes of the crisis. Beyond any government response, this problem also requires active participation from the private sector, NGOs, and humanitarian groups.
A coherent effort across these sectors is key to making a difference in the lives of the people affected. In particular, private sector financial institutions and NGOs can ensure resources go to the individuals and small companies that need funding and help to grow their businesses, and an incentive to remain in their home countries.
For decades, microfinance institutions (MFIs) have pioneered ways to bring financial services to some of the world’s most vulnerable and excluded people. In the Northern Triangle, many MFIs and cooperatives focus on reaching the poor—precisely the people most likely to emigrate. With additional capital and new technology, these institutions could grow significantly and help more people expand their farms, build small businesses, and boost incomes.
MFIs already reach almost 9 percent of the region’s population, or 4 million people. They serve clients who play important roles in the region’s economy, and who we need to help: 62 percent of active MFI borrowers in the region are women, and 60 percent live in rural areas. And considering that the total MFI portfolio in each country is already 2 to 7 times the annual amount of U.S. development aid, the opportunity to scale and achieve impact is immense.
Three ways NGOs and the public and private sector can help create economic opportunities
The United States’ public and private sectors should unite to support MFIs in the Northern Triangle and extend an economic lifeline for millions of small businesses and families there. Here are three ways that U.S. development finance institutions, with support from philanthropic or corporate partners, could help MFIs expand economic opportunities throughout Central America:
First, we need to catalyze the digital transformation of MFIs.
The pandemic continues to widen the digital divide, threatening to leave behind people without the tools and skills they need to adapt, rebuild, and recover. Helping MFIs leverage time- and cost-saving technologies can allow them to reach more clients, understand their clients’ needs, and improve their operations.
And as MFIs digitally transform, they can help their clients do the same, allowing microentrepreneurs to stay in business during lockdowns and access the benefits of the digital economy. But given their focus on the poor, MFIs need support through funding and subsidies to successfully innovate and transform.
Second, we need to extend support through debt financing.
Amid the pandemic’s continuing hardships, MFIs have a serious need for liquidity to offer credit to more clients. U.S. development agencies should set up a debt financing facility to help Central American MFIs access the capital they need today, while requiring them to pay off the debt at a later date, with interest.
This funding would help MFIs offer more credit, insurance, and other services that small businesses need to grow and thrive. It could also help MFIs offer new services, like supply chain financing, and leverage already high levels of remittances to lower their related costs and offer remittance-based lending.
And third, we must ensure MFIs can reach vulnerable people.
Should MFIs increase their lending activity, they would also assume more risk as more small businesses start receiving credit. U.S. development finance agencies should create portfolio guarantees to support MFIs focused on reaching riskier target markets. This would help stabilize MFIs as they increase lending activity and take on more losses, ensuring they have the solid footing they need to continue energizing local economies.
Many factors have contributed to mass migration in Central America, and persistent poverty is likely linked to every one. With the right support to expand their reach and harness digital technology, MFIs in Central America can serve as powerful partners in stabilizing the economy and addressing the root economic causes of migration. As Vice President Harris prepares to meet with leaders in the Northern Triangle, these institutions should remain top of mind in the discussion on how to help vulnerable people gain an economic foothold in their home countries.