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Improving the Financial Health of Micro-Entrepreneurs

Long-term, personalized support is needed to achieve the behavioral change necessary for most micro-entrepreneurs’ financial health
Welder in Nigeria. Photo by Wim Opmeer, 2018 CGAP Photo Contest.

While financial inclusion is considered to be our sector’s main objective, the latest Global Findex shows us that access to financial services does not necessarily imply their use, and it definitely does not tell us whether people’s situations are improving. So, is financial inclusion an ambitious enough goal? Or should the real goal be improving financial health?

Defining the concept of financial health for micro-entrepreneurs

If our goal should be financial health, then we still need to define exactly what it is, as the concept is relatively new in the inclusive finance sector. The first publications on the financial health of individuals and micro and small businesses started to come out in 2015, initially in the USA, and then more widely as several organizations active in the inclusive finance sector, such as CGAP and the Microfinance Centre, began to take an interest in the subject. While there is not yet a precise definition, there is overlap among the different approaches, with most including the concepts of behavior and planning for the future.

To explore the concept of financial health and its implications for micro-entrepreneurs and the organizations that support them, ADA collaborated with the European Microfinance Network to carry out a qualitative study on this topic, funded by the JP Morgan Chase Foundation. We focused on four European countries - France, Italy, Spain and England - and four southern countries - Brazil, Mexico, Peru and South Africa – and in each country, we interviewed a financial service provider (a microfinance institution) and a non-financial service provider supporting entrepreneurs (an incubator or accelerator in most cases), as well as 83 of their clients. Our aim was to gain a better understanding of micro-entrepreneurs’ financial difficulties, and to identify the most relevant solutions to overcome these difficulties and improve their financial health.  

From this study, our proposed definition of the concept of “financial health” is the following: a micro-entrepreneur is considered financially healthy if s/he possesses the capacity to deal with financial issues in his/her business, understands how to manage his/her finances and plans the future of the business in line with aspirations and capabilities.

Some North-South similarities

One of our first observations was that the main difficulties encountered by micro-entrepreneurs were the same across countries, both in the North and in the South. These challenges included separating personal and business finances, cash management, cost and pricing calculation, and planning. However, most micro-entrepreneurs had trouble identifying the source of their difficulties on their own, and depended on their support organizations to help them with this analysis.

We also found that entrepreneurs supported by incubators or accelerators were generally aware that they could improve their practices and eager to learn how to do so, while MFI clients were less inclined to do so. This observation led us to conclude that a thorough accompaniment process would be necessary for most entrepreneurs to be able to improve their financial health.

Improving micro-entrepreneurs’ financial health requires long-term support

The study revealed that good financial health for a micro-entrepreneur is a question of know-how and, above all, of putting this know-how into practice and adopting certain behaviors. The behaviors associated with financial health are by nature qualitative and thus difficult to measure, and they do not change simply or quickly.

In order to improve micro-entrepreneurs’ financial health, therefore, individual, personalized and long-term support is necessary. While trainings can be useful, they are not enough to induce entrepreneurs to change their day-to-day behavior. Similarly, a first diagnosis is helpful to assess a micro-entrepreneur’s financial health and identify the sources of difficulties, but this should be only the starting point of the improvement process, which requires regular support.

In addition to the study, we are also working on an operational guide intended for coaches or mentors working within service providers (financial or non-financial) for micro-entrepreneurs, to support them to improve their financial health. This guide, along with translations of the study in other languages, will be available in 2020.

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