Micro-Entrepreneurs in El Salvador Access Credit with the Help of IFC’s Remittance-Secured Financing

July 7, 2010 – About 30,000 more micro-entrepreneurs a year in El Salvador will soon have access to credit, thanks to a $30 million IFC financing, which is backed by an innovative new funding structure that leverages the significant remittances of El Salvadorans working abroad.

As a region, Latin America and the Caribbean is the top recipient of remittances. These flows of hard currency are an important source of income, comparable to direct foreign investment and much larger than official development assistance. With an annual volume of $2.8 billion, El Salvador’s remittances represent approximately 18 percent of GDP.

IFC’s remittance-secured financing helps maximize the development impact of these hard currency flows and establishes a creative new funding platform for Fedecredito, a cooperative owned by 55 El Salvadoran credit unions and workers’ banks. This will be the first remittance-secured funding undertaken anywhere by a financial intermediary focused on low-income clients. It is also one of the few investment projects IFC has carried out with a cooperative entity.

“One of the fascinating aspects of this transaction is that you have a non-traditional financial institution that is establishing a relatively sophisticated funding structure with enormous benefits for its overall business and its member-owners,” said Principal Investment Officer Xavier Jordan. “Doing this transaction with a cooperative was an eye-opener. We found an institution that was well-run and profitable – and we’re helping it provide credit to people who would not likely obtain it at a conventional bank.”

Fedecredito’s credit unions and workers banks mobilize savings deposits from 600,000 low-income member-owners, who represent close to one-quarter of El Salvador’s workforce. In addition to raising wholesale funding for these credit unions and workers’ banks, Fedecredito offers numerous services, including remittance processing.

IFC’s financing will help Fedecredito grow its credit portfolio by up to 25 percent. Fedecredito will also be able to use the remittance-secured funding structure established for IFC’s financing to obtain additional long-term, secured funding from other investors in the future.

“What is really great is that there are already private sector banks calling on Fedecredito to do the next remittance-backed deal,” Jordan added. “Previously, this kind of placement opportunity had not been on their radar screen.”

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