Empowering MSMEs: World Bank’s Credit Push Transforms Ecuador’s Small Businesses

A new study by the Finance, Competitiveness and Investment Global Department and the Development Research Group of the World Bank has revealed transformative effects of a targeted credit program on Ecuador’s micro, small, and medium-sized enterprises (MSMEs). The initiative, titled “Promoting Access to Finance for Productive Purposes for MSMEs” and implemented through Ecuador’s development bank Corporación Financiera Nacional (CFN), leveraged over USD 500 million to empower more than 23,000 businesses between 2021 and 2024. This second-tier lending program, backed by World Bank loans, aimed to address long-standing credit constraints among smaller firms by channeling funds through commercial banks and credit cooperatives. Through a rigorous evaluation involving 2,035 formal firms from 2019 to 2023, the researchers used a staggered difference-in-differences method to isolate the program’s impact, finding significant boosts in financing, employment, asset accumulation, and sales, especially among previously excluded businesses.

A Lifeline for Ecuador’s Small Businesses Amid Crisis

Launched against the backdrop of a strained Ecuadorian economy grappling with COVID-19, political upheaval, crime waves, and a liquidity crisis, the program came as a timely intervention. Ecuador, a dollarized economy, lacked the fiscal space to absorb shocks, pushing it to rely on international financial institutions. CFN, once a struggling development bank with a shaky governance structure and a weak first-tier lending portfolio, transformed into a robust second-tier operator under this program. The World Bank extended an initial USD 260 million loan in 2020, followed by another USD 300 million in 2023, enabling CFN to provide lines of credit to participating financial institutions. These intermediaries, in turn, issued loans to MSMEs on the condition that they used the funds for productive purposes, reaching nearly every corner of Ecuador’s formal business landscape.

Expanding Credit, Fueling Growth

The findings of the study are compelling. Firms that participated in the loan program increased their formal borrowing by 26%, grew their employee headcounts by 8.9%, and boosted their short-term assets by 17%. Most strikingly, sales surged by over 50%, a testament to how access to capital can ignite operational and commercial expansion. The additional financing allowed firms to invest in working capital, purchase inventory, and stabilize business operations during volatile times. Interestingly, the data shows no significant growth in long-term assets or profitability across the sample, perhaps because many loans were geared toward short-term needs rather than fixed capital investment. Still, the uptick in revenues and headcount suggests that the program stimulated business activity and demand-driven growth.

Unlocking Potential for the Previously Excluded

The clearest impact was observed among firms that had never accessed formal credit before. These businesses, often the smallest and most vulnerable, demonstrated a remarkable responsiveness to the program. Sales nearly doubled, employment rose by 27%, and short- and long-term assets grew by 86% and 142%, respectively. For these firms, the loan program was not just an operational boost; it was a gateway to market participation and business resilience. Smaller sample sizes limited precision in some gender-based analyses, but both male- and female-led firms in the previously unbanked category recorded substantial gains. In contrast, firms that already had access to credit primarily used the program to refinance existing, more expensive debt. These businesses did not increase their employment or assets and experienced only modest sales growth, underscoring that the real power of credit access lies in reaching the excluded.

Gender-Inclusive Growth and Institutional Trade-Offs

One of the program’s notable achievements was its gender-neutral impact. Female-led firms, which often face structural barriers to finance, benefited on par with their male-led counterparts in terms of credit access, job creation, and revenue expansion. However, the study also reveals a significant challenge: participating financial institutions were more likely to allocate loans to medium-sized and already banked firms. Despite the program’s objective to target underserved businesses, banks and cooperatives often prioritized less risky clients with established credit histories, possibly viewing them as better-quality borrowers. This reveals the inherent tension in public-private financial programs, while governments aim to promote inclusion, intermediaries operate under commercial logic that can skew allocation.

A Model for Future Financial Inclusion Programs

The CFN program’s success provides a roadmap for similar interventions in other emerging economies. By 2024, CFN had transformed from a troubled lender to a credible second-tier institution, sourcing 36% of its liabilities from international financial institutions, up from just 7% in 2020. It restructured its governance and liquidated non-performing first-tier assets, making way for a leaner, more focused mandate. Though political turmoil in 2023 temporarily slowed disbursements, a renewed administrative push in 2024 reinvigorated the effort, leading to USD 290 million in new loans in that year alone. The study underscores that public credit lines, when paired with institutional reform and private sector engagement, can produce substantial development dividends. Yet it also cautions that aligning financial institution incentives with policy goals is crucial to ensuring such programs truly reach the most underserved. As MSMEs continue to expand under this support, the long-term gains could ripple across Ecuador’s economy, reinforcing inclusive and sustainable growth.