Why access to financial services can open doors for young entrepreneurs
I was invited to speak briefly at Chemonics last week on what I thought was an important component to support youth enterprise development. As one of MEDA's core areas of experience, I decided to talk about providing access to appropriate financial services for youth. Here's why I think this is one crucial component to enable youth enterprise development...
Global youth dominate the ranks of the unemployed. Demographic challenges, gender barriers, education or skill mismatch, and unsafe or poorly paid work are among the many difficulties that youth face in the search for economic opportunities. This is something we saw clearly illustrated in the Arab Spring. Compounding these challenges, entrepreneurial youth typically have limited access to financial services that meet their business development needs – this can be because their loan requests are often small and too costly for Microfinance Institutions (MFIs) to administer.
According to the World Bank, only 12.3% of youth aged 15-24 in the MENA region have a formal bank account, which is the lowest rate inthe world. In this context, access to appropriate financial services has the potential to lead to many positive outcomes for youth, including a heightened capacity to manage money and build assets, as well as increased opportunities for employment and education.
Our YouthInvest project worked with 3 leading MFIs to address the issue of youth financial exclusion. One financial institution partner in Morocco, Attadamoune, developed a product particularly geared towards youth wanting to start-up a business. They designed a product that was flexible in term length (ranging from 6-48 months) at a 2% monthly interest rate.
The other unique piece of this was that the Attadamoune required, as part of the eligibility for the loan, that the client either had received their diploma in the sector they were seeking to start a business in OR was working under the tutelage of a sector specific mentor. Attadamoune found that this additional step brought about serious clients and offered an unexpected outcome of recruiting additional clients who may not have been familiar with their services.
While all loans still require a guarantor (to mitigate MFI risk) or collateral – which youth have reported as one barrier for them accessing credit – MFIs that once would not even consider lending to young start-up are now changing the way they think. At the close of the project there were several reports from MFIs on young clients who had started successful businesses. See the image here for some examples.
If you are interested in reading more on developing youth financial products check out our YouthInvest Praxis Series