Governments and development institutions spend billions to help small businesses access financing, hoping this will create jobs and support inclusive economic growth. But we don’t really know if these programs reach the firms that need help most and help them grow.
In a recent paper, we evaluate a loan program in Ecuador implemented by the state development bank Corporación Financiera Nacional (CFN) with support from the World Bank. Between 2021 and early 2025, more than USD 500 million was lent to more than 24,000 small businesses through commercial banks.
Evaluating the Program: A Natural Experiment
We evaluated the program’s impact by tracking outcomes for over 2,000 formal firms between 2019 and 2023. Since firms received loans at different times, we could compare those that had received a loan with similar firms that had not yet. This approach allowed us to identify the effects of the program on participating firms.
What Did the Program Achieve?
The program significantly improved access to finance for participating firms, increasing their overall financing by 26%. This enabled firms to hire more staff (employment rose by 9%), invest more in short-term assets (up 17%), and achieve over 20% higher sales. Both men- and women-owned firms benefited, and these positive impacts became even stronger over time. (Figure 1).
But the real game-changer was for firms without prior record of access to bank credit. Among these previously unbanked businesses, the gains were substantial. Employment expanded by 27%, short-term assets rose by 87%, and long-term assets grew by 142%. Most strikingly, these firms nearly doubled their sales. In short, giving credit to firms that had been excluded from formal finance enabled them to invest and grow in ways that were previously out of reach.
For firms that already had access to credit, the benefits were more modest. The loans helped them reduce borrowing costs by replacing expensive financing with cheaper alternatives. However, it did not lead to an overall increase in financing or substantial changes in performance.
Figure 1. Impact of the program
Notes: The panels plot the Callaway and Sant’Anna estimates of the yearly pre- and post-loan program effects on outstanding debt, log employment, short-term assets and sales. The x-axis shows time relative to the year a firm received the loan (year 0). The y-axis shows the average treatment effect on treated firms (ATT)—that is, the average difference between treated firms and similar firms that had not yet received a loan. Points to the left of zero reflect outcomes before firms received the loan, serving as a check for pre-trends. Points to the right show how treated firms evolved after the program. All financial variables are in levels (million USD), winsorized at the top and bottom 1 percent. The plots are generated using the event plot command in Stata, clustering the standard errors at the firm level. The vertical lines correspond to the 95% confidence intervals.
A Trade-off Between Inclusion and Efficiency?
The findings also shed light on a key challenge in designing financial access programs: how to ensure that funds reach the firms that need them most. The program targeted firms with no prior access to credit, yet banks still tended to prioritize larger, less credit-constrained MSMEs. This is understandable from a market perspective, as banks aim to minimize risk and maximize returns. But it underscores a tension between financial inclusion goals and the incentives of private lenders.
Policy Implications
This evaluation offers several takeaways for policymakers and development practitioners:
- Targeting Matters: The largest impacts were seen among firms that had been previously excluded from bank credit. Programs that target this group can yield high returns, both economically and socially.
- Program Design is Key: The use of second-tier lending allowed CFN to scale up quickly and leverage the screening capacity of private financial institutions. However, this also made it harder to ensure that the most credit-constrained firms were prioritized.
- Aligning Incentives to Maximize Impact: Credit programs should consider an inherent tension between financial inclusion goals and the risk-averse incentives of private banks. For instance, performance-based incentives could encourage banks to lend to riskier, albeit potentially high-growth firms.
Conclusion
Ecuador’s loan program provides strong evidence that access to credit can help small businesses grow, especially those that had previously been excluded from bank financing. But it also reminds us that these types of programs require thoughtful design to reach their full potential. As governments and development banks continue to invest in MSMEs, this paper offers timely lessons on how to make those investments count by focusing on the unbanked, designing programs thoughtfully, and looking for ways to align the goals of banks with broader development objectives so they support the businesses that need it most.
Source : World Bank
