> Posted by Christy Stickney, Independent Consultant

“Como tengo ya 57 años, ya no quiero más fuerte.” (Since I’m already 57, I don’t want [to work] any harder.) – A market vendor in Lima, commenting on her vision for her business’ growth.

“Tengo tantos planes, pero ya me siento cansado.”  (I have so many plans, but I already feel tired.)  —  A 42-year-old owner of a bakery in Guayaquil.

“Después de pagar todo y sacar las hijas de la escuela puedo descansar.” (After paying off everything and getting my daughters through school I can rest.)  — A 37-year-old paint store owner in Lima.

Entrepreneurs work hard—and when it comes to envisioning their older age they want to be able to have the luxury of slowing down. The above were common themes expressed by entrepreneurs in the three countries where I conducted my research as part of a CFI fellowship. “I’m tired.”  “I never rest.”  “We don’t take time off.” These are sacrifices associated with running one’s own business, especially among those who have grown their firms from a truly micro size, rising up from poverty and informality into what could be labeled as a “small enterprise” or SME (typically classified as those employing between 5 and 250 workers).

Throughout the developing world, active saving for retirement and participation in formal financial services for older age, like pensions, are minimal. Entrepreneurs of micro-businesses and SMEs face even fewer options than the formally employed, as they tend to operate outside the scope of either private or state-sponsored pension plans. The intention of my research was to learn about the nature of the micro-to-SME entrepreneurs and their businesses, as well as their experiences in growing their enterprises, overcoming hurdles, and utilizing available resources to their benefit. The goal of the research is to inform how to tailor financial services, which are key to enterprise growth, to this client niche. However, in studying these entrepreneurs and their businesses, I also encountered a pervasive alternative being pursued for the financing of one’s later years…

But my first step to finding these entrepreneurs was to identify MFIs’ borrowers with steadily increasing business loan sizes, expecting to expose entrepreneurs with vibrant businesses that were poised for growth. However, the “growth entrepreneurs,” as I’ve named them, represent only about a quarter of the clients I interviewed in low-income neighborhoods of Lima, Quito, Guayaquil, and Santo Domingo. Among the remaining three quarters, there emerged many entrepreneurs that spoke of fatigue and of their desire to slow down and eventually stop working. Clearly, they had worked hard to build up their businesses from scratch, requiring long hours and few breaks. Most of them have raised a family, and along with growing their enterprises have put their kids through school, built a house, and even created jobs or homes for their adult children. Nevertheless, for many of them, their economic futures feel uncertain. Their cash savings are insignificant. As entrepreneurs, they have not invested in a pension, and the majority has not contributed to social security.

Thus, I was both surprised and relieved to discover that among the entrepreneurs that were slowing down, many had invested in rental units as a source of future income. Almost half of the clients interviewed had bought and built rental properties, and quite a few were using their loans to purchase land and build more rentals, repaying these with income from their relatively stable microenterprises. One example is Claude, a Haitian migrant living in Santo Domingo, who has slowly built his second story home and two rental apartments below through microfinance loans that he repays with the meager income from his door-to-door sales business. As in Claude’s case, apartments are often built above or below the microfinance client’s own residence, comprising incremental construction projects that may reach up to four or five stories. Other clients I visited had bought empty lots, after catching wind of a good deal, with future plans of developing these into rental spaces. Former homes and business sites were also rented as owners moved to better locations.

“Tengo que pensar en mi vejez, la enfermedad…. Pensar a tiempo.” (I need to think about my [future] old age, and infirmities…. To think in time.) — A small day-care owner in Santo Domingo, reflecting on her reasons for building rental apartments behind her home.

What I observed is that rental properties are not only an attractive investment strategy for successful microenterprise owners in the cities I visited; rental income has become the de facto pension for much of this population. Undoubtedly, steady urban growth is fueling domestic rental markets, making this a very profitable venture and relatively stable source of future income.

Through reflecting on these observations, which are but a corollary to my study focus, I’m left with more questions than answers.

  • How common is this strategy of investing in rental properties to finance retirement among microfinance clients in other contexts?
  • How can financial service providers and the broader microfinance industry better support clients in planning for retirement, whether investing in rentals or other options?
  • And what are lower-income clients’ other options for financing later life? How about offering them alternative investment products, micro-pensions, or specialized savings plans?

Perhaps these underscore a next frontier for not only aging micro-entrepreneurs, but also for the maturing microfinance institutions that have been serving them for the past several decades.

Image credit: Accion

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Microfinance as a Tool for Active Aging

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