With the ninth highest GDP ranking in the world, Brazil’s economy is a force to be reckoned with. As a member of MERCOSUR, the G-20, WTO, and USAN, the country is well established in the global market. However, Brazil has historically struggled to incentivize and foster its domestic economy. Government regulations and laws stunted domestic economic activity for quite some time.

Recently, President Bolsonaro signed measures which waive the difficult processes and licenses previously required for small and medium enterprises (SMEs) and entrepreneurship. The Empresas Simples de Crédito (ESCs) help fund SMEs and entrepreneurship and breakdown economic barriers for startups.

We give an overview of how approval of ESCs came to fruition, what it does, and what it could mean for the Brazilian economy.

The need for the ESCs

Local ESCs are expected to stimulate local economies and make Brazil an innovation hub.

The need for ESCs stems from the fact that SMEs in Brazil account for 27.5% of the country’s GDP. Moreover, they supply 55% of the country’s legal jobs. Because of the large role SMEs play in Brazil’s economy, the government felt pressure to ease regulations and license/permit requirements.

While the country had steady growth in the entrepreneurial sector for some time, it came to an abrupt stop. In 2018, the Global Innovation Index ranked Brazil 64th. This was the second-worst ranking amongst the country’s BRICS counterparts.

Lack of legal infrastructure, heavy tax burdens, license/permit requirements, and insufficient monetary incentives inhibited the expansion of the entrepreneurial market. Moreover, Brazil’s 2014-2016 recession also stunted growth. The fall of oil prices, coupled with increased valuation of the dollar sent Brazil’s economy into a state of exacerbated inflation.

All the while, SMEs and even larger corporations halted production. As a result, Brazil’s economy became stagnant. Now, Bolsonaro is ‘priming the pump’ for Brazil’s entrepreneurial sector to encourage economic activity and innovation.

What are ESCs

The ESCs are private companies established by citizens with their own money. Anyone can open their own ESC, but may only operate in a single business. Moreover, citizens cannot use other collateral – such as a business they own – to start and fund an additional ESC. Through the establishment of these ‘miniature banks,’ ESCs can grant small loans to SMEs. When loans are granted, a contract between the lender and the borrower is drawn up and the transaction is then registered and authorized by the Central Bank and/or the Securities and Exchange Commission.

When issuing a loan, ESCs may only set a fixed interest rate to the amount. They cannot charge any additional fees to the principal amount either.

Effects of the new legislation

Overall, the effects of these newly established lenders are positive. As of now, interest rates on loans are at a mind-blowing 40% per year. ESCs should drive this rate down because they are smaller, local entities. ESCs also create an environment of increased competition between lenders, which helps lower interest rates as well.

In terms of ESC generation, they may only operate and distribute loans within their own municipality and neighboring municipalities. This rule avoids the possibility of one ESC having a monopoly over the whole country. Additionally, it emphasizes the importance of keeping money circulation local. As a result, credit borrowing and SME generation will increase and stimulate local economies.

FinTech companies in Brazil can capitalize on the creation of the ESC market.

Moreover, through the creation of ESCs, an additional R$20 billion will be injected into the Brazilian economy and its startups. With money circulating around smaller businesses, more companies and SMEs will be encouraged to expand in Brazil.

Opportunities for FinTech companies

FinTech companies are starting up all over the world. With new laws and markets in Mexico, Australia, Costa Rica, and many other countries, FinTech is the next big market. Surely, the creation of ESCs in Brazil creates a niche opportunity for this industry in particular.

Although ESCs can only operate in their own municipalities, there is yet to be any regulations regarding FinTech ESCs. Without regulation, these companies can provide online assistance, loans, and coaching to companies and SMEs all across the country. Moreover, the industry in general challenges traditional means of banking and financing. Should local FinTech startups catch on to the trend, the ESC industry could potentially become 100% digital.

Ready to get started?

The recent changes in Brazil create a handful of opportunities for foreign businesses and investors. President Bolsonaro is trying to stimulate the Brazilian economy and make it a global hub for innovation and investment. However, with this stimulation comes many changes in laws and economic regulations. Biz Latin Hub is here to help you navigate these changes.

With expertise in commercial representation and back office services, our team at Biz Latin Hub can work with you and your business to ensure a successful transition into the Latin American markets. Contact us at [email protected] if you are interested or have any questions.