Gazing down the dirt street, with houses stretching on either side. Houses that look like crooked teeth, wooden slats cobbled together with large gaps between, some constructed with only a partial roof, structures that can easily be destroyed when the rains come. A guard standing at the entrance, working on behalf of the traficante (drug dealers) with one arm holding his rifle while the other one beckons. As night descends the sounds of the baile funk and gunshots mix together.
From Paraiopolis, to Alemão, to Rocinha, to Vidigal, to Maré, the favelas (Brazilian slums) are teaming with life and contain thriving economies. According to experts, the 10 largest slums in Brazil represent £21 billion in consumption potential, with over 262,000 active commercial establishments, the informal economies support cities unto themselves. An estimated 13.6m live in Brazil’s favelas today, with ~24% of the population in Rio alone housed within these “peripheral” communities. While crime and access to basic necessities like running water and electricity are major problems for these communities, the entrepreneurs who dominate these economies also face the added challenge of financial exclusion. In Brazil there are five major banks that control 80% of the credit and most entrepreneurs living in favelas find their requests for credit denied.
These informal economies however, represent a large portion of the country’s total economy as well as a significant growth opportunity. In 2019, prior to the start of the pandemic, it was estimated 45% of Brazilian employment was in the informal (non-agricultural) economy and the economy is estimated to represent 15-20% of the country total GDP.
Many startups have focused on targeting the problem of financial exclusion faced by these entrepreneurs, a key development challenge today, and Brazil now has over 100 community banks offering microcredit, according to Banco Palmas Institute. Such institutions include Creditas, Conta Black and G10 Bank, a recent fintech that sprung out of COVID. These fintechs have a large role to play in the recovery of the Brazilian economy since the majority of their clientele living within the favelas, works in the informal economy that has long been denied financial inclusion and was hardest hit by the COVID crisis with lockdowns and large outbreaks making it challenging to keep businesses afloat.
Economic recovery in these economies is linked to Brazil’s overall economic recovery post-COVID and the fintechs focused on granting entrepreneurs broader access to credit will play a vital role in reinvigorating the economy. Lack of access to financial institutions and credit is often cited as the biggest operational constraint for growth of business in the informal economy. Therefore, a post-COVID economic recovery in Brazil, which requires an economic recovery in the informal economy, will need these new financial institutions to sustain growth.
Financial inclusion has always been a lever for private institution and policy makers to drive growth in developing economies. This is even more critical in a COVID recovery Brazil where the growth of the informal economy, which can be achieved through greater, improved access to credit affects almost half the country’s population. Furthermore, in a post-COVID world, ongoing development in periphery communities in Brazil will require continued focus on financial inclusion efforts in order to support entrepreneurs, with access to credit being a vital factor for the country’s overall development and individual’s successful business outcomes.
Margaret Wieland (MBA 2022) has a background in corporate finance, with 6+ years of experience in audit, controllership and financial analysis roles. Prior to London Business School she was based in Shanghai, China leading revenue accounting teams in the region for a large multinational. Margaret is an intern for the Wheeler Institute, contributing to the creation of content that amplifies the role of business in improving lives.
The Wheeler Institute is seeking to understand, illuminate and offer solutions to the challenges faced by the developing world, with an aim to identify the role of business in addressing these challenges and a focus on the implications and actions for those in developing countries. In support of our students, we approach this blog section as a reflective platform and a space where individuals can generate debate as long term agents of positive change.