Financial Markets, Microfinance and Tourism in Developing Countries

Many developing countries consider promoting tourism as a main strategy for achieving economic growth. The tourism sector at destinations is mainly organized through micro and small-scale enterprises. In developing countries, these lack access to credit and other finance: financial markets do not consider them as clients and government support is mainly aimed at attracting foreign direct investments (FDI), not oriented towards expansion of domestic business in tourism. Financial sector modernization in some developing countries has been pushed in recent years through so-called Microfinance Institutions (MFIs). These deliver credit to micro- and small enterprises and contribute to poverty reduction by providing poor people access to financial services. Until now, in tourism destinations, these MFIs do not seem to close this aforementioned finance gap in supply and demand for finance. Given their lack of access to credit, domestic (tourism) micro- and small enterprises in developing countries are unable to compete against large international suppliers of accommodation and tourism services. As a consequence, the potential of positive local economic impacts from growth through tourism is not fully used in most developing countries. Further research is required to develop appropriate (tailor- made) financial instruments that fit the needs of these tourism micro- and small enterprises. These should include investment subsidies, tax measures, long-term loans, and leasing and insurance products. Commercial banks could play a leading role in innovating financial markets in tourism destinations, and make use of the experience of MFIs when it comes to uncollateralized lending techniques. Governments in developing countries that emerge as tourism destinations should facilitate the reform of their domestic financial sector and the delivery of specific financial products oriented towards micro and small-scale tourism enterprises. This could well be done through specific credit lines, just like agricultural and industrial development banks that have supported agribusiness and industrial development in the past.