Timor-Leste Access to Finance for Investment and Working Capital

Private and Financial Sector Review - February 2006

Executive Summary

This study argues the need for a policy environment supporting both urban informal sector dynamism and rapid transition from subsistence to monetization in agriculture. Such policies must include measures facilitating access to financial services for households, which are the backbone of the informal and subsistence economies.

The economy of Timor-Leste is divided between a farm sector in which as many of 80 percent of workers remain, with most of these still dependent on subsistence production, and a non-farm sector in which micro- and small enterprises are an overwhelming majority. Most urban enterprises operate in an informal environment, while in both the farm and non-farm sectors the household is the basic unit of economic activity.

With only about 40,000 workers in the private sector and some 15,000 potential labor market entrants each year, there are severe limits on the capacity of the non-farm sector to offer wage employment to new job-seekers. In these circumstances, it is pertinent to ask: what is the meaning of "private sector development" in Timor-Leste?

With such a large rural subsistence element remaining, it is appropriate to commence private sector development there. Diversification and monetization of farm output is crucial to raising rural incomes. Access to financial services is needed for the embryonic rural private sector, to support produce trading and the supply of manufactured goods to a rural economy making the transition from subsistence.

Beyond agriculture, "informal" enterprises form a major component of the non-farm sector. The distinction between formal and informal enterprises is problematic in Timor-Leste.

While business registrations give some guide to the extent of formal enterprise activity, even many registered entities exhibit "informal" characteristics, in terms of scale, use of family labor, home-based operation, technologies employed and other criteria. Thus while all "formal" enterprises are registered, not all registered entities in Timor-Leste can be regarded as formal. Numbers of workers employed provide some guide to the formal/informal divide.

Among formal (i.e., registered) enterprises, while more than 70 percent have fewer than 10 employees, almost 20 percent have from 10 to 20 workers. Among informal (i.e., unregistered) enterprises, slightly more than 50 percent have only a single worker. The distinction is thus between the small and the very small; even in the "formal" sector, more than 90 percent of entities have fewer than 20 workers. Hence even most formal enterprises conform to the definition of micro-enterprise...

Full executive summary and recommendations below.

Access the report:
 Cover, Abbreviations, Table of Contents (256kb pdf)
 Executive Summary and Recommendations (58kb pdf)
 Full Report (525kb pdf)
 Workshop Looks at Issues Constraining Access to Finance in Timor-Leste (press release)

 Full report also available in Portuguese  (564kb pdf) and Bahasa Indonesia  (555kb pdf)