The current economic and social crisis provides an opportunity to re-think values and business models in finance. "Microfinance is not “just” another asset class, it is not finance “en miniature”, but a financial strategy with a social agenda. The crisis has led to a self interrogation about the right business model in finance. Microfinance is an interesting alternative model." ILO Online spoke with Bernd Balkenhol, chief of the ILO’s Social Finance Programme.
ILO Online: Why does the ILO engage in financial sector issues?
- Bernd Balkenhol: The ILO helps advance the creation of decent jobs. Whether women and men have decent work also depends on the access of households, workers and enterprises to financial services. Decent work embraces various aspects of the daily life of the working poor – productive employment, safe working conditions, absence of child labour, abolition of bonded labour, formalization of informal enterprises, access to social protection and the right to organize. Decent work is far from being a reality for millions of working poor: still, 1.5 billion people live on less than US $ 2 a day.
ILO Online: What is the impact of the current crisis on microfinance?
- Bernd Balkenhol: It depends largely on the way microfinance institutions raise their resources. Cooperatively organized microfinance institutions (MFIs) use primarily member deposits, while NGOs work mostly with grants and soft loans. Microfinance banks for their part are refinanced on market conditions or at concessional rates and if they are authorized to do so, they also collect member deposits. These different types of financial resources transmit the crisis effects differently. A MFI that depends on outside credit lines in hard currency is likely to face cost increased and harsher collateral requirements. By contrast, MFIs that work primarily with locally mobilized resources, and especially retail deposits are fairly isolated from the contagion. In short: the more a MFI is integrated itself into the commercial financial market, the more it is now exposed to the fall-out from the crisis.
On the asset side matters are more straightforward because the loan portfolios of MFIs show greater similarities. Practically all types of MFIs cater largely to people running livelihood activities or micro-enterprises. A small number of MFIs recently ventured into the segment of small enterprise financing, i.e. a market segment more likely to feel the contraction of consumer demand. Small and medium-sized enterprises (SMEs) in developing countries are obviously more likely to suffer the consequences of the financial crisis than micro-enterprises or those running livelihood activities. Indirectly this is likely to affect also the loan portfolios of MFIs that had started to go up-market.
ILO Online: The financial crisis and the new perception of microfinance represent an opportunity for the ILO and its constituents?
- Bernd Balkenhol: Microfinance is not “just” another asset class, it is not finance “en miniature”, but a financial strategy with a social agenda. The crisis has led to a self interrogation about the right business model in finance. Microfinance is an interesting alternative model. It puts a premium to longer term profitability, to sharing benefits between capital owners, lenders, borrowers, it factors in the needs of the local community, it is highly transparent and – fundamentally - has a social agenda which does not prevent it from being sustainable and profitable at the same time.
There may be a lesson or two. The idea that finance should serve the real economy, a recent mantra of analysts, politicians and the media of the last months, has been practiced day after day in microfinance for the last 20 years. Hence the need to enhance the capacity of employers’ and workers’ organizations to adopt informed positions on financial policies that affect decent work. This is not lobbying for particular interests, but a guarantee to keep the financial sector firmly and more stably aligned to the needs of the real economy.
ILO Online: But MFIs are quite diverse, some are banks, others NGOs and still others cooperatives. What do they have in common?
- Bernd Balkenhol: All microfinance institutions – regardless of their governance – seek to provide financial services to the poor on a sustainable, i.e. cost-covering basis. Some go a bit further and adopt a more commercial approach, others emphasize more outreach to large numbers of the poor. Each microfinance institution combines financial performance and social impact in its own manner. These trade-offs make it sometimes difficult to compare the overall performance of different MFIs, but it is the fascinating feature of microfinance that all institutions engaged in this field – estimated 10,000 world – combine efficiency with social justice. Hence the interest of the ILO to use microfinance as a vehicle to advance decent work.
ILO Online: What is the economic and social impact of microfinance worldwide?
- Bernd Balkenhol: There is a growing body of impact studies that shows positive social impact in terms of reducing income and consumption fluctuations, asset building and empowering the excluded. Moreover, it emerges that households with access to microfinance spend more on education than non-client households. Microfinance clients are overwhelmingly female. Microfinance has also been widely credited for empowering women by increasing their contribution to household income, the value of their assets, and control over decisions that affect their lives. Most importantly, however, it has in many instances given the poor a sense of being more in control of their lives. Recent ILO research has started to track the impact of microfinance on decent work, focusing on child labour, formalization, induced job creation, working conditions and so forth. So, the impact question is key and necessary.
ILO Online: How do microfinance institutions balance social impact and financial performance, isn’t this a contradiction?
- Bernd Balkenhol: Even before the crisis it had become clear that not all MFIs could automatically reach financial sustainability after a few years. In some market configurations the costs for delivering small amounts of credit to remote villages are exorbitant and cannot be loaded onto the client. A second factor is the growing competition amongst MFIs that have slightly different priorities. It has been observed that very commercially operating MFI leave no choice to competing more socially oriented MFIs to align their offer of services, which means cutting down on services too costly to deliver, even if they respond to a need. The crisis and the growing involvement of public authorities in financial markets led also to a reassessment of how much market and how much policy is needed to ensure a fair distribution of financial services. The mainstream has arrived at the consensus that some promotion of micro-finance is necessary, but that it should use incentive-based, smart public policies.
- He is also the editor of Microfinance and Public Policy - Outreach, performance and efficiency, International Labour Office, Geneva, 2007, ISBN 978-92-2-119347-0.