(Part 2 of 4)
I continue sharing some findings of a research project I supervised for my student in Paris, wondering: What happened to Microfinance? It seemed to have become increasingly like a mini-traditional bank in the developing world and curiously started emerging in developed countries, which obviously have strong financial institutions and would not have needed such things. We asked ourselves the question why and how would Microfinance emerge in Western Europe? and conducted an exploratory, qualitative study in 2017 using 16 personal interviews of relevant persons from member organizations of the Microfinance European Network from seven countries. We found that while Microfinance in the developing world was conceptualized as a tool to fight against financial exclusion, in Europe, being excluded professionally is what first and foremost creates financial exclusion, which eventually creates social exclusion. We found that there were three characteristics of Microfinance in Europe which allowed it to re-integrate people into society: 1) a focus on entrepreneurial and inclusion loans; 2) entrepreneurship training; and, 3) for-profit status with non-profit funding. Today we continue this series, explaining our findings on the second characteristic.
We found something very specific: European microfinance institutions (MFIs) offer an array of entrepreneurship-related non-financial services to their beneficiaries. These services are usually free of charge for the beneficiaries and provide him or her with the necessary tools to turn the loan into a business success, and it was this that truly set MFIs apart from commercial banks. They acted as a sort of consulting firm and educational institute rather than a bank. In doing so, they created a relationship of trust between the MFI and the micro-entrepreneur unique in the industry which ultimately provided avenues for monitoring. Interestingly, although the broader objective was to help people out of poverty, the utilitarian objective was simple: “We want to be paid back.” This was the simple explanation of one of our interviewees when asked why they would spend so many resources on training.
One of the most interesting forms of training was that even before granting a loan, MFIs would help the entrepreneurs with their project idea, and give them the tools to write and think of a relevant business plan. Many partner NGOs help in this process, acting as an intermediary between the beneficiary and the bank. Some MFIs also offer mentoring services which range from providing them with a business network or an experienced micro-entrepreneur mentor who guides them in each step and follows-up on their progress. Economic viability was a keyword for them, and another facet was to make the Microentrepreneur feel “less alone” in the journey. But they did not limit themselves to the usual tools like accounting, finance, marketing and sales, and instead branched out into soft skills like communication and crisis management, which empowered the beneficiaries.
What is noteworthy here is that beginning with the social mission of helping the poorest of the poor in developing countries, Microfinance hit a wall in lacking financial sustainability unless they turned to market-driven models which compromised their mission. In opening their doors to as many people they could help with as many microloans they could offer, many MFIs in developing nations found it difficult to sustain the high costs of monitoring and funding became scarce. Because of the loopholes in the financial systems in which such institutions were embedded, it became easier to manipulate the system by disguising exorbitant interest rates and abusive lending practices as carrying a social mission. To maintain legitimacy, MFIs began becoming more and more stringent and naturally institutionalized to differentiate themselves from the players who had misused the social mission. And while the former are indeed creating avenues for financial inclusion, the initial Yunus model has been all but lost, and the rural banks, traditional retail banks, and fintechs have stepped in to commercialize and render more accessible the concept of borrowing with a lack of collateral as well as the concept of making savings grow (a form of investment) even for the economically marginalized.
In Europe, Microfinance was birthed from a different need; that of finding employment to be socially integrated and accepted. There was a focus on financial sustainability of the model from the get-go, with more stringent rules in lending, larger amounts, and personal qualifications required, but notably: the guidance of the MFIs. Not only were they extremely strict with the users and usage of funds but also assisted the grantees in being ready to take out a loan even before they applied, paving way for an approach that ultimately centered on Social Welfare. To wit: in creating standards, in being more selective, in adhering to quality over quantity — things that intuitively sound exclusive — they ended up creating and fostering inclusion. Does the market-driven model, the cream-of-the-crop, the only-those-who-deserve-it model — if applied correctly — then lead to better social gain? Or does this approach only work in an environment with strong regulation that strengthens institutions? n
Notes: This article is based on a co-authored working paper originating from the Master Thesis of Hélène Laherre under the supervision of the author at the IÉSEG School of Management (Catholic University of Lille) in Paris, France. References are available upon request.
Daniela “Danie” Luz Laurel is a business journalist and anchor-producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Prior to this, she was a permanent professor of Finance at IÉSEG School of Management in Paris and maintains teaching affiliations at IÉSEG and the Ateneo School of Government. She has also worked as an investment banker in The Netherlands. Ms. Laurel holds a Ph.D. in Management Engineering with concentrations in Finance and Accounting from the Politecnico di Milano in Italy and an MBA from the Universidad Carlos III de Madrid.