(Part 3 of 4)
Does the end justify the means? When we talk about the most pressing problem on earth – poverty – does it still matter? or the money comes from or from whom, as long as it serves to improve someone’s life? Philanthropy has, from time immemorial, been criticized for benefiting the donor rather than the recipient, providing an outlet for a person to right their moral wrongs through finance. Even more problematic is when philanthropy becomes a tool to advance one’s economic or political agenda. This has happened in many cases, from the smallest village fundraisers to election campaigns to large institutionalized foundations. Microfinance does not lack for its part problems related to the gaps between the mission and the agenda of the donor.
We take a look at this today as I continue in my series of sharing the results of a research project I supervised for my student in Paris, asking myself: why and how would microfinance emerge in Western Europe? We found that there were three characteristics of microfinance in Europe that enabled it to reintegrate people into society – its primary responsibility: 1.) A focus on entrepreneurial and inclusion lending, 2.) Entrepreneurship training, and, 3.) For-profit status with non-profit funding. Today we continue this series by explaining our results on the third characteristic.
In the developing world, one of the main trends that shifted microfinance models towards more market-oriented strategies was when microfinance institutions (MFIs) began to accept different sources of funding. With the growing interest in the movement, not only for what it could achieve but also for the investment opportunity, many people began to jump on the trend disguised as benefactors. The diversification of sources of finance and ownership has greatly influenced the strategies and policies of MFIs, consequently leading to a change in the type of business from non-profit to profit. By moving from NGOs to non-bank financial institutions (NBFIs), MFIs have been able to distribute profits to their shareholders and have better access to technology. However, they also tended to rely more on individual loans, accompanied by larger loan amounts and longer repayment terms. In Latin America, many MFIs have been forced to make this transformation in the face of competition, especially with commercial banks, with an increasing percentage now listed as for-profit organizations. Just to make this point – globally, the big banking houses Citigroup, Deutsche Bank and Morgan Stanley are already in space.
Whether accepting more funding can make the company more efficient, distributing dividends to shareholders and being controlled by capital markets is where heated debates come into play. So how does Europe fare? lessons when deploying her own version of the practice?
It is interesting to note that outside of Switzerland, Western European NGOs are do not authorized to provide financial services and therefore cannot act as microfinance institutions and lend money. For this reason, NGOs assume the role of intermediary between individuals who need micro-financial products and services and the banks which provide finance. The NGOs do all the preparatory work with the future beneficiary to determine their need, verify eligibility and help them with their project. In this way, their role remains clear and less confused.
Meanwhile, private banks called microbanks are the main players in the microfinance industry and hold a for profit status. Although they are private and can act independently to a certain extent, EU regulations on MFIs mean that their activities are largely limited, putting them at a disadvantage compared to traditional banks. For example, Italian regulations set a cap on the interest rates of MFIs in Italy. Likewise, the selection criteria to be eligible for microcredits are stricter and interest rates are set at around 10% in the UK. So, although they have a for-profit status, many are content with the balance. For this reason, MFIs limit the risk of default by excluding certain clients to have a better portfolio quality, thus effectively limiting the scope.
A second form is the cooperative model. In these organizations, beneficiaries are also owners of the cooperative, as they must subscribe to a share in order to benefit from its services. By owning the cooperative, each member has the right to vote at the general assembly of the organization. Community models are similar to what we see in developing countries and generally target migrants from developing countries.
Finally, autonomous public programs financed by regional directorates also exist but are highly criticized by microfinance professionals for the fact that they grant interest-free loans (0% interest rate, no administrative costs and no guarantee required).
MFI funding sources are essential to illustrate the social inclusion approach. MFIs in Europe are financially supported by a variety of institutions ranging from microfinance foundations, small foundations that promote entrepreneurship and large banking groups that have established foundations for the specific purpose of funding microfinance activities. For example, BNP Paribas acts as a major financial contributor to the microfinance sector in Europe and in developing countries by financing microcredit portfolios, entering the capital of certain MFIs or providing technical support, while the Grameen Crédit Agricole Foundation focuses its activity on developing countries. . This availability of diversified capital compensates for the losses that strict regulations impose on them. For example, as one of our interviewees explained, in their model, they accept a default rate of up to 20% but in the event of default, they do not take the entire loss due to guarantees. provided. In fact, most business-entrepreneurial loans are guaranteed up to 70% while individual loans are guaranteed up to 50%.
It is therefore with clear and concise barriers of what entities are and are not allowed to do, and defined objectives that microfinance in Europe is able to focus on social inclusion. There is no need to justify the means, just specific ends to specific means. not
Notes: This article is based on a co-authored working paper from Hélène Laherre’s Master’s thesis under the supervision of the author at 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 featured producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Previously, she was a permanent professor of finance at IÉSEG School of Management in Paris and maintains teaching affiliations at IÉSEG and Ateneo School of Government. She also worked as an investment banker in the Netherlands. Ms. Laurel holds a doctorate. in Management Engineering with concentrations in Finance and Accounting from Politecnico di Milano in Italy and an MBA from Carlos III University in Madrid.