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Microfinance paves the way to decent work

Microfinance makes a powerful contribution to decent work: it facilitates small investments in self-employment and job creation; it also helps the poor to manage risks through emergency loans, savings and micro-insurance. The launch of the UN International Year of Microcredit on 18 November is an occasion to look at the pioneering role of microfinance. Here are two examples from an industrialized and a developing country.

Article | 18 November 2004

GENEVA - From the former coal-mining regions of Germany to the rural areas of Nepal, microfinance is making a major contribution to job creation and decent work.

In the case of Anna Berger, who set up an enterprise in 1997 to provide secretarial services, self-employment has become successful enough to allow her to begin employing others. And in Nepal, it means a family of seven that used to live in debt bondage may now benefit from negotiations with their former "master".

The ILO has been promoting social finance since 1991 to build on the links between microfinance and decent work and analyze, evaluate and disseminate financial sector issues relevant to employment and social justice.

In Germany, Ms. Berger's business is situated in a new centre for start-ups located north of Essen, one of the big - former coal-mining - cities of Northrhine-Westphalia. Ms. Berger offers telephone and fax services and acts as an office address for external companies that only temporarily need office space in Essen. Half of her clients come from inside the start-up centre, the other half are external companies.

Ms. Berger describes her way into self-employment as more or less "accidental". "The idea was triggered by a colleague when my new employer could not pay me after half a year on the job", she explains. They agreed on her continuing to work for the company as a free-lancer. She started looking for new clients using a room at home or in the clients' companies as her office.

"I attended informal meetings organized by an association of women entrepreneurs where I met the consultants from the local agency for start-ups", she says. "When they created a new centre for start-ups in 1987 I asked them whether they would need secretarial services".

Ms. Berger's proposal was accepted. She had to present a business concept to the centre including profitability calculations that she prepared after successfully applying for a professional consultancy. She would have never thought of employing a consultant herself, but a former colleague gave her the idea - a move she did not regret as "they came with lots of ideas I would never have thought of..."

She financed her business using a credit from a specialized program for women entrepreneurs while her husband provided the 15 per cent of capital that was needed. Although she forfeited her business car and a risk capital life insurance as securities the investment bank which handles the program additionally asked for a personal guarantee of her husband.

Today, Ms. Berger already plans to extend her business and to look for more external clients who need office space and secretarial services. Currently, she employs a part-time employee, but she already applied for a new wage-subsidy program of the local employment agency to transform this trainee post into a fulltime working place in the long run.

Microfinance and Bonded Labour

Until it was abolished in 2000, the Kamaya system, a form of bonded labour in Nepal, was prevalent in the Tharu Community of the western Terai region of the country. Its abolishment outlawed the debt arrangements that underpinned the system and many people were liberated from forced labour.

But effective abolition takes time, as desperate economic and social conditions still cause people to return to bondage as a way to get money.

Ms. Baijayanti Mala Chaudhary and her husband, both former Kamayas, live in Binauna District. They have one son and four daughters. Not having enough land to cultivate sufficient food for the family, Ms. Chaudhary felt obliged to send her daughter to work as a domestic child labourer in the house of a local judge.

Through an ILO programme that supports local anti-bonded labour initiatives, Ms. Chaudhary has joined a new self-help group that enables her to share experiences and voice concerns collectively with others in her position, as well as receive help on how to manage family finances so that she can avoid bonded labour in the future.

"Now we can at least bargain with our master on wages and through the group we learn about savings and curtailing unnecessary expenses, which are the most crucial aspects to the poor like us." In addition, the Chaudhary children are now receiving some schooling.

The role of the ILO

In 1998, the UN General Assembly declared 2005 the International Year of Microcredit in recognition of microcredit's contribution to poverty reduction. For microfinance to make an effective contribution to the attainment of the Millennium Development Goals, a number of challenges will need to be met over the next ten years: improve the access for the working poor to affordable financial services and the performance of microfinance institutions, help microfinance scale up and tap the international capital markets to support microfinance institutions, and improve policies in support of social finance.

The ILO builds on the links between microfinance and decent work. Given the considerable impact that financial markets have on decent work in a globalized world, the ILO created in 1991 the Social Finance Programme as a focal point to analyze, evaluate and disseminate financial sector issues relevant to employment and social justice.

The programme is centered on reducing vulnerability, investing in job creation and making financial policies more employment-focused. The ILO promotes institutions that work for the poor, it is engaged in making markets more inclusive and accessible and it seeks to make policies better known that alleviate obstacles to the market for the working poor.

The Social Finance Programme undertakes action research to show the viability of microfinance, to test various approaches in target group outreach and service delivery, and to monitor and assess the impact of microfinance on household incomes and assets.

Over the past decade, the ILO has pioneered several microfinance applications: linking worker remittances to microfinance, post-conflict microfinance, micro-leasing, micro-insurance and micro-equity.

This work has been carried out with ILO constituents - for example with trade unions to improve the conditions of bonded home-workers, worker banks and other such initiatives, and with employer organizations on issues such as start-up financing for new entrepreneurs, property rights and collateral.

Note 1 - For further information on the International Year of Microcredit please refer to, and on the ILO Social Finance Programme: