Microfinance in south-eastern Europe: How small business helps to create jobs

Experience in Western countries shows that microfinance can be a useful tool in the fight against unemployment, by helping people start their own viable small businesses. An ILO project is now bringing these successful experiences to three countries in south-eastern Europe, helping to introduce microfinance as a tool in active labour market policy. The effort is particularly timely, as 2005 has been designated the "International Year of Microcredit" by the United Nations.

BUDAPEST - Unemployment remains a significant problem in south-eastern Europe, where the difficulties of economic transition from state socialist systems have been compounded by other factors such as perceived instability by investors in the wake of the conflicts in the former Yugoslavia, as well as greater distances and more difficult transport linkages to key western European markets. Meanwhile, these countries often lack the budgetary resources needed to develop and implement a wide range of active labour market policies.

An ILO project, Social Finance for Support to Self-Employment 2004-2005, funded by the French Government, seeks to prepare the ground for national schemes that will provide start-up capital to prospective entrepreneurs coming out of unemployment. The project, which has created task forces in Bulgaria, Romania, and Serbia, is based on successful experience in France, other western European countries, the United States, and Canada, where microfinance is just one of several tools that governments use to combat unemployment.

"There is increasing recognition of microfinance as a tool for poverty alleviation", says Ms. Severine Deboos, Technical Expert on Social Finance at the ILO Sub-Regional Office (SRO) for Central and Eastern Europe in Budapest. "The ILO has a comparative advantage in its ability to bring the various actors together - including governments and the social partners - to link the social and economic aspects of microfinance", she adds.

"If you give the unemployed the opportunity to create their own business, plus financial support and needed business development services, the survival rates of the enterprises are very similar to those of other business start-ups", said Deboos. In France, for example, survival rates of businesses started by the unemployed under these conditions reach 67 per cent, higher than for most new businesses. Survival rates then decrease somewhat, but even after two and three years they are still on par with the average. Data from other countries also indicate positive experience with microfinance in the fight against unemployment.

Task force network

Under the ILO project, a task force has been set up in each country, with the participation of the relevant public authorities - usually including representatives of the ministries of labour, economy, and finance; central banks; and other state agencies such as labour offices or agencies for the development of small and medium-sized enterprises (SMEs). The social partners are also involved in the work of the task force, as well as microfinance institutions (MFIs) and the banking sector wherever possible. The goal is to create a genuine sense of ownership of the proposed schemes, and facilitate alliances between institutions which would otherwise not necessarily work together. These stakeholders meet regularly, once every three months.

"The task force in Serbia is about to finalize its action plan for microfinance to support business start-ups, and a proposal will soon be submitted for government approval", says Ms. Radmila Bukumiric Katic, Assistant Minister at the Ministry of Labour and Employment. Plans in Serbia also call for a special microfinance programme at the state railway company, where a restructuring plan will result in substantial lay-offs.

"We have a big problem with unemployment. Many people have been made redundant and left their jobs," Katic said. Indeed, official statistics from Serbia indicate that unemployment reached 18.4 per cent in 2004. Katic also notes that there was significant interest in a recent joint tender issued by the Ministry of Finance and the Ministry of Economy for state loans to help the unemployed launch their own businesses, as close to 7,000 individuals applied for the support. "But the budget was only sufficient for 1,500 cases. We hope the new microfinance scheme will reach more people".

"Romania has had significant positive experience with microfinance, and once a programme is in place, local MFIs will be ready to use their expertise in the framework of new active labour market programmes sponsored by the Ministry of Labour", says Maria Doiciu, a member of the Romanian task force whose firm, Shorebank Advisory Services, has provided valuable advisory support for the development of Romanian MFIs under a US-funded programme.

"In Romania, company downsizing is frequent, with 10 to 15 per cent of workers usually laid off from their companies", Doiciu said. "Of this group, up to 15 per cent are keen to open their own businesses, especially younger people and those in service occupations such as transportation. This is less true of production line workers, who usually try to find a similar job", she adds.

Although long-term survival rates for businesses started under microfinance schemes in Romania are not readily available, Doiciu said that initial evidence is encouraging. In a recent project in the city of Brasov, a local company laid off 189 workers, 33 of whom started their own businesses with the help of microfinance. Six months later, all 33 businesses were still in operation. "This means a lot, as these people were all still employed", she said.

Building partnerships

As participants at the ILO Governing Body in March 2005 noted, the ILO has unique advantages in its involvement in microfinance worldwide - including a combination of traditional microfinance goals with the Decent Work Agenda, implementing microfinance in a rights-based framework, helping the working poor, and not least of all involving the social partners in these efforts. Microfinance is increasingly seen by trade unions as a means of protecting workers in case of company insolvencies and layoffs, and employers have welcomed the ILO efforts to build partnerships in this area with banks and international financial institutions.

Trade unions and employers are taking an active part in the task force work on microfinance in the region, which requires the adoption of new skills and viewpoints on all sides. For example, the Serbian trade unions representing railway workers at first approached the upcoming company restructuring from a traditional viewpoint, concentrating above all on achieving the highest possible severance payments for their workers. However, they quickly became interested in the possibilities of microfinance as well, to help their workers secure sustainable incomes in the future.

Some countries showed hesitation at first to the idea of providing loans to the unemployed. "There was some reluctance, for example by ministries of finance and central banks, to ideas that would increase borrowing by the population", Deboos recalled. "But they soon realized that these worries were unfounded because the funds will not finance consumption, nor are they for pyramid schemes, which have caused some problems in the region in the past". Indeed, financial services for enterprise creation support income-generating activities, and are therefore a significant instrument for economic development.

The ILO efforts to promote microfinance programmes in the region received another important boost in February 2005, when the European Union officially endorsed microfinance as a tool to fight unemployment. This decision is still news to many policymakers in the region, but is becoming increasingly well known. "Now there is more and more interest in these kinds of projects", said Deboos.

In focus: 2005, the Year of Microcredit

The United Nations General Assembly designated 2005 the International Year of Microcredit. The year has seen the launch of a wide array of programmes throughout the UN system to raise public awareness about microcredit and microfinance, while promoting partnerships and innovation among governments, donors, international organizations, NGOs, the private sector, and microfinance institutions (MFIs). Microfinance has already made a positive impact on the quality of life of millions of poor people by providing greater access to credit, savings, insurance, transfer remittances, and other financial services which would otherwise be unreachable.

But there is still a huge gap in the availability of services. As ILO Director-General, Juan Somavia, said at the launch of the Year of Microcredit, MFIs reach only 10 per cent of the world's poor today.

"Microcredit is about poverty reduction. And the ILO has a tremendous interest in microcredit precisely because fighting poverty is at the heart of our mandate", said Somavia. "Microcredit creates jobs. It promotes self-employment, livelihood, and it helps people expand their economic activities so they can hire others". It can also become an important part of the social safety net, and plays a critical role in empowering women.

The ILO is committed to building on the links between microfinance and decent work through its Social Finance programme. In countries where the ILO works to assist in attaining compliance with core labour standards, such as the abolishment of forced labour and child labour, microfinance initiatives have played a key role. They help replace family income when a child labourer leaves work and goes to school, provide poor workers with credit to avoid slipping into debt bondage, assist women who are vulnerable to human trafficking, and help migrant workers send remittances back home through secure channels while supporting the use of those remittances for income-generating activities.

For more information, see www.yearofmicrocredit.org.