Microcredit And Sme In Italy

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MICROCREDIT AND SMALL AND MEDIUM ENTERPRISES IN ITALY

Francesca Romana Armini

2009/2011

GLOBAL DEVELOPMENT AND SOCIAL JUSTICE MASTER PROGRAMME

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Introduction

The main purpose of the project is that of assessing whether the micro-credit in Southern Italy may represent an opportunity to implement a larger financial scale in order to improve the financial ability of the so called “active poors’” of the country.

In the last few years the phenomenon of “microcredit” has become a well-known concept, both in developing countries and in developed countries, as a tool of economic development aimed at supporting the emergence and development of a new micro-entrepreneurship.

• Particular form of credit;

• Small loans addressing poor individuals;

• No collaterals and guarantees;

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Microcredit: definition

These characteristics have enabled microcredit to become disseminated across

underdeveloped countries, and contribute to the emergence of micro-

businesses, self-employment projects and micro-activities in developed

countries.

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History of microcredit

Microcredit was born in Bangladesh in the second half of the ‘70s and was designed

by Prof. Muhammad Yunus in order to address “the poorest of the poor” and enable

them to access credit through the establishment of Grameen Bank.

Aims addressed by Yunus:

• Improving poor people’s quality of life• Providing equal access to decent work • Reducing social and economic inequalities• Reducing poverty

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Grameen Bank

Prof. Yunus created a milestone in the traditional system by establishing a bank of the poors, the Grameen Bank, which provided loans to the so called “non bankable subjects” and “active poors”: poor people usually not considered by the traditional credit system but willing to start new economic activities.

Differently from the previous credit system, Grameen Bank relied on the following principles:

•Poor people’s reliability;•Group’s solidarity;•Joint liability

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Microcredit and Grameen Bank’s success

Through microcredit it was finally possible to overcome the obstacles finance formally met in granting credit to the poors:

• Alleged insolvency;• Usury;•High unit costs of financing;•Inability to provide adequate guarantees;

For these reasons, microcredit soon became an alternative to the formal and traditional credit system and is actually spreading in many parts of the world to address a new range of customers, the active poors.

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The following are the most common forms of microcredit:

• Group lending: groups constituted by 5-10 entrepreneurs involved in processes of

reciprocal peer monitoring, where the insolvency of one of the members precludes

the other members to access credit;

• Individual lending: is the oldest form of micro-credit which looks at the individual as

the centre of the lending.

• Solidarity group: these loans address groups of 3-10 people who are all responsible

for credit in proportion to their share of loan.

Forms of microcredit

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Approaches to microcredit

Microcredit programmes are commonly identified according to the approach they

follow in providing services to customers:

• Minimalist approach: only based on the provision of loans;

• Integrated approach: the most common; it aims at providing customers with loans +

additional services, such as technical support and other financial services depending

on the specific needs of targeted groups.

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Microcredit is not only about money...

It must be noted that the role of microfinance is not only that of providing financial services for credit and savings, but also supporting development of small and medium enterprises (SME).

The following are additional services often provided:

•Business management services;•Technical assistance;•Marketing services;•Tutoring services.

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Evolution of microcredit (I)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Sub - Saharian Africa 377 455 613 740 811 919 994 959 970 935

Asia – Pacific 329 352 647 1075 1377 1603 1628 1652 1677 1727

Latin America – Caribbeans 141 152 193 230 246 261 388 439 579 613

Middle East - North Africa 14 16 17 23 23 30 34 30 30 85

Developing Countries Total 861 975 1470 2068 2457 2813 3044 3080 3256 3360

North America - West Europe 30 48 53 59 47 48 48 35 39 127

East Europe - Central Asia 34 42 44 59 68 70 72 18 21 65Industrialized Countries Total 64 90 97 118 115 118 120 53 60 192

Global Total 925 1065 1567 2186 2572 2931 3164 3133 3316 3552

The table below represents the evolution of microcredit programmes in the last years, depending on geographical area.There is a relevant difference between developing and industrialized countries, since microcredit programmes in industrialized countries represent almost 10% of microcredit programmes realized in developing ones

“State of Microcredit, Summit Campaign” between 1998 and 2007.

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Evolution of microcredit (II)

As we can observe from the table below, microcredit consolidated until 2005 and obtained a strong success in 2006 -2007. The table also shows a strong increase of interventions in North America and West Europe, East Europe and Central Asia as well as Middle East and North Africa.

The table below shows the comparison between the total number of people reached by programs and the number of poor people reached: this is an important indicator of microcredit ability to address poor people and reduce poverty level.

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Evolution of microcredit (III)

Years Programs numbers

Clients involved

Poor Clients involved

Poor Clients

involved (%)

1997 618 13.478.797 7.600.000 56,38%1998 925 20.938.899 12.221.918 58,37%1999 1.065 23.555.689 13.779.872 58,50%2000 1.557 30.681.107 19.327.451 62,99%2001 2.186 54.932.235 26.878.332 48,93%2002 2.572 67.606.080 41.594.778 61,53%2003 2.931 80.869.343 54.785.433 67,75%2004 3.164 92.270.289 66.614.871 72,20%2005 3.133 113.261.390 81.949.036 72,35%

2006 3.316 133.030.913 92.922.574 69,85%

2007 3.552 154.825.825 106.584.679 68,84%

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Microcredit and communication

Microcredit practitioners usually respond to poor people’s needs through special mechanisms and strategies customized to appropriately meet their needs, gain poor people trust and involve their participation in the projects.

As a consequence, communication plays a fundamental role in order to make a project successful and reach the following aims:

• Contributing to participation and social inclusion;• Enabling people to interact with one another;• Sharing ideas and information;• Building awareness and critical sense about the project and its challenges.

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Characteristics of communication

In order to make a microcredit project successful, communication should be:

• Customized to satisfy every population’s individual needs;• Precise and effective;• Understandable and clear;• Democratic and comprehensive.

In view of designing an efficient microcredit project, the following actions should be undertaken:

• Focusing on the problem;• Identifying beneficiaries;• Finding the solutions to incentivize change and progress and develop the project.

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Principles of communication

In order to rend the project’s outlines understandable to all beneficiaries, the following series of principles should be followed:

• The message should be “culturally and socially appropriate”: not too long and difficult;

• The message should be “translated” according to audience’s different knowledge and awareness level;

• The message should be positive: it should not create a sense of panic or anxiety about the problem.

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Brazil: a successful experience in terms of communication

In Brazil, the continuous introduction of information and ICT into financial services provided positive results in terms of productivity increase and business performance.

A network was established called “meso level”, actually understood as the ideal network for microfinance institutions to efficiently operate thanks to the following elements:

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Microcredit and women (I)

OECD states that microcredit programmes can provide women with the following essential benefits:

• Improvement of their role within the household;•Reduction of their dependency on men;• Access to community services and collective actions with other women;• Change in the perception of their role within the community;• Increase of women’s awareness of their fundamental rights.

According to IFAD studies, microcredit experiences concretely helped women to enhance their status in the following terms:

• Modification of gender relations within household and community;• Gaining of respect and decision-making power;• Creation of self-help groups performing as a protection against gender-based violence.

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Microcredit and women (II)

OECD suggested the following guidelines microcredit professionals should follow while developing a microcredit project addressing women:

• Identifying discriminatory legislation, negative attitudes and prejudices towards women;• Promoting women’s access and participation in the management and planning of the programs;• Ensuring that provision of credit is supported with additional business skills;• Identifying specific barriers and constraints;•Incorporating gender equality issues into training;• Implementing supportive social service to support women’s participation;• increasing the understanding of women’s economic potentialities both at local and international level.

In the light of these suggestions, several microfinance local programmes have been started both at European and national level to fight against women’s economic exclusion.

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Microcredit and health (I)

With the aim of extending to health care the success of microcredit, in 1993 Grameen Bank established in Bangladesh the so called Grameen Healthcare programme (GH).

Objectives of Grameen Healthcare:

• Promoting best practices in a wide range of health care services;

• Providing Grameen Bank’s borrowers and rural poor with quality health care services at affordable costs;

• Improving disease prevention, diagnosis and awareness.

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Microcredit and health (II)

Actions undertaken by Grameen Healthcare:

Establishment of 51 clinics, pathological laboratories,

pharmacies and emergency services

Training of young women in the village: they will be

encouraged to become entrepreneurs and operate house-to-house to spread

the use of new medical devices

Introduction of new IT tools for professionals, new medical devices,

education programmes and network for

professionals to share medical information

Establishment of nursing colleges for young women to receive education loans from

Grameen Bank: thanks to bachelors and diplomas in

nursing, they will enter local and international market

and will repay their education loans

Development of a new medical college and a

teaching hospital

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Microcredit and health (III)

In the light of Grameen Healthcare’s experience, other States are including health care services in the framework of microcredit projects. The following are two examples:

• The Banco Mundial de la Mujer provides health coverage together with credit loans

• Partnerships with MEDICOS and SER-CEGIN, to provide clients with free cards

Argentina

• Kenya Health Store Clinics created health franchises to target poor clients

• In 2001 Jamii Bora started to offer health care to its clientsKenya

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Microcredit in Europe (I)

In the last century also Europe saw the spreading of microcredit as a financial instrument able to engage poor people in productive activities and new businesses

Instruments to foster microcredit programmes in Europe:

•Tax incentives and business support services;

• Establishment of the European Microfinance Network (2003) which calls upon Member States to follow a set of guidelines to encourage microcredit:

Promoting self-employment; Supporting microfinance through training; Improving national legal and regulatory framework on microfinance. Providing additional services (business plan assistance, marketing and customer care assistance, legal advices)

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Microcredit in Europe (II): projects

Particular attention should be focused on two European projects aiming at promoting new forms of funding at European level:

aims at optimizing financial context in which SME operate

It betters SME access to funding and their guarantees instruments

Jeremieaims at establishing a legal and regulatory framework

It promotes new good practices, provides short and long-term loans and strengthens technical assistance

Jasmine

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Microcredit in Italy (I)

In Italy, people needs credit to respond to two fundamental needs:

• Social inclusion of the most vulnerable (in particular immigrants, women, young and unemployed people) •Promotion of self-employment and self-entrepreneurship.

At the same time, SME need credit to face several difficulties:

• Insufficient sales;• Increase of suppliers’ prices;• Irregularity of payments;• Indebtedness;

IMPORTANT: Small and medium entrepreneurship is a fundamental characteristic of Italian productive structure, thus microcredit could be an important instrument to improve them, especially in Southern Italy.

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Microcredit in Italy (II): focus on Southern Italy

Obstacles to growth in Southern Italy:

Usury

Economic weakness

Unemployment and illegal work

Low educational levels

Marginalization

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Microcredit in Italy (III): Cooperative Credit Banks

A solution to the problem of marginalization has been found in the establishment of the so called Cooperative Credit Banks.

•What is a Cooperative Credit Bank (BCC)?-Is a non-profit institution operating to enable vulnerable people to access credit, participate in socio-economical life and better their own self development;

• What principles does it follow?- Locality (support to families and enterprises);- Mutuality (provision of loans and focus on social utility);- Solidarity (promotion of reciprocal help between members);

• What about its structure?Cooperative Credit Bank is based on a three levels structure depending on different territories: local level, regional level and national level

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Microcredit in Italy (IV): Cooperative Credit Banks

What are the aims of Cooperative Credit Banks?

-Privileging immigrants and bettering their economic position, taking into consideration origins and elements characterizing different ethnic groups;

-Promoting growth of voluntary associations and non-profit organizations to facilitate social and assisting initiatives (for example, the Ethical Bank);

- Fighting against usury and financial exclusion.

What are its methods?

Cooperative Credit Banks follow the relationship lending method, characterized by a long term credit relationship based on reserved and confidential information shared by population and banks

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Microcredit in Italy (V): where is it?

Microcredit’s progress in Italy is actually constrained by several factors:

• Disinterest toward microcredit;• Lack of financial resources (often in Southern Regions);• Lack of a specific regulatory framework;

Anyway, since 2000 microcredit activities have really developed and several organizations became interested in it.

Italian National Committee for

Microcredit

RITMI (Italian Network for

microfinance)

Promotion of microcredit

activities

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Microcredit in Italy (VI): Classification of projects

The project started in Italy can be grouped into the following two categories:

Credit provision to enterprises

• Direct provision of small loans to non bankables

Loans addressing social economy

• Indirect provision through the intervention of non-profit organizations operating at social level and gathering funds to finance projects in the field of social and international cooperation

• S. Charles Foundation• Microcredit and solidarity

• Caritas and Ethical Bank

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Italian Caritas: an example of “loans addressing social economy”

Project in partnership between Caritas and the Ethical Bank

• Beneficiaries: Italian and foreign poor families

• Aims: Providing credit to face household’s needs

• Actions:

-Provision of 5.000 Euros (Ethical Bank)

- Provision of home, health care, financial and scholastic assistance (Caritas)

- Participation of Diocesan Caritas:

- Gathering information and institutional document to evaluate credit requests

Signature of an agreement with Ethical Bank

Establishment of a guarantee fund

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My project: overview (I)

I tried to develop my own project in Italy, taking into consideration the

fundamental characteristics of a microcredit project:

- Identification of beneficiaries;

- Individuation of promoters;

- Individuation of interventions

•Beneficiaries:

- Unemployed and jobless women

- Graduated and not graduated young people up to 35 years old

- Unemployed people up to 40 years old

- Immigrants residing in Southern Italy

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My project: overview (II)

•Promoters:

- Government (financing the project)

- Local entities in Southern Italy (management of funding)

- Ministries interested in the project (training campaigns and participation in the design of the

project)

-Nature of interventions: Providing credit and establishing new SME in the following sectors:

- Technological innovation

- Facilities and services for enterprises

- Environment

- Tourism

- Fruition of cultural, historical and archaeological goods

- Local services

- Handicraft

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My project: overview (III)

Finally, in order to verify that all beneficiaries meet the requirements to benefit from the

project, I identified some criteria to evaluate credit requests:

-Potential beneficiaries’ credibility, according to coherence between their professional

profile and the entrepreneurial activity to be performed;

- Market opportunities;

- Economic and technical efficiency of investments;

- Initiative’s economic profitability.

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Conclusions

It is possible to completely apply Grameen’s experience to Italy, where the success of

credit cooperation implies the possibility to start interesting initiatives addressing poor

people, unemployed people, women, immigrants (Caritas project)

Microcredit approach is different from the traditional ones, since it focuses on the

importance of dialogue between beneficiaries and microcredit institutions in view of

identifying the causes of insolvency and individuating new ways to overcome these

difficulties.

The success of microcredit demonstrated that poor people are reliable and solvent and

they definitely can better their lifestyle conditions in an autonomous way, not needing

policies of mere charity, but integrated policies which can enable them to redeem

themselves from poverty.

THANK YOU FOR YOUR ATTENTION

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