Compendium 2.3.4 Partnerships with banks
back to Compendium 2.3 Finance
2.3.4. Partnerships with banks to access finance and financial services'
Although until the current "credit crunch" our societies appeared to be awash with credit, certain groups have particular difficulties in accessing finance and financial services. For the self-employed and micro-enterprises this can be a considerable barrier.
Banks are both the solution to this form of financial exclusion and sometimes its cause. Financial exclusion takes place where people encounter difficulties in accessing and/or using financial services and products in the mainstream market that are appropriate to their needs and enable them to lead a normal social life in the society in which they belong (see Anderloni, B., Bayot, B., et al., 2008). Partnerships with banks have developed to find ways of improving access to finance.
How EQUAL has approached the issue – examples
Partnerships with banks
Partnerships with banks have been a major way of promoting access to finance. These partnerships are formed for different reasons and in particular:
- To help potential business borrowers to access bank credit by providing business support and ways of minimising risk through ‘packaging’ the loan (examples Association pour le Droit à l’Initiative Economique (ADIE) in France, Associação Nacional de Direito ao Crédito (ANDC) in Portugal;
- To help the banks to adapt their products to better meet the needs of target groups, for example women borrowers;
- To work together with the banks to provide new services – such as financial literacy and debt crisis advice, delivered either by independent NGOs or by the banks themselves.
These partnerships have normally been developed as a result of sustained efforts by NGOs at national level including with microfinance organisations and other organisations concerned with the issue.
Successful approaches to access to finance have tended to involve complex partnerships and the involvement of three parties: the government, banks, and business support and microfinance organisations. Their respective roles are as follows:
- Governments and regulators: developing responsible lending legislation, detecting and deterring illegal lending, commissioning studies on financial inclusion, putting pressure on banks to develop new products, providing financial services directly, providing funding;
- Banking sector and microfinance providers: developing adapted financial services through the provision of basic bank accounts, increasing access to affordable credit, saving and insurance products;
- Community-based organisations in partnership with banking sector and/or public authorities: outreach, providing financial education and advice to financially excluded groups, following up specific financial products (e.g. microcredit), raising awareness of the financial needs of certain groups.
In the United States the Community Reinvestment Acts (CRA), which were reformed in 1995, have played a key role in stimulating the partnership between banks and community development finance institutions. The CRA was originally introduced in an attempt to combat mortgage 'red-lining' in major cities – a practice by which banks would not lend to minority households. Under the act banks are obliged to disclose their lending in disadvantaged neighbourhoods and are also encouraged to play a proactive role in helping to develop community-based financial services. Chicago-based Shorebank is a model institution that has developed with support from CRA and the local banks. It lends for house purchase and maintenance, as well as for personal and business purposes.
Basic bank accounts
In some countries (Netherlands, UK) commercial banks, under pressure from public authorities and social sector organisations, have developed simple, low-cost transaction bank accounts to meet the needs of people on low and unstable incomes. In others (Norway, France, and Belgium) the right to a basic bank account is guaranteed by law.
In the Netherlands, the development of the basic bank account was stimulated by the Salvation Army, which pushed for an account that could be offered to the people they assist. Following negotiations with banks and the Finance Ministry, this became a wider national initiative. Similarly in Belgium Dexia Bank, in collaboration with public authorities, has developed a bank account for the Public Centres for Social Action of the Belgian municipalities (CPAS/OCMV) to enable local authorities to help disadvantaged people to access full range of transaction banking services and an overdraft facility of €20. The annual charge for these accounts is paid by the CPAS/OCMV, and nearly 51,000 have been opened. In Poland, work undertaken by the Polish Banking Association (ZBP) promotes non-cash payment methods including mobile telephony and bill payment at supermarkets. In the UK the major banks launched a range of basic bank accounts for bill payments and direct debits.
Access to credit
In Spain, Obra Social de Caixa Catalunya, Spain’s seventh largest financial institution, in partnership with Fundació Un Sol Món, has led a programme to deliver microcredits to entrepreneurs without access to mainstream banking and lacking conventional collateral. During 2001-2008 it granted more than 1,500 loans. In Sant Cosme, Barcelona, the project has packaged its loans so that women and members of ethnic minorities have been targeted. In Poland, the Związek Banków Polskich (ZBP) has promoted loan guarantee funds and micro-finance institutions to support micro-enterprises. Poland also has the largest membership of credit unions in the EU and these organisations provide a wide range of financial services including saving and borrowing facilities and also insurance.
In Germany, the Deutsches Mikrofinanz Institut (DMI) is the direct result of the experience of a number of EQUAL Development Partnerships and particularly of the National Thematic Group they set up on "finance for start-ups". The DMI aims to build on existing projects in order to develop national solutions to what is generally considered to be an important financial gap at the lower end of the financial market for start-ups.
Unemployed people are responsible for just over half of business start-ups in Germany. Based on their own experience and an analysis of the situation in other European countries, EQUAL projects argued that there was still an unmet need for smaller, more gradual financial instruments closely linked to specially adapted business support. As a result 22 microfinance institutions have sprung up in Germany over the last few years with the financial and technical support of Deutsche Bank-Stiftung and GLS Gemeinschaftsbank. However, many of these initiatives are extremely small (less than a 100 loans a year) and have great difficulty in achieving sustainability. The DMI was set up in order to respond to this challenge.
At EU level the European Microfinance Network brings together most of the European microfinance players, be they microfinance institutions, foundations, consulting companies or others. The EU has launched a Microfinance Initiative called JASMINE, to stimulate work between banks and the microfinance sector. It will start active operation in 2009. The initiative has three main areas of interest
- it invites Member States to adapt their national institutional, legal and commercial frameworks to promote a more favourable environment for the development of microcredit. This should make changes to their National Reform Programmes under the Lisbon strategy for jobs and growth, in order to set themselves meaningful targets in this field.
- setting up a new European-level facility with staff to provide expertise and support for the development of non-bank microfinance institutions in Member States. This would equip microfinancers to offer not just loans, but a service mentoring the borrower to help develop and ensure the success of their business. This kind of accompaniment is the key to the success of microcredit operations.
- setting up a microfund in the new facility to find more capital for microcredit providers. This would help finance the loan activities of microfinance institutions which can also expect to draw in contributions from a range of investors and donors. The European Investment Bank (EIB) and the European Investment Fund (EIF) have expressed interest in running this facility.
The new initiative will build on pilot initiatives in which the EIF has supported microfinance, for example by working with the Prince's Trust in the UK and ADIE in France. In the United States and developing countries there has been a growing role for private banks as well as development banks to securitise and refinance the loan books of microfinance institutions thereby freeing them to grow and reach more people.
There appears to be considerable potential for the ESF to co-ordinate with the other funding instruments to provide training and build capacity in microfinance institutions, to provide accompanying measures such as business support and coaching to entrepreneurs and to raise awareness in Managing Authorities of the role of microfinance as a pro-enterprise policy measure.
Recommendations for mainstreaming policies
Developing initiatives with banks is a complex business. Organisations such as the European Microfinance Network can help local organisations by organising exchange visits and also publishes good practice in many fields of access to finance. In the Member States organisations such as banking federations have been a useful intermediaries.
The US experience of the Community Reinvestment Act suggests that regulation over the disclosure of bank lending could lead to major advances in co-operation between banks and other organisations to combat financial exclusion. Enabling legislation such as the CRA could radically stimulate the corporate social responsibility work that banks already do – especially their work with microfinance institutions.
EQUAL has demonstrated that there are many opportunities for the ESF to participate in funding access to finance initiatives.
Small microfinance and advice projects fragment the market and find it hard to grow to scale. Donors and banks need to develop funding strategies for identifying and growing microfinance organisations of a significant size in partnership with banks to ensure that potential is maximised.
The EU microfinance initiative offers a major opportunity to grow microfinance partnerships with banks and to scale. This will require understanding of models as well as discipline and concentration from the funders to ensure that the market does not develop in a fragmented way. For the future the refinancing potential of banks will be key to growing access to finance for target groups.
Links to EQUAL case studies
- ADIE (F): http://ec.europa.eu/employment_social/equal/practical-examples/entrep-07-proxy_en.cfm
- Sant Cosme Innova (E): http://ec.europa.eu/employment_social/equal/data/document/etg2-suc-santcosme.pdf
- Community Reinvestment Act (CRA): http://www.ffiec.gov/cra
- Community Reinvestment Act: http://www.wikipreneurship.eu/index.php5?title=CRA
back to Compendium 2.3 Finance