Sant Cosme Innova
Financial lifebelts for excluded communities
Deprived industrial neighbourhoods, like Sant Cosme in Barcelona, can be found in most European cities. Restructuring in these areas has often cut the number of job opportunities dramatically for local people. In Sant Cosme, unemployment rates stand at around 25%, but the area still acts as a magnet for migrants, who make up nearly two-thirds of the population. Many local residents are forced to survive through a combination of social security payments and the submerged economy.
This is the context in which the EQUAL project called Sant Cosme Innova (Sant Cosme Innovates) decided to test a particular blend of microfinance and business support as a route out of social exclusion. According to Henry Mcleish, ex-deputy prime minister of Scotland, the problem for the people in these kinds of areas “is not so much the overall availability of money but the kind of money on offer”. The key issues are “why the disadvantaged need specific kinds of money; how to ensure that traditional finance providers work together with other actors and how to ensure the economic viability of the cooperation". This message has already been recognised by the European Council which, in March 2003, for the first time, stressed the importance of microcredit. However, despite this commitment, most of the 1 billion euro risk capital schemes financed through the structural funds goes to the higher end of the market. This is why it is so important that the Commission has proposed to make finance for microcredit eligible under the next round of the European Social Fund as it places greater emphasis on social inclusion.
The main financial partner in San Cosme Innova is the Fundació Un Sol Món, part of Caixa Catalunya, Spain’s seventh-largest financial institution. Through the project they have shown how financial engineering and financial expertise can be brought in to strengthen policies for the comprehensive redevelopment of urban communities facing multiple forms of deprivation.
The project provides insights into how the Social Fund can work in tandem with financial institutions, local authorities and NGOs to build more sustainable jobs for groups such as women and ethnic minorities. This is the only case of EQUAL funds directly being used to invest in microcredit in Europe and in this sense it provides important lessons for the future.
Sustainable tools for community development
Angel Font, director of Un Sol Món, says: "Nearly five years ago we identified a market gap - in the sense that there were many people with good business ideas - but without the collateral required to obtain a conventional loan”. As a result the Foundation launched a microcredit fund. This can now boast of having created more than 1,000 jobs, of which 50% have gone to women and 50% have gone to ethnic minorities. In total the fund has made around 600 loans, worth in total 6 million euro.
According to an impact evaluation among the clients of Fundació Un Sol Món, 80% have improved their economic conditions and 70% consider that the microcredit has provided their business with greater stability. This is the case of Maribel who had worked as a hairdresser for eight years, mostly in the informal economy. Two years ago she obtained a microcredit from Un Sol Món to open her own hairdressers. She says “I am very happy with the business. I have hired two workers and I am planning to open a new hairdressers in El Prat de Llobregat”.
Nine-tenths of the initiatives supported by the microcredit fund are still in business after one year and defaults are within normal commercial levels. However, even if a small proportion of the loans are not repaid, the vast majority of public and private investment returns to the fund after a period and becomes available for further rounds of lending. Isabel Pagonabarraga, the fund manager argues that “the public investment helps to create a long-term and sustainable tool for social and community development rather than a one-off gain as happens with most grants”.
EQUAL’s role in all this was to provide contribution of 150,000 euros of capital which was matched by Un Sol Món to earmark a specific fund of 300,000 euros for direct financial support to business in this particularly deprived neighbourhood of Barcelona. The loans provided through EQUAL are directed at people in St Cosme who are far further from the labour market than most clients.
According to Isabel Paganobarraga, “more than four-fifths of the clients of EQUAL have an income under 15,000 euros a year, a much higher proportion than our clients in general.” She argues that “EQUAL allowed us to test out more flexible methods required for extremely deprived neighbourhoods, groups such ethnic minorities and people in the submerged economy. Since then we have applied many of these methods across the rest of the fund.” An example of a typical client is a woman, also called Isabel, who was looking after two children on her own. This made it impossible for her to get a regular job. The microcredit provided by EQUAL allowed her to open a tapas bar which offered her more flexibility to earn an income and support her family.
Finding out about the financial gaps and testing new products
Although it may seem surprising, one the main problems reasons for the financial gap at the lower end of the market is that most financial institutions simply do not know much about the real financial needs of the most socially excluded people. So in order to find out more about the needs of their potential clients, the EQUAL partnership carried out a survey of local people without stable employment. Eighty per cent of them expressed interest in self-employment, but none could provide security for a loan and all required non-financial support in setting up a business.
They found that access to banks was not only difficult because of lack of collateral, but also because excluded people lack the confidence and experience to negotiate with banks. They are used to being the recipients of social benefits, not the clients of financial institutions. When a hairdresser that set up a business in Sant Cosme was asked about the difference between Fundació Un Sol Món and a normal bank she said: “with banks it is very different. Fundació Un Sol Món is there to help you, banks have very different aims."
Un Sol Mon was also able to build up a better understanding of the overall financial of its clients' situation through close discussions with social services and the personalised programme of advice carried out the other project partners. This allowed its clients to present a viable plan for income-earning activity, however modest. The EQUAL partnership also spread the word about microcredits through a series of community briefing sessions. This was the first time that a financial institution has actually gone out to meet the residents of a socially excluded neighbourhood like San Cosme. Angel Font says: "It is amazing how people grow in confidence when they feel that they are being treated like a the serious clients of a financial institution and not just like someone looking for a hand-out.”
With this information, Un Sol Món adapted its products to the financial situation of the client. The basic product offered was a smaller and more flexible loan from as little as 600 euros to a maximum of 15,000 euros (average 8,000 euros) with a fixed 6% interest rate. The specific terms of the loan were tailored to the needs of each person by using step-lending methods. Loans were initially made for short periods and small sums of money but could be increased in a series of progressive “steps”.
The Foundation also started to experiment with peer-lending methods where small groups of people take responsibility collectively for a loan. However, the lack of organisation and social capital in the area severely limited collective approaches.
No collateral was required. The only guarantee was the solidity of the business plan prepared in conjunction with the Pla d’Actuació de Sant Cosme, the EQUAL leader specialised in providing business support and guidance to disadvantaged groups. In fact, one of the main lessons of the project is that the finance in these kinds of areas must be backed up with a sensitively designed package of mentoring and advice. For example, they found that traditional business plans were too complex for people in such difficult and diverse situations.
The business advisor at Pla d’Actuació de Sant Cosme commented that the people who came to them for information were in such vulnerable position that “they could not wait around for months to prepare a business plan.” He reported that many entrepreneurs who where interested in self-employment got discouraged when asked to investigate suppliers, or to compare their pricing list with that of competitors. “We had to simplify all procedures and requirements in order to adapt them to the, most excluded communities. We focussed on building skills through in-house training, while, at the same time, accompanying and helping the new business." They developed a simplified form which allows them to collect and evaluate all the relevant financial information about the business idea. The partners argue that far more needs to be done to develop new more suitable business planning methodologies for disadvantaged groups and particularly those with one foot in the submerged economy.
Un Sol Món also developed a new programme of financial capacity building for its clients, to help them stick to the “steps” associated with the loans and to use the finance as an investment rather than just a one-off hand-out. Before receiving the microcredit, one-third of the entrepreneurs from Sant Cosme were previously on social security or receiving some form public subsidy. The microcredit helped them to escape this dependency on public money. Now they survive from their own business. For example, until she received a microcredit, Rosario had relied on social security to support her family. Now her travelling sales business is doing sufficiently well for her to employ her husband.
Nevertheless, despite the improvements in financial engineering and support, Un Sol Món found that many businesses were still too vulnerable to take the leap into the formal economy. As the result of EQUAL the local authority of Sant Cosme and Fundació Un Sol Món made a series of recommendations for simplifying the administrative procedures for becoming self-employed, and making it possible to pay the cost of setting up a business in stages. They believe that finance and business services also need to be backed with more progressive tax regimes which facilitate the transition from the informal to the formal economy, extension of unemployment benefits during the early stages of starting a business and changes to the legal situation of migrant workers.
Private finance in partnership with the public sector
Sant Cosme Innova is made of a local authority, Pla D’actuació de Sant Cosme, two trade unions, FIAS (an NGO specialised in providing employment advice to disadvantaged people), a cooperative and a large financial institution (represented by Fundació Un Sol Món). This division of labour between the partners of the project provides a model for microfinance initiatives in Spain and Europe more widely.
Fundació Un Sol Món, which belongs to the Social Work department of Caixa Catalunya, provides the specialised financial expertise. They argue that it is very important to run this as a professional financial concern and not as a charity and insist that it is possible for the operation to become viable in operational terms even with socially excluded clients. FIAS provides the expertise in the mentoring pathways required to support disadvantaged groups into self-employment. This kind of support is more labour intensive and more expensive with excluded groups and tends to require a permanent level of subsidy. Nevertheless the support tends to be far less expensive than unemployment benefit.
The local authority of Prat de Llobregat is responsible for the overall development of the neighbourhood and provides the public legitimacy for accessing the structural funds required to set up the microcredit fund. It maintains that one of the main conclusions of the EQUAL project is that “to reach the most excluded members of society, it is necessary to gain the support of the community organisations that represent them”.
So the EQUAL partnerships have been used as an ideal tool for bringing in the necessary skills to create complex packages of both financial and business support. The partnership has also been useful for bringing financial institutions closer to disadvantaged clients through joint work with social services and other frontline support workers.
Contact: Paula Veciana
Telephone: +34 93 484 5881
National partners: Ayuntamiento El Prat de Llobregat, Fundación Un Sol Mon, Fundación FIAS, ADIGSA, Generalitat de Cataluña, Sant Cosme Innova (Spain UGT del Baix Llobregat, Union Comarcal Baix Llobregat del Sindicato CONC
Transational partnership: TCA 927 Echange d’expérience: création d’entreprise dans les quartiers en difficulté (ADIE, France).