How microfinance develops decent work

GENEVA (ILO News) – Rukhiya is proud of her Punchiri Catering unit. She named it, owns it and runs it, and has been doing so for more than eight years in the Vadanapilly area of Thrissur, India. Her business, like so many throughout the world, is unregistered.

Todzhigul was born and grew up in Dushanbe, Tajikistan. She is a single mother of four striving to earn a living to sustain her family. The sewing workshop she was running faced problems and closed down.

Hurmat-Razia makes bangles in Hyderabad, Pakistan. All her family members are involved in the business. When a health problem stopped her mother-in-law from working, she felt she had no other choice but to take her young daughter out of school so that she could help out.

Poschetty is a dairy farmer from Pulkal in India. He and his wife have six buffalo that produce 20 litres of milk per day which he sells to earn a living. He finds the work difficult and sometimes dangerous.

Like Rukhiya, Todzhigul, Hurmat-Razia and Poschetty, entrepreneurs in the informal economy, and the employees that work in those businesses, are often exposed to difficult and dangerous working conditions. The tools used to identify, prevent and rectify such conditions in the formal economy – including social dialogue between employers and employees, labour inspection and other applications of labour law – generally do not apply to the unregistered enterprises such as the ones cited. Alternative approaches are required to help these entrepreneurs, but what can be done, and how?

Financial institutions as pathways to Decent Work

New ILO research backs up the idea of reaching and helping these businesses through microfinance institutions (MFIs): Microfinance for Decent Work – Enhancing the impact of microfinance: Evidence from an action research programme  was led by the ILO’s Social Finance Programme in collaboration with the University of Mannheim in Germany.

In many emerging markets, MFIs have significant outreach, providing financial services to thousands, if not millions of small and micro enterprises. Since their primary relationship with these entrepreneurs often involves an enterprise loan, they were able to use that leverage to improve conditions in the business.

From 2008 to 2012 the ILO collaborated with 16 microfinance institutions to test a range of approaches to foster social impact through the delivery of innovative financial and non-financial services.

Eliminating child labour, fostering the formalization of enterprises, reducing vulnerability and enhancing business performance through improved working conditions – these are decent work objectives that MFIs addressed in the framework of the “Microfinance for Decent Work” (MF4DW) action research programme.

The financial institutions developed an innovative way to address the decent work deficit that most affected their clients during a pilot study. Three MFIs launched a new financial service, nine introduced a non-financial service, four offered a package of financial and non-financial services, and one restructured its operations.

The impact studies showed that all innovations affected the target outcomes; however, not all with the same intensity and not always in the intended direction.
The results highlighted one key message: that MFIs can achieve desired results if they identify an issue and then focus on that area to help their clients.

Remarkable results

• Child labour: Hurmat-Razia’s daughter is not likely to be taken out of school again to replace a family member at work because the National Rural Support Programme (NRSP) tested an enhanced health microinsurance product that covers the entire household. Indeed, this expanded insurance coverage decreased child labour incidence for boys and girls by almost 7 per cent and lowered the risk of hazardous occupations by 5 to 6 per cent in Pakistan.
• Business Performance: With a start-up loan of US$1,700 and enhanced business knowledge through the entrepreneurship training (both provided by IMON), Todzhigul opened a rapidly expanding food store. The package of women entrepreneurship training and start-up loans resulted in increased self-employment and business expansion for female microentrepreneurs in Tajikistan.
  Poschetti and his wife took part in training on Occupational Safety and Health (OSH) and productivity organised by BASIX. As a result, he built a shed to protect his animals from the wind, sun and rain, which led to a 35 per cent increase in their milk production. In India, training on productivity and OSH resulted in an 11 per cent reduction of work-related injuries and greater productivity, netting an increase in monthly income of US$37.
• Formalization: Rukhiya is proud that she was one of the first to register her business after she attended ESAF’s training programme on formalization. The ESAF team showed their clients the path to formalization by guiding them throughout the registration process, including support in processing their application forms and getting the relevant documents. ESAF’s interventions increased formalization awareness by 93 per cent and formalization itself by roughly 70 per cent.
• Vulnerability: By introducing an emergency savings product, the Negros Women for Tomorrow Foundation helped its clients in the Philippines reduce their indebtedness. As a result, there was a 7 per cent drop in repayment difficulties, and the incidence of having to take a loan in order to repay another one was reduced by 22 per cent.

By sharing the positive findings and experiences from this action research project, the ILO hopes microfinance practitioners, researchers, policymakers and donors will look for innovative ways to help more entrepreneurs and their workers to experience decent work.