György Molnár Kiútprogram – A Social Microcredit Program for the Roma in Hungary With support from the EU A Way Out – and a Possible Way Forward Social Microcredit, Financial Inclusion and Self-Employment Kiútprogram Closing Conference 4 September, 2012 Brussels

Motto With adequate social opportunities, individuals can effectively shape their own destiny and help each other. They need not be seen primarily as passive recipients of the benefits of cunning development programs. There is indeed a strong rationale for recognizing the positive role of free and sustainable agency – and even of constructive impatience. Amartya Sen: Development as freedom

The vision of the program  Enable people living in deep poverty, primarily Roma, to become self-employed, by providing social assistance and financial services  Promote social mobility and Roma inclusion  Microcredit as a tool  Social impact vs. business profit  Benchmark: job creation, employment expansion programs  Aim: to create sustainable micro-enterprises 3

Why we choose social microcredit?  High employment level before system change, also for Roma  The Roma are the main losers of system change  Low education and employment level  Social exclusion, strong prejudice against Roma, segregated Roma areas  No investment in underdeveloped areas and for poorly educated  Failure of state initiated job creation programs  Low share of services and micro-enterprises in the whole economy, especially in underdeveloped areas  In this situation development of micro- and small businesses could be a viable step  national Roma strategies 4

The subject of the pilot – what can we learn?  To test the adaptation possibilities of the Grameen Bank model  Significant differences in the environment: Premature welfare state The capital demand of a new business is higher High level of taxes High level of bureaucracy Lower density of the poor Distrust in lending financial institutions 5

The launch of Kiútprogram  Initiated by Polgár Foundation in 2008  Feasibility study in 2009  Contracts with the Hungarian government  Kiútprogram became a pilot project of Pan-European Coordination of Roma integration Methods – Roma inclusion: self-employment and microcredit, EU DG Regio,  Field workers’ training started at the beginning of 2010  Three areas collapsed heavy industry agricultural crisis area of Budapest  First loans: September

Main features of the Kiútprogram model  Unsecured loans of relatively small amounts (max EUR)  Real interest rate around 10% (yearly), weekly repayment, 1 year loan period  Encouraging saving  Groups of 5 loan recipients, sequential lending (2 – 2 – 1)  In the formal economy: sole proprietors or licensed primary producers. Important difference from other models in the region.  Field workers play a much bigger role than in the original model –Support in preparing business plans, administration. –Support in the bureaucratic process  reduces discrimination –Support in debt management. Financial and business education.  Free of cost book-keeping  Welfare bridge We provide not only financial, but also social capital. The role of trust. 7

The correction of the model  Target group more attention to entrepreneurial capabilities ("entrepreneurial dream") previous informal business acitivities social connections more self-confident and optimistic clients  More flexible group formation  Shorter waiting time in sequential lending  More flexible loan period – but not enough, institutional constrains by the bank  Decrease in the amount of the loans  Introduce network building activities  good examples 8

Base performance indicators Settlements screened202 Persons screened (personal connection with field workers)900 Number of intake questionnaires447 Pre-groups60 Groups formed44 Settlements with formed groups38 Group-members192 Number of loan recipients (clients)138 Entrepreneurs75 Licensed primary producers63 Number of loan disbursements a 153 Value of total portfolio EUR 9

Performance indicators by batch 1st batch2nd batch3rd batchTotal/average Groups formed Loan recipients Still operates as entrepreneur Loan disbursements Average loan per person EUR1 832 EUR550 EUR1 825 EUR Average duration52 weeks43 weeks26 weeks 10

Repayment indicators for clients who received the loans before March 2012 Arrears per payments due, % Persons Still operates as entrepreneur Currently At the 120 th day after borrowing At the 180 th day after borrowing 1st batch nd batch Total8044 (95) a a All clients of the 2 nd batch not listed here and clients of the 3 rd batch still operate their businesses. Estimated survival rate: 60-70%

Estimated costs in the case of continuous operation o 300 clients o 20 field agents and 5 other staff members o continuous training, legal support, external communications o bookkeeping for the clients o transportation, communication, etc.  gross operation costs: 210 euros per month per client  net operation costs (without taxes): 130 euros/month/client o estimated lending loss 30%, average loan 1800 euros  total net cost of continuous operation: 175 euros/month/client The cost per client is basically equal to the cost per person in the public work programmes. 12

Main lessons learnt  Inclusive social microcredit is an adequate self-employment generating tool for poor Roma having entrepreneurial dream and skills. However, it is not universally conducive to reduce poverty  Capable of promoting social mobility and creating sustainable micro-enterprises. Its efficiency is better than the efficiency of public works.  This type of intervention, supplemented with production network building, appears to be capable of strengthening social cohesion and advancing integration.  Such programme is impossible to be implemented without the intense, continuous presence of field workers. 13

Lessons learnt in group formation  The original group based model works only in the case of very strong community  Without strong community sequential lending can be dysfunctional  However, group lending has great advanteges to individual lending even without seqentiality: Group provides security and protection Helps exchange of experiences Facilitates field workers' activity 14

Lessons learnt in lending process  A microlending project can only be successful if the bank/the institution technically administering the loans is fully cooperating  More flexible loan products are needed  The one year long duration of the loan is sometimes too short  Retailers would need classic current assets loans following the initial investment  Saving is crucial 15

Policy recommendations 1 Efficient social microlending is only possible with committed state involvement. To successfully operate a social microcredit programme, a predictable regulatory environment is needed. It is necessary to provide normative support to become an entrepreneur to previously unemployed new business owners. It is necessary to provide an allowance for taxes or contributions payable when people with low education level are employed – including self-employment. European and national regulations must be modified in order to also extend support for social contribution / tax allowances to agricultural entrepreneurs (primary producers), at least in the disadvantaged regions. 16

Policy recommendations 2 Financial services by the banks available to the poor should be encouraged. Social microcredit should be harmonised with the national regulation of the financial and stock market. The national states must encourage large corporations to support social microcredit as part of their corporate social responsibility (CSR) programmes. It would be necessary to further strengthen the organisational structures and tools that could secure efficient counteraction against discrimination of the Roma. The administrative burdens of becoming an entrepreneur should be reduced; the entrance barriers should be removed especially for micro- and small enterprises. Specific training programs meeting output (and not input) indicators 17

Policy recommendations 3 A specific initiative for inclusive social microcredit should be announced at EU-level. Inclusive social microcredit programmes should be multifaceted so that they can also provide social and networking capital in addition to traditional micro loans, including: –Continuous mentoring. –At least basic professional training opportunities; –Training in community development and networking; –Financial and business administration training; –Business network development. Before scaling up the programme in multiple countries, conducting pilots are essential, for which the tender framework needs to be setup by the EU. Monitoring and impact evaluation built into operating procedures and supported / audited by an external party are necessary for both pilots and regular operations 18