UĦM Voice of the Workers eMagazine issue 12

VOICE OF THE

WORKERS ISSUE 12 MARCH 2014

EDITOR’S NOTE JOSEF VELLA

Contents An example to follow

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Vital access to microfinance

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Helping People Help Themselves

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Credit Unions: 360o social finance 08 Micro Credit for the creation of fair wealth 09

Malta needs Credit Unions and microcredit!

Micro-credit Moving towards recovery through easier access to finance 10 Micro Credit in the European Union 11

WELCOME TO ISSUE NUMBER 12 OF THE VOICE OF THE WORKERS E-MAGAZINE! This issue deals with a subject that might not be familiar with many in Malta. However, this does not mean that it is any less important.

Rather, it presents an opportunity.

Malta needs to develop all the tools it can use to combat poverty and give people a fair shot at life. One of these tools is access to finance. Credit Unions can do just that. They are not really substituting the role of commercial banks, as commercial banks make access to microfinance inaccessible through the need for collateral and high processing fees. All over Europe, Credit Unions provide access to savings and micro-finance to millions of households, many of VOICE OF THE

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whom would fall into the poverty trap had they not had this access.

Sometimes, access to finance may involve a small bridge loan that helps a family cope between one month and another. It could help a poor family provide some equipment needed for the training of their children, or a small loan for house repairs.

Micro finance is, by definition, small amounts; but they make a huge difference.

Malta needs Credit Unions. And in order to develop them, we need to remove all the obstacles to their entry. After all, they are socially beneficial financial institutions. This can primarily be done through changes in

legislation. It does not make sense to have a regulatory and tax regime that is identical to those of commercial banks. There are also opportunities to give space to Credit Unions being set up as social cooperative enterprises.

We also need the necessary awareness and education. We need to become aware of the importance and benefits of social enterprises in the Maltese economy, and their crucial role alongside those whose remit is solely commercial. At present, social enterprises are at a disadvantage. We need to work together to give these enterprises the importance they deserve. Our people deserve it. Enjoy!

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PICTURE STORY

An example to follow Credit Unions have been providing assistance as credit co-operatives to their members in the United States for more than a century. Even in Europe, Credit Unions serve millions of households and are a major tool in the fight against poverty. Easier access to microfinance as well as a culture of saving, are essential to many people. In Malta, we do not have a history of such organisations, and our legislation is not equipped to cater specifically for them. The United States, a haven of the free market economy, has recognised the need for these co-operative enterprises. It is high time we do too!

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FEATURE STORY

Vital access to

microfinance Poverty can be defined as the state of one who lacks a certain amount of possessions or money. Relative poverty is defined as economic inequality in the society in which people live. A cruel consequence of poverty is the poverty trap, where individuals find it difficult to better their fortunes through lack of opportunity or lack of skills. To combat this, we have an organized system of welfare which provides a comparative safety net. Although the system of handouts is sometimes essential, we are also moving into a culture of a welfare system that provides a way out of poverty through effective tools for self-help.

Research shows that one of the reasons for the difficulty of breaking out of the poverty trap is lack of access to finance. The VOICE OF THE

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traditional banking system is there to make profits and maximise shareholder returns. Commercial banks are seldom a solution for poor people, as their loans are not necessarily sizeable, and charges to take out microfinance are normally prohibitive.

Credit Unions are a direct and effective instrument in addressing poverty. They provide poor people simpler and cheaper access to finance, giving them and their families the chance at a fair shot in life.

Credit unions started in Europe during the beginning of the 19th century. Franz Hermann SchulzeDelitzsch established the first credit unions in the 1850s in Germany to give those lacking access to financial services the opportunity to borrow from the

savings pooled by themselves and their fellow members. Friedrich Wilhelm Raiffeisen transported the financial cooperative concept to rural Germany a decade later.

In Europe today, credit unions are in operation in different countries, including the Republic of Ireland, Estonia, Romania, Poland, the United Kingdom and Macedonia.

They support thousands of communities, and provide more than 7 million households in Europe with affordable financial services.

There is also the resounding success of the Grameen Bank, a project put forward by Professor Muhammad Yunus in Bangladesh.

Yunus founded the Grameen Bank and pioneered the concepts of microcredit and microfinance.

In 2006, Yunus and the Grameen Bank were jointly awarded 3

the Nobel Peace Prize “for their efforts through microcredit to create economic and social development from below”.

In Malta, Malta Microfinance, founded in November 2013, under the patronage of the President of Malta. has just started micro-lending to immigrants and disadvantaged Maltese women for business start-ups, education, and lodging. It is still in its infancy, but the prospects are bright. However, Maltese legislation is unfortunately not on their side. The current Financial Services legislation does not cater for the development of these financial institutions. Micro finance organisations and Credit Unions have to conform to the Financial Services Act and become a financial Institution, paying considerable sums of money for registration and yearly license at par with large commercial banks.

Malta has a lot to gain from the establishment of credit unions.

These can be instrumental in helping people break the poverty barrier and help them help themselves. Through Jobs+, the social partners have agreed to move away from the culture of welfare handouts, and move into a culture of providing tools for selfhelp. Credit Unions do just that.

They provide a culture of saving, as well as provide micro finance for projects that are important either for their daily lives, or for projects geared to better their future.

It is surprising how in Malta, where we can boast of a thorough system of social services, there is no tradition of credit unions. It is high time that this crucial financial instrument be formally introduced and encouraged within the Maltese economy. It is good to talk about financial services, big banks and capital flows. But financial

services should also have a social dimension.

A lot can be done on the legislative aspect. Credit Unions should not just be legally recognized, but should not be forced to become limited liability companies and made to pay such exorbitant fees. Moreover, they should also be able to incorporate as cooperatives, governed also by the Co-operative Societies Act. This will help in having a social co-operative business that, by its very nature, has a social soul.

We can really do something about this. Now is much better than later.

The Malta Microfinance project is showing us that not only can micro credit work in Malta, but Credit Unions can also be successful and effective in helping people out of poverty to be able to enjoy the opportunity of a healthy, prosperous, and successful life they all deserve as human beings.

Credit Unions provide a culture of saving, as well as provide micro finance for projects that are important either for their daily lives, or for projects geared to better their future.

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INTERVIEW WITH PETER LLOYD, CHAIRMAN MALTA MICRO FINANCE LTD.

Helping People Help Themselves What is the idea behind Malta Microfinance?

Malta Microfinance was based on the concept of the Grameen Bank and the Muhammad Yunus model of giving loans to the poor. This helps transform the lives of the poor. It gives them a buffer and helps them get out of poverty. At the outset, we were of the idea that Malta Microfinance should have a savings dimension.

However, that was not possible since to take savings, you have to be a bank. What we have now done is that we bank with APS Bank, who have been very supportive of what we are doing.

They offered us a form of current account whereby our clients can open an account with no charges and no overdraft facility, and have a card for the purpose of deposit and withdrawal. This will help people get into the culture of saving.

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Microfinance institutions work on the principle of helping people help themselves through small loans and through repaymentsthe Microfinance Institution can then help others. On its part, how does Malta Microfinance increase its capital base?

This initiative is being funded by the Church of Scotland, and we will have a capital base of around 150,000 euro within three years.

The intention is clear: you lend money to a person to start a small business, they repay, you lend to somebody else, they repay, and the cycle goes on. As long as you do not have bad debts, the system is sustainable. We are getting away from this culture of donating charity where we give, give and give, and the people take, take, take. This is a loan you have to repay.

Do you normally charge interest or is it interest free?

The initial intention was to support migrants. Had we charged interest, we would have had problems with some of their religious views. So what we have done is that we are offering it interest free, but we have a small administration charge. This may add up to 6% or 12% of the initial sum. This would equate to 24% APR. Given that the loans are unsecured, and given that the amounts are so small, this is very beneficial. It is important to point out that banks do not lend such low sums. Their charges would be huge. A good example that comes to mind is someone who wants to move into a flat, but needs to advance a deposit, rent and pay other charges. Normally, government assistance is paid after a few weeks. If they have no money, they would not be in a 5

position to get any accomodation.

We therefore lend the amount, just to get the person started. If government assistance comes in before the expected time, and the loan is repaid quicker, we repay back half the fee.

Commercial banks, with all their collaterals and guarantees, have their own default rates. Microfinance Instiututions lend money without any security. Are the default rates any different?

Around the world, with the Muhammad Yunus model, the

repayment rate is very high.

This is the point: the poor repay.

For example, a business loan normally payable over one year.

If the business struggles, we will approach the person and we extend the loan repayment for another year. So in this case, we would not be making a bad debt, but we would be extending the loan repayment period.

The same applies to loans for accommodation. They normally pay this from what they earn when they are in a job. Again, if something happens to their employment, we will wait until

they are in a position to repay us. When giving our loans, we make sure we understand how we are going to be paid. We also extend advice to people, especially in loans for business, and lend upon a good business plan. If the business plan does not make sense, then we do not issue the money. This further decreases the risk. We also lend to people who need training at MCAST, and get paid once these people are in employment.

Who do you normally lend to?

Our main focus group is to target poor women. This includes both Maltese and migrant women. In the case of Maltese women, we are looking at shelters such as Dar Teresa Spinelli, where our church currently gives lots of support, and similar hostels, where if a woman with infants is facing a domestic abuse situation she can move out of the hostel and into a flat with her children. What we do is that we lend them the deposit and first month’s rent and electric to get them started. If a Maltese woman is entrepreneurial, and has a good business idea, we will also give her support through business mentors to help her with the idea, and lend for that as well.

Is there any cap on the amount that can be lent?

Yes there is. Generally, the first loan is a few hundred Euros.

This could be enough for accommodation or for training at MCAST. Regarding training, we have just signed up a couple of migrants to do a course in welding. We gave them funds for their safety gear, as well as for the course itself. We believe that at the end of the course, there are good opportunities for these students to find a job since there is a demand for welders in the market. They could pay us back as soon as

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they start working. In the case of businesses, we tend to steer away from shops, as these tend to take up funds quite quickly. We look at an initial loan of around 500 euro, depending on the solidity of the business case, their experience, and whether they will be putting their own money into it. The maximum loan is 2,500 euro. If they need to expand, and they need more money, we advise them to go to the banks.

Is Maltese legislation friendly to the setting up of Microfinance institutions?

Not at all. To lend money you have to be a financial institution, and become a limited liability company. If you are a limited liability company you cannot be a voluntary organisation. To get a tax exemption, you have to apply to Minister of Finance. We did this, and to date, we have not heard from them. Banks who have millions of Euros pay as much as us to operate, that is 3,000 Euro, together with 2500 Euro a year for supervision costs. So far, our loans are in the hundreds, small money. The fees are escessive. We want to develop, but we cannot sustain these expenses. And when we voice our concerns on this, the response we get is that this is the law. We have got a whole mixture of expertise from the church, from the University of Malta, financial experts, together with many volunteers. We only pay a person working for 20 hours a week. Everything is donated for free, including the premises. Yet we have to pay all these expenses.

It’s really frustrating.

Can you see your services increasing with time?

We are currently in talks with government Ministers to look for opportunities to expand operations in such a way where we could help people such as poor women. We are ready to support as much as we can. We are currently in the first round of loans. Once the word gets out, I am very confident it will develop.

Do you have any relationships with other Microfinance institutions outside of Malta?

The Grameen Bank which began in Bangladesh, is launching its first operations in Western Europe, namely Glasgow. We have got regular contact with the Grameen Scotland operation, and this is done through the University, where they have a large scale operation there, running into millions of pounds.

How relevant do you see Credit Unions to the Maltese situation?

I believe credit unions are a wonderful tool. I don’t know why historically they are not yet developed in Malta like they have in, say, Scotland.

This initiative has come out of the Church of Scotland.

You are helping people who come from different religious denominations and faiths (as migrants are often Muslim).

Yes, that’s true. We are not using this in any form to try to convert people to our faith, but rather, this is simply a reflection of our belief and our drive to serve others. I personally went to Bangladesh in 1991, with the charity Christian Aid,

and saw micro-finance happening with a tea-shop belonging to a widow woman. With the help of micro-finance, she opened this shop, repaid the loan, and there I was, drinking a cup of tea in this shack . Had she not had that loan, she would have been a beggar.

She never got a loan from a bank, but set up this tea shop through micro finance. She is now getting her second loan to open a coffee shop as well, and it was a success story. These stories inspire you and convince you that micro-finance is a fantastic solution. When three years ago, we were given the opportunity as a church to apply for funds from Scotland for a specific project, we already had a long tradition in Malta of helping migrants in different centres. At that point we knew we needed to go beyond straight charity and do something more to improve the lives of the poor in Malta. We talked to different partner NGO’s in Malta, and rather than duplicating what these organizations were doing, we thought we could do something that complements all our efforts.

And it developed from there.

This could be something that can really catch on, right?

I really think so. We have focused on business, which is the Grameen version , and as well as eduaction.

If there are other needs, and we are convinced that they we can be repaid, then we will happily support it. Our numbers are still small. But even now, knowing that you are taking somebody effectively out of poverty is fantastic. This is not charity. It is the poor effectively helping themselves.

Mr. Lloyd was interviewed by John Mallia For more information on Malta Microfinance, you can log on to www.maltamicrofinance.com You can also access the Malta Microfinance page on Facebook

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CREDIT UNIONS

Credit Unions

360 SOCIAL FINANCE O

What is a credit union?

A credit union is normally a cooperative financial institution in which individuals pool their money to provide loans and services to other members.

Although they are called credit unions, they do not just provide credit, but also savings deposits.

How does it work?

Because the users and members of the cooperative are the same people, the idea behind credit unions is that they provide services that are tailored to the people who use them, rather than to driving profit for the institution.

Without outside owners demanding increasing profits, the credit union should provide great services at a fraction of the cost.

What is the difference between a credit union and a bank?

Credit Unions are normally local, they do not charge the fees banks do on their services, and are more geared to microfinance than on big loans. Also, credit unions have the social dimension as their raison d’etre, whilst commercial banks have profit as their main priority.

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CREDIT UNIONS IN EUROPE What is the Grameen Bank?

The origin of Grameen Bank can be traced back to 1976 when Professor Muhammad Yunus, Head of the Rural Economics Program at the University of Chittagong, launched an action research project to examine the possibility of designing a credit delivery system to provide banking services targeted at the rural poor. The Grameen Bank Project (Grameen means “rural” or “village” in Bangla language) came into operation with the following objectives: • extend banking facilities to poor men and women; • eliminate the exploitation of the poor by money lenders; • create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh; • bring the disadvantaged, mostly the women from the poorest households, within the fold of an organizational format which they can understand and manage by themselves; and • reverse the age-old vicious circle of “low income, low saving & low investment”, into virtuous circle of “low income, injection of credit, investment, more income, more savings, more investment, more income”.

The action research demonstrated its strength in Jobra (a village adjacent to Chittagong University) and some of the neighboring villages during 1976-1979. With the sponsorship of the central bank of the country and support of the nationalized commercial banks, the project was extended to Tangail district (a district north of Dhaka, the capital city of Bangladesh) in 1979. With the success in Tangail, the project was extended to several other districts in the country. In October 1983, the Grameen Bank Project was transformed into an independent bank by government legislation. Today Grameen Bank is owned by the rural poor whom it serves. Borrowers of the Bank own 90% of its shares, while the remaining 10% is owned by the government. www.grameen-info.org 8

MCESD

Micro Credit for the creation of fair wealth Small and Medium Enterprises are the backbone of the Maltese economy, contributing to sustainable economic development. SMEs across Europe face the same challenge, the Financial Gap. Access to finance for them is limited or difficult to obtain consequently making it hard for them to realise their business ambitions. This can be attributed to the fact that financial institutions consider SMEs as being high risk and therefore they are reluctant to grant them credit. However, the more financing is given to SMEs, the more investment is made leading to further growth and more job creation.

Globally, microfinance has been growing in popularity and a steady increase was registered between 2004 and 2011. One has to note however that interest rates on minimal loans have grown in the past few years.

In Malta, the JEREMIE scheme was a good source of SME funding and with it being extended in 2013; its benefits will continue to be reaped by SMEs. However,

Government needs to continue to find alternative sources and channels for SME Funding. Government and Managing Authorities have to ensure that with the implementation of such schemes, information sessions and awareness campaigns are held so as to ensure that SMEs are aware of the funding opportunities available.

Microcredit has been high on the national agenda in the past years.

MCESD held various meeting on the issue of Access to Finance during 2013 and a working group was set up to discuss the matter. After a few meetings the Working Group formulated a proposal which was then sent to Government. The extension of the Loan credit guarantee, tax credits as well as the creation of a Development Bank were

among the proposals made by the Working Group.

Government, in partnership with private financial institutions, can assist in the creation of further microcredit schemes which are beneficial to all. Microcredit facilities will lead to investment in creativity and innovation as well as entrepreneurship which will not only improve Malta’s competitiveness but that of Europe at large.

Government and Managing Authorities have to ensure that with the implementation of such schemes, information sessions and awareness campaigns are held so as to ensure that SMEs are aware of the funding opportunities available.

MCESD 280/3, Republic Street, Valletta, VLT1112 Tel: (+356) 2200 3300 www.mcesd.org.mt VOICE OF THE

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MEUSAC

MICRO-CREDIT Moving towards recovery through easier access to finance SETTING UP THE RIGHT ENVIRONMENT FOR STIMULATING ECONOMIC GROWTH, IN LINE WITH THE EUROPE 2020 STRATEGY, IS CURRENTLY AT THE VERY TOP OF THE EU’S AGENDA TOWARDS A MORE PROSPEROUS FUTURE The lack of financial resources has played a significant role in limiting investment. While large organisations have looked into building up cash-reserves, small and medium enterprises (SMEs), innovative initiatives and other small projects throughout the EU have been largely affected.

Such decline in fixed investment throughout most of the EU’s economy may eventually lead to further negative implications for the medium to long-term economic growth.

Accessibility to funding for such enterprises is instrumental in the EU’s fight against the economic crisis as more than 99% of all European businesses are, in fact, SMEs. Moreover, SMEs are the back-bone of the European economy, being primarily responsible for wealth and economic growth, next to their key role in innovation and research and development. Sadly, in times of crisis, micro-credit clients typically find it even harder to obtain capital.

finance for SMEs and individuals who would like to become selfemployed and therefore targets those groups that find it most difficult to obtain access to funds.

The EU does not directly provide microloans to individuals or businesses, but provides guarantees, loans and equity to intermediaries who can then lend to small businesses or make available equity finance.

JEREMIE is one of the most commonly known initiatives that the European Commission has developed in order to tackle issues with access to finance.

Through such funding schemes, prospective businesses that would otherwise not have the opportunity to contribute effectively to the EU’s economy, can now be supported in various ways which would create room for further growth.

Micro-credit loans, which are loans of usually up to €25,000, normally provide access to

MEUSAC 280 Republic Street, Valletta VLT 1112 Tel: +356 2200 3315 • Fax: +356 2200 3329 • Email: info.meusac@gov.mt www.meusac.gov.mt VOICE OF THE

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Micro Credit in the European Union

The European voice of savings and retail banking (ESBG) publication: Microcredit in Europe Experiences of Savings Banks The publication is available here: http://tinyurl.com/ppg2glj

EIF supports first social fund under the Social Impact Accelerator Initiative http://tinyurl.com/p4pjpl5 The Social Impact Accelerator (SIA) is the first panEuropean public-private partnership supporting social enterprises. Launched in May 2013 with the collaboration of private sector investors, SIA is a pilot initiative which aims to address the growing need for availability of equity finance to support social enterprises. This segment of the business world is becoming increasingly instrumental in promoting social inclusion, providing alternative sources of employment for marginalised social groups, and contributing to growth.

NEWS

European Progress Microfinance Facility is a microfinance initiative for which EUR 205 million of funding has been made available from the European Commission and the European Investment Bank, targeting all EU Member States, aims at increasing access to finance for individuals who have lost or are at risk of losing their job or have difficulties entering or re-entering the labour market. It also targets disadvantaged individuals, including people at risk of social exclusion. In addition to individuals, Progress Microfinance also supports micro-enterprises, including those in the social economy providing jobs for the unemployed or the disadvantaged. More information here: http://tinyurl.com/p386kge FAQs: http://tinyurl.com/nrtxh7l http://tinyurl.com/cttn2yh

SIA is a first step in the EIB Group’s (European Investment Bank and EIF) strategy to pioneer the impact investing space and respond to the wider EU policy aim of establishing a sustainable funding market for social entrepreneurship in Europe. More information are available here: http://tinyurl.com/nm8b3g9 European Microfinance Network The promotion of microfinance in the European Union, assisting the fight against social and financial exclusion. EMN has been active in the support to microentreprises and self-employment, through its Members, in lobbying activities at the EU level and in raising awareness on the need to build European legislative and regulatory frameworks fostering a sound microfinance market. www.european-microfinance.org

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