Investopedia defines microfinance as a type of banking service provided to unemployed or low-income individuals or groups who have no other access to financial service. The goal of microfinance is to give improvised people an opportunity to become self-sufficient. Moreover, Stella Dawson, head of communication at Consultative Group, reports that microfinance (microcredit) is panacea for lifting millions of people from poverty and extending microloans to very poor people has been hailed as a path out of poverty, especially for women. Thus, microfinance could be one of solutions for underemployment issue.
Similarly, Plan International describes microcredit as financial service to people that currently have no access to capital. They also agrees that it is one of key strategies to help people live in poverty to become financially independent. Consequently, microfinance will help employees be more resilient and better provide for their families in time of economic difficulty. Additionally, microfinance is easy to access, better loan repayment rates, extending education, improving health and welfare, sustainable, and creating new employment opportunities.
International Labour Organization (ILO) also conducted a study with 16 microfinance institutions (MFI) to test a range of approaches to foster social impact through delivery of innovative financial and non-financial service. The study is meant to eliminate child labour, foster formalisation of enterprise, reduce vulnerability and enhance business performance through improved working conditions. ILO’s study on microfinance found that microcredit improves poor working conditions and brings better financial to poor employees.
Some remarkable results of the study are:
1 Child labour: the coverage of entire family by a microinsurance product decreased child labour incidence for almost 7 percent and lowered risk of hazardous occupations by 5 to 6 percent in Pakistan.
2 Formalisation: interventions increased awareness about formalisation by 93 percent and formalisation itself by roughly 70 percent for clients in India.
3 Vulnerability: emergency savings reduced taking a loan repay another loan by 22 percent plus resulted in a 7 percent drop in repayment difficulties and a generally lower level of indebtedness of clients in Philippines.
4 Business performance: the package of women entrepreneurship training and start-up loans resulted in increased self-employment and business expansion for female micro-entrepreneurs in Tajikistan. In India, training on productivity and occupational safety and health resulted in an 11 percent reduction of work-related injuries and enhanced productivity leading to an increase in monthly net income of USD 37.
However, unfortunately, the study findings were not all positive. For example, in Nigeria, an awareness campaign on child labour did not have any impact on value that parents placed on school. Also, clients in Cambodia that benefited from financial education training were 20 percent more likely to borrow from informal lenders. Interventions to help women’s business in Tajikistan did not increase empowerment of female entrepreneurs as well. Yet, the evidence provides a compelling case for intentional efforts to enhance impact.
Recommendations for improving innovation process in microcredit
Although microfinance is an effective strategy, there are still gaps needed to be closed and improved in order to create a decent working area for employees. These following recommendations proposed by ILO should be taken into consideration in order to improve microcredit process.
1) Implementation of an innovation is a medium- to long-term project. Therefore, it is extremely important to identify reliable coordination in MFI to support project, and ensure there are backup options in event of staff turnover.
2) All resources – human, financial, and any authorisations required – should be in place prior to project start date.
3) In collaboration with MFI’s HR department, clarify implications of innovation on staff as part of their career development and appraisal system. Ensure they are compensated for their engagement, either by offering self-development opportunities or financial rewards.
4) Consider appropriate lobbying to help create a conducive legal environment if the innovation needs government authorisation.
5) Explore possibility of support from national and regional microfinance networks before, during innovation, and after innovation piloting.
Besides some recommendations, ILO also conducted an action research and implemented MF4DW innovation in their microfinance strategy. MF4DW is aimed to tackle all the problems that cannot be finished by simple microfinance. The result was MF4DW programme has successfully gave rise to a community of practice. It was helpful, especially to those that were experiencing challenges. MF4DW can also be a reminder that they are not alone and that there is a support system in place to help them. Also, it is hoped that this innovation can help to enhance results for betterment of all stakeholders involved.