1. The relevance of Ethical Finance and. Microcredit for local development and co-operative banks . Roberto Burlando. Dipartimento di Economia S. Cognetti de ...
The relevance of Ethical Finance and Microcredit for local development and co-operative banks .
Roberto Burlando Dipartimento di Economia S. Cognetti de Martiis Torino
Paper prepared for the Conference: Financial co-operative approaches to local development through sustainable innovation, Euricse, Trento, giugno 10 e 11, 2010
Preliminary Version
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The relevance of Ethical Finance and Microcredit for local development and co- operative banks .
Roberto Burlando1 1. The macroeconomic out look and the perspectives The current economic and social phase is characterized by the consequences of the financial crisis of 2008/2009 and by the effects of the following economic crisis. There are a number of further transformations in act, that will transform our world in ways that are still not easily detectable. The stable world of the 50s and 60s is far away but also the roaring 80s and 90s have ceased their cycle; in general the world is in much more complex and difficult conditions. We need to recognise the relationships among the various crises: climatic, energetic, financial and economic, and of the fact that them all will have a central role in the future and will heavily affect the development of economical activities and of international competitiveness. In face of such conditions at the moment there seem to prevail defensive answers, often nationalistic ones, generally reductivistic in their search for immediate and easy solutions. At the world level there are substantial changes in the weight of the various geo-‐ political and economic areas and globalization is seen less and less as a source of opportunities and more as a threat. Some countries have since long chosen lines of development for the medium term (e.g. Germany with the green economy), others are walking to re-‐regulate their economies in order to contain the increasing costs imposed by the financial tendencies (e.g. Great Britain and the U.S.A.). The re-‐orientation in the direction of local development will have to compete with a territorial and productive structure globally oriented and the change will imply difficulties and costs but might suggest a much needed “new” perspective. It is, therefore, easy to forecast for the near future a clash of contrasting tendencies, in which it will be crucial to re-‐think development (and sustainability). This might lead to a re-‐construction of local networks of producers, distributors and customers in which trust and direct relation are essential elements. 1 Dipartimento di Economia “S. Cognetti De Martiis”, Torino. Associate professor of Economic Policy
and Ethical Finance and Microcredit, faculty of Politica Sciences. Previously president of the Ethical Commettee of Etica SGR and member of the board of Afe (Italian Association for Ethical Finance).
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Paradoxically, these tendencies could be accelerated by social and political realities external to there original nature. In Italy, in absence of significant changes, the level of economic and structural instability seems destined to increase. In such a perspective, the social recognition and control associated to the participation to a local community might exercise again an important role. The experiences of ethical finance with their “glocal” nature might prove useful also in the attempt to figure out different principles of social and economic interactions. This all appears as a new challenge and the opening up of renewed opportunities for the local banks in general and for the co-‐operative ones in particular. 2. The current phase and the recent evoluzions in Ethical Finance and microcredit. These perspectives will concentrate more and more the public attention on the aspects of local development and on the role of finance as a fundamental activity at the service of real-‐life economies (as opposed to the speculative ones). In the recent past many big banking groups concentrated their activities on financial intermediation and left a large void in the financing of local projects (often considered interesting only when realised with complex financial derivative instruments). These conditions look like a modern version of those that favoured the emergence and affirmation of financial co-‐ops in the past2, and the positioning achieved in this period might constitute an important base for the future roles. It is worth noticing also that is this period the reactions of Italian depositors and non-‐professional investors seem characterised by a strong polarization. On the one side there are those who believe that the crisis will be short and are again looking for the highest returns without paying much attention to the level of risk. On the other there is a growing number of people that feel bad about the unfulfilled promises of many financial intermediaries and have developed a prudent attitude of distance with respect to both the current development model and in the financial institution that have played an important role in it. The level of mistrust seems bigger with respect to the “bigger” financial institutions, reputed more involved in international speculative activities and in causing or at least deteriorating the current problems. On the other hand they appears to others as more stable and secure (the “too big to fail” argument). Another aspect – less relevant and quantitatively still relatively modest, but in great increase – of the recent financial evolution is the growth in umber, dimension and role of the ethical financial initiatives and of the micro finance institutions. 2 See, for instance, Cafaro 2001.
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In the rest of the paper we will deal with their development and with the potential interest that they present for the local financial systems, against the background of the tendencies highlighted in the first part of this article. The role of Ethical finance and microcredit for the local development in the Ics. Numerous features, like the presence of some form of community bond, of sharing the responsibilities for choices and the involvement of local (in geographical and/or social sense) savings are common to the co-‐op banks and to the ethical banks and microcredit institutions. These are among the features that allow to drastically reduce the information asymmetries and the negative economies of scale connected to the small amount of the loans, but they can also exercise a positive role in the re-‐construction of trust with respect to the banking system. The Ethical finance marketing (in Italy particularly that of the Italian Popular Ethical Bank) insists particularly on the trust relationship and on shared values and it looks like a winning strategy, at least from the firm point of view. In the more recent years the microcredit initiatives seem to have taken en even greater dynamic, but it is a more diversified one and characterized by more specific organizational and managerial problems. This phenomenon requires more in depth analysis and a greater consideration of the role of “external” factors w.r.t. the operational environment of credit. Nevertheless microfinance appears to gain role also as a relevant instrument in the toolkit of local authorities and private bodies aiming to active local interventions using non traditional measures. This contributes to make of it also a large but complex market. 3. The development of ethical finance. Various specialised reports document a progressive expansion of EF in the recent decades and years. The European Socially responsible investments (SRI) market registered in the years 2006 and 2007 a compound rate of growth of 102% (42 % only in 2007) that put an end to its consideration as a “niche” phenomenon at the European level. In the UK all the investment funds are due to specify the terms of their “ethical” policy (including the lack of any) and there are about 90 different but “proper” ethical funds, while the London stock exchange has introduced since some years an ethical index, the FTSE for Good, that uses the information provided by the oldest and more reputed European Ethical Rating Agency, the London based EIRIS3. On the British financial markets play an important role the Independent Financial Advisors (IFA), and among them the number of those specialised also on ethical finance is increasing. The anglo-‐saxon model of ethical finance is thus largely based on initiatives on the financial markets (as its traditional counterpart) and on individual investors’ choices (well informed and guaranteed). 3 EIRIS. For a brief historical perspective on ethical finance see R. Burlando (2000 and 2001) and
the included references.
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To the contrary, the Continental European model is based (again as it traditional counterpart) on specialised institutions (like Ethibel, the Belgian rating agency that in recent years has been bought by the French group Vigeo) that pair the selling of information about firms CSR with the possibility for their fund clients to adhere to their agency’s ethical criteria and use an ethical quality label provided for the compliant enterprises. Continental Europe witnesses also a more modest and less considered evolutions of ethical (or “alternative”) banks and the attempt – by some of them – to give birth to a central institute4. At the Italian level, instead, the volume of ethical funds is still limited for many reasons, including the lack of regulations. Our country lacks any norm to guarantee customers and firms alike, and the self regulation of the market does not help to sustain ethical initiatives. After various financial scandals and the 2008 crisis, the less compromised banks and various ethical finance institutions registered a significant increase in deposits; a sign that the perception of greater attention to ethical issues is being considered a positive value and one that can be even more important than perspective gains. A possible limitation to the expansion of ethical finance in Italy comes – surprisingly – form the supply side, where a number of small but long-‐lived initiatives do all what they can to differentiate themselves from the rest of the sector and to project an imagine of being at the limits of the system. Other limiting factors could be the complex organizational structure some of them has chosen in response to the changes in the banking law in the ‘90s and a dimension that is perceived as even too small and local. These aspects seem to leave quite of a room to the only Italian ethical financial enterprise that has chosen to get out of such a “marginal” position and to use the ethical marketing a san important instrument for its expansion. Not surprisingly a small number of new initiatives by major banking groups have been tailored for such a market segment (e.g. Banca Prossima). These projects evidence the growing relevance of the 3rd sector for the Italian banking sector. The co-‐op banks are already closed, starting from their own origins, to the values and themes pursued by ethical finance, but they do not seem to have come back to terms with both their origins and the new tendencies. Is it the time to think again and change such an attitude? 4. The development of microcredit and microfinance. In the recent years there has been a growing interest for and a clear development of MF activities, both in the world South and in the industrialised world, including Europe and Italy. The data show a clear growth of both the demand for microcredit and of the actors in this sector, plus an increasing interest for it by part of charities and public authorities. This development seem to bring about relevant diversifications within 4 It is the case of Sebea and Febea.
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the sector, leading to the existence of different approaches and models to do MF, both in terms of general philosophy and of specific operational aspects5. On the “philosophical” side the main distinction is that between the “welfarist”6 and the “institutionalist” approaches, that informs various realities and working attitudes within MFIs. On the more operational level there are relevant differences w.r.t. the aims and targets of MF initiatives. The choices (and rigidities) about the maximum amount of the loans, the timing and terms of repayment, the concentration on one gender, generally females, seem to direct MC toward certain type of activities (mainly small trade) and not on other ones (e.g. proper small productive enterprises). In response to such observations it is often suggested that MCIs should become more flexible in all the previously mentioned dimensions. We do not share this view because we believe such a move would imply rising transaction costs. To the contrary we maintain that MC should be recognised as a more and more complex and differentiated activity and very likely the best possible response to such development would be the differentiation also in the institutions providing the different services. Such a differentiation could occur both within a single MCI, making it bigger and bigger, or via the separation of the different activities into different –possibly connected – agencies. Different situations might ask for one or the other solution. What seems important is the recognition that the success of MC was due to a simple and cheap methodology that has allowed the giving of loans to groups of people previously cut off from such possibility. Different contexts and different aims might ask for different methodologies and different organizations. The lessons we can learn from the world South, where MC initiatives have a longer history, is precisely that there is not a single MC methodology that is the “right” one. Not that greater flexibility is always an advantage. The two approaches to MC co-‐exist even in the Ics, and are related in particular to the different aims of diverse MC initiatives, particularly the start up of small economic initiatives and enterprises and active labour and welfare policies. The two require very different approaches and MCIs willing to operate on the market might decide whether to concentrate on one or the other or differentiate their structure in order to deal with both. References Anderson CL, Locker l, Nugent R, 2002, Microcredit, social capital, and common pool resources, World Development, 30, 1, 95-‐105 Andreoni A, Pelligra V, 2009, Microfinanza. Dare credito alle relazioni, Bologna, il Mulino 5 Si veda, ad esempio, Bouc e Cappello, 2002. 6 Il cui modello di riferimento è quello della Grameen Bank, fondata da colui che è considerato il
“padre” del microcredito, il premio Nobel per la pace M. Yunus.
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