ABSTRACT
Introduction In industrialised coun tries, social protection is typ ic ally achieved by making cash grants, rather than loans, to low-income groups. However, as budgets have come under pressure, wel fare providers have nat urally looked for ways of providing it in a more cost-effective way. One approach to this is potentially through providing wel fare through microfinance loans, rather than grants. For example, if loans to fin an cially excluded small businesses reduce unemployment over the long term, then the repayment of those loans can enable eco nom ies to be made on state wel fare payments. This will help achieve ‘wel fare ends by market means’– a key aim of, in par ticu lar, the Anglo-Saxon demo cra cies over the last thirty years (Taylor-Gooby et al. 2004). Of course this depends on lending to the poor being feasible and expandable; but as we saw in Chapter 1, microfinance has been able to grow fast across most of the de veloping world (Hulme and Mosley 1996; Armendariz de Aghion and Morduch 2005; Hermes and Lensink 2007) and now makes a con tri bu tion to wel fare in most industrialised coun tries. The most recent overview of the microcredit sector in the European Union records that in 2009, 432 microfinance institutions in twenty-eight Euro pean coun tries provided some 135,000 micro-loans, worth €1.3 billion, aimed at the relief of pov erty (Jayo et al. 2010: 17). The fiscal impact of this new form of wel fare has never been investigated; in this chapter we examine it with a par ticu lar focus on its pov erty impact. Until the early 2000s most microfinance programmes in industrialised countries took the form of business CDFIs: loan funds for the pro mo tion of small businesses excluded from access to high-street finance, typ ic ally operated by non-profit organ isa tions and financed by a mixture of NGO, central gov ern ment,1 local gov ern ment and private capital, with con tri bu tions also from inter na tional organ isa tions such as the Euro pean Social Fund. This way of organ ising microfinance in industrialised coun tries then, as related in Chapter 1, came to be supplemented in 2001 by a new form of CDFI, the consumer CDFI, which has no parallel in de veloping coun tries. The ob ject ive of consumer CDFIs is to ease the debt prob lems of low-income people who are fin an cially excluded, i.e. unable to borrow from banks, and as a con sequence find themselves open to ex ploita tion
by loan sharks and doorstep lenders at very high rates of inter est.2 Most of the beneficiaries from this new kind of CDFI (unlike beneficiaries from business CDFIs) are not in work of any sort and are de pend ent on wel fare bene fits for their livelihood; in con sequence, the budgetary im plica tions of this new kind of CDFI can be expected to be very different from the con sequences of business CDFIs. What fiscal impact has this new form of wel fare pro vi sion had overall? Initially, it was expected that business-lending CDFIs would enable a switch from unemployment to self-employment and thereby reduce pub lic spending on welfare bene fits (United Kingdom, Social Exclusion Unit 2000) and there is some evid ence that this in fact occurred: for example, Mosley and Steel (2004: 728), using back-of-an envelope methods, calculated that through loans by CDFIs in 2000-02 ‘21900 indi viduals exited from unemployment as a con sequence of microfinance lending over the period 2000-02 (saving an estim ated £0.3 million within the sample or £178 million on the national social secur ity budget)’. However, even in the case of business CDFIs, the relationship between microfinance spending and wel fare spending is more complex than a mere switch from an income pattern based on bene fits to an income pattern based on selfemployment. In many cases, as we shall docu ment, the shift from unemployment to self-employment which CDFIs were seeking to facilitate could not have occurred without an expansion of the new welfare-into-work bene fit, working fam il ies’ tax credit (later working tax credit), first introduced in 1999: thus it would not have been pos sible to expand CDFIs without first expanding wel fare bene fits. It is not, in other words, a question of simple crowding-in or crowdingout of state wel fare spending by CDFIs, but rather a more complex pattern of interaction. In this chapter, we estab lish, in the next section, a simple pic ture of the interrelationships between the growth of different kinds of CDFI and different kinds of wel fare expenditures, with a view to understanding how the advent of CDFIs has influenced the level and pattern of wel fare bene fits expenditure. The model is matched against data for 2007-09 for a sample of CDFI beneficiaries in our four cities.
