Fighting the high-cost lenders

In Hackney, the London neighbourhood where Fair Finance has one of its offices, shopping streets are lined with so-called “high-cost lenders” offering small loans at interest rates of 700 percent or more.  The signs in the lenders’ windows are in Arabic – but also Polish, Portuguese and Spanish, because workers from other European countries are typically rejected by local banks for loans.

Fair Finance and other social lenders aim to rescue small businesses from the clutches of the high-cost lenders. An estimated 8 million people in Britain are “underbanked,” meaning that, while they have bank accounts, they lack the detailed financial history to obtain overdrafts or loans. The gap between the money small businesses need and the amount banks will lend them is put at GBP 2 billion a year.

“The space is immense,” says Rahman, who received an honour – the Order of the British Empire – from Queen Elizabeth II for his services to community finance.

A big part of what makes Fair Finance’s services work is a financial guarantee from the European Investment Fund, which provides risk financing to small and medium-sized businesses and is part of the European Investment Bank Group. Fair Finance operates with a GBP 1 million loan from UniCredit, the Italian banking conglomerate. The European Investment Fund guarantees a quarter of that loan, reducing the risk of losses and thus enabling Fair Finance to work with clients that it would otherwise consider too shaky.

“We get clients who’ve already taken on dreadful loans from high-cost lenders,” says Rahman. “The EIF guarantee allows us to take the risk of fixing our clients’ finances.”

The EIF is extending its programme of loan guarantees. On 19 October it signs with six microfinance lenders from around Europe, providing guarantees that will unlock loans worth EUR 237 million to 20,000 small businesses.

A piece of the old country enriches a new community

Refugees can certainly look like risky business propositions. Of the eventual recipients of EIF microfinance funding, half of those who started their own company were unemployed before they received the loan. But when they get the finance they need, refugees enrich their new community by creating jobs and adding cultural diversity. Take Vardan Babayan, who successfully brought Armenian cuisine to a place where food is taken rather seriously – the Tuscan city of Florence.

Babayan fled Armenia during a period of internal strife. He bounced from Russia, to Ukraine, and to Austria, before he reached Italy in 2012. Rejected by local banks and unemployed for a year in Florence, he finally found PerMicro, a microcredit company that was founded in Turin and now operates across Italy. Branch manager Francesca di Giuseppe gave Babayan a loan of EUR 25,000, which he used to create Ararat Le Bracerie, a restaurant selling traditional Armenian foods.

“It was my chance to open a little corner of Armenia in Italy and to feel at home,” says Babayan. “I had no other option. I had no Plan B.”

A prize from the King

Refugees aren’t always looking for small loans, however. Almi, a government-owned Swedish company that finances and advises small businesses, loaned EUR 1.5 million to a pair of Pakistani brothers who developed a technology for using rice husks to make composite wood planks.

Nasir Gill had already moved to Europe to work on the export end of the brothers’ company, Green Plank, when political violence swept Pakistan in 2009. His brother Jamshaid stayed in Lahore to run the company’s manufacturing and was increasingly frustrated by corruption, particularly local electrical company officials who squeezed him for bribes under threat of cutting off supplies to the factory. The last straw came when, with law and order breaking down, Jamshaid was held up at gunpoint by thieves.

“It was a nightmare there,” says Nasir, who now lives in Malmö. “Here we’re accepted as people and as entrepreneurs. Back there, we weren’t accepted at all.”

“Accepted” is the correct word, after all. On 14 October the Gill brothers, who got Swedish residence permits, received the award for New Builder of the Year from the very symbol of the Swedish establishment, King Carl XVI Gustav.

Helping people not to become refugees

Microfinance can also play an important role in stabilising unsettled regions, by alleviating the conditions that cause refugees to flee. The European Investment Bank has committed EUR 80 million to the European Fund for Southeast Europe, a partnership of donor agencies, international finance institutions, and private investors. In the last decade the Fund made 650,000 loans to small businesses in southeast and eastern European countries which are transit locations for refugees from outside the continent and the source of migrants within Europe. The loans created 500,000 jobs and helped build the kind of prosperity that enables people to remain in their home countries.

“Microfinance plays a real role in countering instability,” says Per-Erik Eriksson, who runs the European Investment Fund’s guarantees, securitisation and microfinance unit in Luxembourg.

The same could be said for minority communities that benefit from microfinance. Sofia-based Mikrofond made three loans totalling EUR 6150 to Anton Topalov, a small farmer in southeast Bulgaria. Topalov employs five Roma on his farm, and hires more during harvest time.

Meanwhile, for the latest refugees, once they settle legally in a new country, microfinance is likely to be central to their economic success – and ultimately to their integration. “From the cultural, economic and social point of view, refugees are an opportunity for European economies,” says Patrick Sapy, director-general of microStart, the company that helped Said al-Obaidi finance his laptop repair shop in Brussels. “The way to create positive social and financial inclusion is to help them start a small business.”