> Posted by Center Staff

Many enterprises operating in the informal economy provide low-quality working conditions for their employees. Workers might be exposed to difficult or dangerous environments, and the formalities of labor law are missing. A new project from the International Labour Organization’s Social Finance Program and the University of Mannheim in Germany tested the hypothesis that microfinance institutions, given their unique and expansive connections to the informal economy, can successfully apply interventions aimed at improving their clients’ working conditions. The project spanned 2008 to 2012 and included collaborations with 16 microfinance institutions. The project results are shared in the recently released report, “Microfinance for Decent Work – Enhancing the Impact of Microfinance.” It suggests that microfinance institutions indeed have the potential to leverage their positioning and resources to improve their clients’ business environments.

The project was carried out in four steps. First, the participating MFIs conducted an internal diagnostic to identify the most pressing work-related challenges faced by their clients. Across the breadth of identified challenges, the issues that the MFIs chose to address were reducing child labor, promoting business formalization, enhancing business performance, and reducing vulnerability, particularly in regards to risk management and over-indebtedness. Each MFI created its own intervention with its unique institutional context in mind. These innovations included launching new financial services, introducing non-financial services, offering packages of financial and non-financial services, and restructuring institutional operations. The innovations were piloted with client impact tracked to enable before and after comparisons in control and treatment groups.

In aggregate, the pilot studies provide a compelling case for the ability of MFIs to achieve positive outcomes on clients’ business conditions. Here are a few of the impact statistics:

  • Child Labor: In Pakistan, introducing an expanded microinsurance product that covered the entire family decreased child labor incidence for boys and girls by 7 percent and decreased the risk of hazardous occupations by 5 to 6 percent. The premise behind this innovation was that by enabling households to reduce health-related expenses, it would improve their capacity to manage shocks and reduce the need for households to resort to child labor to cover unforeseen expenses.
  • Business Formalization: In India, interventions related to awareness of formalization increased actual formalization among clients by about 70 percent and awareness about formalization by about 93 percent.
  • Business Performance: In India, training on productivity, occupational safety, and health led to an 11 percent decrease in work related injuries.
  • Vulnerability: In the Philippines, interventions to boost the incidence of emergency savings resulted in the reduction of borrowing to repay another loan by 22 percent.

Along with these promising results, some of the interventions did not have as positive effects. In Nigeria, for example, a child labor awareness campaign did not change the value that parents placed on school. In Cambodia, a financial education training was associated with a 20 percent increase in likelihood to borrow from informal lenders.

For more details on the project and the results, read the new report, available in English, Spanish, or French.

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