Episode 13: EaSI business development services pilot for migrants and refugees

Welcome to the new fi-compass Jam Sessions podcast on financial instruments under EU shared management funds. My name is Bruno Robino and I am Head of fi-compass at the European Investment Bank.

As you may know, together with Directorate-General for Migration and Home Affairs (DG HOME), we are examining how financial instruments can be used in the current programming period to support the integration of third-country nationals using resources under the Asylum, Integration and Migration Fund (AMIF), or co-financed with other resources.

This is the first fi-compass podcast episode exploring the potential for financial instruments in this specific area and today we will be discussing the support through the EaSI Business Development Services pilot, called in short, the BDS pilot, to migrant and refugee entrepreneurs.

Joining us today is Cristina Dumitrescu, Senior Investment Manager in the Inclusive Finance Division at the European Investment Fund.

Hi Cristina and welcome to the podcast.

Cristina: Thank you so much Bruno – it is so nice to be here today.

Cristina, can you tell us a bit about the role of the European Investment Fund in promoting employment and inclusion and your work in the Inclusive Finance Division at the EIF?

Cristina: Sure, the EIF is a financial institution and is part of the European Investment Bank Group.

The EIF’s central mission is to support European small and medium-sized businesses, the SMEs, by helping them to access finance. We support entrepreneurship, employment and social inclusion, and want to ensure that everyone, including vulnerable groups, so also migrants recently arrived to the EU, have access to the financial products and services they need to start and grow their businesses. We believe that promoting these areas is key to ensuring Europe’s economic growth and social progress.

At EIF’s Inclusive Finance Division, we manage and deploy European Commission programmes aimed at financial and social inclusion. Of course, sometimes we receive such mandates also from other institutions – mainly the EIB or various national or regional managing authorities. I joined the Inclusive Finance Division 10 years ago, and I have been directly involved in the implementation of EU programmes that foster access to finance for the non-bankables, vulnerable groups including migrants and refugees.

We work closely with financial intermediaries, including microfinance institutions (MFIs), but also other social finance providers, across the EU and beyond, when the program is eligible in non-EU Member States.

I would like to thank you very much for the invitation to join this podcast on financial inclusion of migrants and refugees. It is a very relevant topic, especially during the todays’ debates and discussions on climate change and climate adaptation, on digitalisation, while kind of forgetting there are people in an exclusion situation, people at risk of poverty. The financial instruments deployed by the Inclusive Finance Team at the EIB target specifically these people.

Can you explain to what extent migrants are keen in undertaking entrepreneurial activities?

Cristina: Migrants in the EU are actually quite entrepreneurial, and in many cases they have a higher rate of entrepreneurship than the general population. Migrants often face barriers to traditional employment, such as language barriers or even discrimination. Entrepreneurship is an inclusion tool for them, a way to create their own opportunities in the host countries. Additionally, many migrants come from countries with strong entrepreneurial traditions and may have experience running businesses in their home countries.

We hear sometimes claims that migrants ‘steal our jobs’. Well, according to the research, they not only do not steal our jobs, but they contribute to entrepreneurial activity and create new jobs. One of the EIF Working Papers, the ‘European Small Business Finance Outlook’, prepared by our colleagues from Research and Market Analysis Division, calculated that in 2019, foreign-born self-employed were as likely to create jobs as the native-born self-employed. And non-EU self-employed were more likely to create jobs than self-employed EU born migrants – the proportion was 30% vs. 24% in this regard

That is very detailed. At the beginning you spoke about the barriers that third-country nationals might face when setting up their own business in their new homeland. Can you expand on this?

Cristina: Indeed, third-country nationals face some unique challenges.

In the phase of their ‘early integration’ in their new homeland, this is the period when they just arrive to the EU, migrants often do not speak the language at all, they do not have social networks, they do not fully understand the culture, perhaps have issues finding adequate housing or healthcare. Often, due to regulatory barriers, they actually cannot start a business directly. They might even face issues in opening a bank account.

Usually the medium and long term integration phase is when they become employed or start their own business. But even now, they often lack training to foster their employability or entrepreneurial spirit. And even if their business idea is great, they lack access to finance. The traditional banking sector perceives them as too risky, as they do not have the necessary collateral, lack credit history, or business history in the host country.

This is why it's so important to provide targeted support to help migrants overcome these challenges and achieve success in their entrepreneurial ventures.

Could you tell us more about the role microfinance plays in support to integration of migrants in the EU?

Cristina: By the internationally accepted definition of the Consultative Group to Assist the Poor, the CGAP, microfinance is “Provision of basic financial services to poor (low income) people, who traditionally lack access to banking and related services”. What started years ago as an empowerment tool for the people to get out from poverty in the developing countries, transformed into a policy tool also in Europe, aimed at financial and social inclusion through entrepreneurship.

Microfinance offers a chance, an opportunity, for people to follow their entrepreneurial dream or project. Over the years, microfinance in Europe has become an essential mechanism to facilitate the necessity-driven business creation. Vulnerable people, people at risk of poverty are a potentially important group of business creators, since a decision to start a business often arises out of necessity.

But the motivation to start a business goes beyond escaping unemployment and early-stage entrepreneurs are creating jobs or tackling other societal challenges, including environmental implications.

Microfinance supports inclusive entrepreneurship by offering both financial products and non-financial services – mentoring, training, coaching.

The microfinance sector is still developing in the EU, being highly fragmented and diverse, with no common business model. The European Commission has recognised its importance and supports its further development through various initiatives.

One of the key initiatives in this regard was the EU Programme for Employment and Social Innovation, called the EaSI programme, during the 2014-2020 programming period.

It is also worth mentioning that a number of microfinance instruments have been implemented, co-financed with 2014-2020 European Social Fund (ESF) resources in various EU countries, for example Italy, Germany, Bulgaria.

It is great that you mentioned this. Indeed, on the fi-compass website, we publish a number of case studies related to microfinance instruments under ESF. Coming back to EaSI, can you briefly describe how the programme did it support microfinance?

Cristina: The EaSI Programme included a mix of both financial and non-financial instruments. As financial instruments, we had the EaSI guarantee, the EaSI Capacity Building Investments Product and the EaSI Funded instrument – offering both guarantees, capital strengthening and liquidity aimed at strengthening the microfinance and social entrepreneurship finance markets.

Our flagship instrument, the EaSI guarantee, was a free-of-charge capped portfolio guarantee, with a guarantee rate of 80% on a loan by loan basis, and a guarantee cap rate established at the level of the expected loss of the portfolio to be built, but in no case larger than 30%.

Based on the most recent reporting round, this instrument helped mobilise about EUR 5bn for the benefit of more than 150 000 micro and social SMEs. The strong financial inclusion focus is demonstrated by an impressive 79% figure – indicating the number of entrepreneurs who received their very first business loan ever under the EaSI programme.

And if we speak about numbers – 24% of the included business loans were granted to migrant entrepreneurs.

Thanks for these figures. Could you expand on the launch of the Business Development Services pilot project to which microfinance institutions benefitting from the EaSI guarantee could apply to?

Cristina: We mentioned before that microfinance needs an integrated approach - financial and non-financial services together for the benefit of the micro-entrepreneur. Because any vulnerable person or start-up entrepreneur—and I would say any entrepreneur if I am allowed—is often in need of acquiring the necessary skills for entrepreneurial success through various trainings, mentoring and coaching. 

Moreover, the migrants face additional obstacles including language, cultural differences, settling costs and limited access to entrepreneurship training programmes or even subsidies. Therefore, migrants need specific attention to overcome the challenges to stimulate their entrepreneurial activities.

As a direct consequence, costs incurred when providing BDS to such migrants and refugees higher than for any other mainstream micro-enterprise/micro-borrower, for instance because of language or administrative barriers.

As the EaSI guarantee instrument aims to enhance access to finance for vulnerables, and migrants and refugees are a specific category of vulnerable people, especially during recent years when migration waves entered Europe further to conflicts in Syria or Ukraine – the European Commission, DG Employment specifically, together with EIF have designed a pilot instrument to partially offset these costs, enabling financial intermediaries to provide such business development services and therefore boosting entrepreneurship amongst vulnerable communities.

What did the business development services pilot project consist of?

Cristina: The BDS pilot was embedded in the EaSI Guarantee. The available budget was rather small, only EUR 1m. It provided a grant, a lump sum of EUR 400 for each migrant who received, on one side, a loan covered by the EaSI Guarantee and on the other side, training, mentoring or coaching services from the beneficiary of the guarantee.

How did the BDS pilot project work in practice? How long did it last?

Cristina: The pilot was launched in 2018 through a dedicated EIF Call of Expression of Interest that was available until the end of 2021. We had intermediaries that applied to the pilot while being on course of deploying the EaSI Guarantee product, but also intermediaries that applied at the same time for both the Guarantee and the BDS Pilot.

How many financial intermediaries participated in the pilot project and from which countries?

Cristina: Nine intermediaries located in eight countries (Belgium, France, Greece, Italy, Luxembourg, the Netherlands, Spain and Sweden) are participating in the pilot.

Great, the pilot covered quite a number of EU Member States. If we get into the details, how many migrants and refugees participated in the exercise? Can you also tell us more about the difference between the terms ‘migrants’ and ‘refugees’ – what are the definition behind?

Cristina: Based on the latest reporting received, about 2 000 migrants and refugees have benefitted so far.

If we speak of definitions, for the purpose of the BDS Pilot, a refugee means a person who benefits from international protection or refugee status in the relevant jurisdiction, while a migrant means a person whose country of origin differs from the participating country where he/she is residing, evidenced by a relevant residential permit in accordance with the applicable laws of the country.

How did microfinance institutions participating in the BDS pilot identify and approach the migrants and refugees?

Cristina: Borrowers with no business or credit history have only limited access to finance – this is obviously the case of migrants. When asking for a bank loan, vulnerable micro-entrepreneurs find themselves rejected or discouraged by the banks. So, they turn to alternative solutions: microfinance institutions provide such an alternative. They do not always charge lower interest rates, but they are less demanding in terms of collateral or other guarantee requirements; plus the MFIs know their market and their target group very well – they can really offer a more personal, tailor-made and simple service.

In addition, various NGOs, other support organisations that offer various integration services to migrants and refugees – they themselves refer the migrant to an MFI or to a cooperative or ethical bank, knowing that such specific institutions can address the financial needs for the migrant or refugee.

Do you have a success story from the BDS pilot project to share with us?

Cristina: Well, there are a lot of interesting stories.

Ariela, an Argentinian national living in Spain had already worked in dermo-cosmetics in her home country. Today she set-up her own company in the Basque country, offering a full range of cosmetics and beauty products rooted firmly in sustainable development and based on local products. Ariela was supported by our Intermediary in Bilbao, Laboral Kutxa.

Another example could be Hussein – originally from Iraq, he arrived in Luxembourg as a refugee, struggling for a couple of years to find a job. Today, benefitting from the support offered by Microlux, our EaSI BDS intermediary – Hussein is the owner of Lux Cars, a company dedicated to the purchasing, selling and renting of second-hand vehicles.

These are great stories, and I am sure there are many more. Can you tell me more about the lessons learned from the EaSI BDS pilot project and what lessons can be applied to future programmes or initiatives aimed at supporting migrant and refugee entrepreneurs?

Cristina: There are definitely opportunities to build on the experiences of the EaSI BDS pilot. As this was a pilot, it turned out to be quite time consuming from an operational perspective. Then, it allowed for a fixed, uniform lump-sum amount, even though we know that various BDS efforts cost differently, not only from one country to the other, but also from one type of BDS to the other. Not to speak about the fact that usually, trainings, advisory support are offered to a large number of recipients, and not all of them end up becoming microfinance borrowers. In addition we know that provisions of business development services by an EaSI financial intermediary involves different parties, and generally the amount of money provided under the pilot was going into the EaSI Intermediary bank account, remaining for this institution to distribute the proceeds towards the ‘real’ BDS provider. We all know that BDS can be provided directly by the financial intermediary, but more often, this is done indirectly, through various external parties.

Overall, this pilot is a good example of blending a grant component into a microfinance instrument. Such combinations between a financial instrument and a grant are possible according to various regulations currently in force. If I am not mistaken, your team, Bruno, is looking into this.

Yes, thank you for mentioning this. We are currently exploring the potential for financial instruments to support the area of integration of migrants as part of its EU-wide study in the AMIF workstream.

One of the three focus areas of the study is microfinance and we are analysing how a combination of a microfinance instrument and a grant element, for instance to cover the business development services. We are trying to see if this combination could work. Stay tuned in the 2nd half of 2023 for the results of this study.

There is some debate from market as to whether support such as the EaSI BDS should target specifically only migrant and refugee entrepreneurs, or whether they should be extended to support entrepreneurship more broadly. What is your perspective on this issue?

Cristina: Provision of BDS is an essential dimension of microfinance. But they are costly. At the same time, they are very diverse, and each one of the microfinance providers we are working with have a different way or method to provide this advisory service for their clients. We also know of institutions that are charging a very symbolic fee for these type of services, trying to ensure the commitment and real engagement of the participating entrepreneurs.

But in general, these services are offered for free – which bears a substantial cost for the MFIs.

Cristina, can you tell us more on how you currently support this sector through 2021-2027 initiatives?

Cristina: Sure. As you know, we are at the beginning of a new programing period, a bit of a delayed start given the COVID-19 pandemic that impacted all of us, but new financial instruments are being made available under the multi-thematic InvestEU Umbrella Fund.

As the EIF Inclusive Finance Team – we are deploying a capped portfolio guarantee product for microfinance and social entrepreneurship finance, that is a continuation of the previous EaSI Guarantee instrument. As such, the features of the InvestEU guarantee for micro and social are similar with the ones of the previous EaSI. What has changed, and this is due to the market consultations that we have frequently with the market players, the maximum loan amount –increased to EUR 50 000 for microfinance from the EUR 25 000 old threshold, and to EUR 2m for social entrepreneurship from the previous EUR 500 000. The goal of the InvestEU guarantee product for micro and social is to foster financial and social inclusion for vulnerable groups, which includes migrants and refugees. 

We also offer a Capacity Building Investments Product, in the form of a subordinated loan aimed at strengthening the institutional capacities of eligible micro and social finance providers that in turn have a direct effect on increased outreach for vulnerable groups, including migrants and refugees.

Cristina, many thanks for these insights. Thank you very much for all this information, it has been a pleasure to listen to you.

Cristina: Thank you Bruno, the pleasure was mine.

Thank you all for listening to this episode. Hopefully you enjoyed this discussion on the EaSI business development services pilot and how it supported the integration of migrants.

If you have any questions, please send us an email at info@fi-compass.eu.

We also encourage you to visit the AMIF page on the fi-compass website and read our fi-compass AMIF factsheet – these are good starting points for any of you interested in knowing more about how financial instruments under AMIF or other resources that could support the integration of migrant and refugees.

Also do not forget to follow us on social media and keep an eye out for new podcast episodes.

We hope you enjoyed, have a nice day everybody!