East End Microcredit Consortium
pdf reference DF/02/280
Summary of Main Findings
Operation of the Lending Circles
• The peer group structure provides social collateral for loans and access to peer-to-peer business support;
• The emphasis is on character-based lending for smaller loans, with simple cash-flow and project appraisal for larger and longer term loans.
• Repayment incentives substitute for collateral and augment the social collateral of the group.
• Mixed experience groups allow skills and knowledge to be shared and passed down. The group system links people at different stages of business development, which gives them direct access to people with commercial experiences.
• Working in groups and having people in the groups at different stages of business development allows group members to see the step-by-step process of building up a business.
• Men have also been involved but have had much poorer records of repayment
• Nature of the group system is that it fosters support and motivation. Group facilitators support the groups, which give emotional and psychological support to each other. They also act as a sounding board for each others’ business ideas
• The close consortia approach allows individual borrowers to link in with initiatives and wider experience from other member organisations, such as Business Clubs and Enterprise Networks.
Operation of the Consortium
• The consortium has evolved with a flexible and adaptive approach building on the work and experience of existing partners.
• The flexibility of the partnership structure allows the project to evolve naturally, and allows all partners to feel a strong sense of buy-in.
• The partnership approach does have relatively high administrative costs, but repays several times over in group learning, skills development and reach.
• The different partners work with slightly different target groups, based on their particularly organisational aims. This also brings different experience into the consortium.
• The consortium itself is also like a peer supporting circle, with the Environment Trust as facilitator. The partners have different business objectives, experience and target markets and are coming together to facilitate access to a loan fund.
• In replicating the model a distinction needs to be made between the core essentials that are robust, well tested and universal, and those that are much more flexible and context specific.
Assessment of EEMC
It is difficult to make broad generalisations about the East End Microcredit Consortium (EEMC) because of the diverse nature of the different partners. Overall, the partnership is like any good family: everyone gets on with their own lives, and pretty much does their own thing. There is healthy banter, communication and negotiation about the ways to take things forward, plenty of sharing of ideas and problems and the occasional conflict. The flexibility that the Environment Trust allows in the design and implementation of the EEMC for different partners really allows the consortium to function and grow, and allows the micro-credit product to become much more truly embedded in each organisation’s culture and service portfolio.
StreetCred / QSA seems to be an organisation with a strong social ethos more able to access the most disadvantaged parts of the community, particularly ethnic minorities. The loan and circle product has become an important new strand in its own right to attract new people. Account3 comes across as a very professional, dynamic and impressive organisation which has integrated the circle lending into an existing set of enterprise support services.
Overall, the EEMC is clearly an innovative project which has been wisely and sensitively managed using a partnership approach to really build impact and learning across a large geographic and social area. It’s maintained the balance between programme strategy and individual partner flexibility very well, and should be a show case in this regard.
History and Context
Although the East London Area has benefited from the influx of new financial services and businesses, notably in Canary Wharf, little of this has had an effect on the local residents. They still face problems accessing finance and business support and a major cause of concern in the area is the high rate of small and micro business failure.
For people on low incomes, amassing savings is often not an option. As such they are unable to accrue enough capital to act as security for investment. Based on methodologies pioneered by the Grameen Bank in Bangladesh the East End Microcredit Consortium has developed a number of group lending circles. These circles are similar in design to those developed by WEETU in Norfolk (see box at end of case study) which were also inspired by Grameen experiences. The circles use a mutual guarantee where members guarantee each other’s loans and spread the risk. The mutual support structures and the intensive outreach and development work undertaken by staff bring women into economic activity who would not otherwise do so.
Faisel Rahman, now project manager of the East End Microcredit Consortium (EEMC) worked with the Grameen Bank in Bangladesh, one of the longest running, most successful and most famous group lending programmes in the world. When he returned home to the East End in 1997 he joined Lloyds of London as an underwriter but he retained an interest in micro-credit and was struck by how difficult it was for entrepreneurs without collateral or a financial track record to access funding. This seemed to be the number one hurdle for entrepreneurs and many of the agencies supporting them were struggling with the problem. Few banks or even Community Finance Initiative funds were prepared to lend without some collateral. Many simply believed small time entrepreneurs or start-ups to be too higher risk as a client group. Rahman was determined to prove them wrong. He approached the Environment Trust, one of east London’s longest serving Development Trusts, and was given one month to prove his idea that group collateral, the formula used in Grameen, could work in the UK.
“I got together with Ms Ekong from Account3, a women’s enterprise support organisation, and in our lunch breaks we developed the basics of a very simple loan fund based on a one sheet application form and group collateral with a mutual guarantee. Account3 had people desperate for small sums who we knew we could trust so we decided to risk loaning our own funds so that we could get a track record and prove our case.”
The first £4000 came from his credit card. People thought he was mad but for him it was a no-brainer: the bank was charging 4% and he was charging them 10%! That was in Jan 1999 and by the end of the year he had four groups and a 100% repayment rate. With this track record he put a loose consortia of local organisations together and went to the local regeneration initiative, Cityside SRB5, and got them to invest a further £50,000 in the fund.
“A year on we had a 25 loan track record and had formalised the consortium into the EEMC. With this in place we persuaded Natwest to lend £20,000 of community bond fund it had launched. Natwest was impressed by our joint initiative and wide coverage and felt it was a good way to use its community funds safely while reaching out through several different voluntary organisations. It saved them a big headache and helped get us going. We’ve since also received major funding from the DTI’s Small Business Service Phoenix Development Fund”
Through this early experiment they proved that poor people weren’t an unreasonable risk and that such a loan fund could run with excellent repayment rates and good profit too.
Project Description – Aims and Activities
The consortia is chaired by the Environment Trust, who also manage the loan fund. In addition it is made up of:
- StreetCred operated by Quaker Social Action to assist those in abject poverty into business;
- Account 3, a women’s enterprise project based in Bethnal Green. It has a particular focus on assisting women who may have run businesses in their countries of origin;
- Homeless Family Campaign.
The central aim of the project is to develop a number of peer support circles that will empower women to take more control of their life and develop their own businesses. It aims to:
- Help people out of their homes to think about their economic options;
- Promote self employment as a way of improving economic status and a route out of poverty;
- Develop peer support systems for various groups who are interested in developing their own business;
- Provide training to give people appropriate skills;
- Start and support a number of micro-businesses.
Members of the mutual support groups are supported by a staff member and their peers. The group form emotional and psychological bonds because each faces the same issues in different contexts and each is operating at the same level. The group members effectively mentor each other. This is innovative in the UK context, although EEMC it is not the only group pioneering in this field.
The close of association of the project workers with the EEMC’s Microcredit Loan Fund (MLF) allows client-appropriate lending. The product provides quick, simple and convenient access to small, short-term loans that are renewed or increased based on excellent repayments. Collateral substitutes – such as peer guarantees or incentives - motivate repayment.
An outreach worker is employed to do targeted outreach to community groups and organisations. He / she locates disengaged women with business ideas and places the women with 4-6 other local women who have a business idea. This same outreach worker then provides facilitation and capacity building support to the group and as general advisors and personal mentors to the members on a 1-2-1 basis.
The group then begin a series of regular meetings, usually held in a member’s home with the children present but cared for. Bi-lingual workers are employed and the groups work in the most convenient language. They meet weekly for at least two months during which the facilitator provides support as each member develops their own business plan for their business idea. These simple and straightforward plans act as the loan fund application form.
The facilitator attends each and every meeting. To begin with they help the group form and support them in agreeing the rules for the group. They are able to provide facilitator and mentoring support to the group and individuals within it but rarely get involved in providing specialist or technical advice. For this they are directed through to existing support services.
Not every has to take a loan. Indeed several groups have one or more members who does not. Members who have found that they cannot or do not want to start a business are able to drop out leaving space for others to join.
The loan application is assessed by a loan evaluation committee which is co-ordinated by the Environment Trust as loan administrator. Their main job is to make sure the i’s are dotted and t’s crossed. A simple check of previous defaults and financial record is run but there is not risk analysis of the business. The emphasis is on character-based lending for smaller loans, with simple cash-flow and project appraisal for larger and longer term loans.
Procedure for Applying for and Receiving loans
The business plan – loan application form is a simple and straight forward form with six sections:
1) What is being supplied? 2) What is the market? 3) How will it be advertised? 4) What will the prices be? 5) What does the rest of the group think? 6) Comment from the facilitator / outreach worker?
The group members apply for and receive the loans on an individual basis. However, the loans are given sequentially and each subsequent loan is dependent on the successful repayment record of previous loans. Thus it is in the group’s interest to ensure everyone can repay, and thus to ensure that everyone’s business is running smoothly. There are also incentives for early or excellent repayment records.
The women may be at different stages of business development, and indeed business experience. If this is the case the group will agree that the most advanced member submits their loan applications earlier, giving the less advanced members time to get their business ideas together. The loans are given out in pairs and a loan application cannot be made until the group has been operating and meeting for at least two months. Borrowers have a six week repayment holiday before they start making repayments, which are made at group meetings every month. They have to repay within 12 months and interest is 10% per annum on the first loan value of £500. After successful repayment of the first loan second and third loans can be applied for up to £1000 and £2000 respectively.
Outcomes and Impacts.
Since inception in 1999 there have been 237 clients, of which 205 have been women, 20 white, 35 asian and 35 black. 144 new enterprises have been formed and 16 existing enterprises have been supported. From the £140,000 loan fund 230 loans have been made to 60 lending circles. Most had spent the funds in three months and repaid in twelve. 30 of 205 women have come off benefits.
The different partners have different target groups. Streetcred tends to work with new start-ups and specialises in confidence building. Account 3 handles more advanced groups who might already have some business experience or have been in business for some time but need credit to grow. HFC tends to do more estate outreach, bringing people round to the idea of enterprise and perspectives beyond the state.
85% of loan recipients are women. There are no rules to say that women cannot join but the partners tend to prefer to work with women (Account3 works exclusively with women) and women have a better track record. Indeed men’s groups don’t tend to bond so well and tend to default early.
Client stories, told by project workers:
“SA was passed on to me from a previous Street Cred worker. She was importing coffee and dates from Saudi Arabia but she found buyers unreliable and never she enough money to buy enough stock to sell to the buyers all at the right time. Then after, September 11th, her business crashed. She was also training to be a Keep Fit instructor and improving her literacy and numeracy so she started to work in a local community centres teaching Keep Fit. She is now in the process of applying for a loan to run and manage the Keep Fit Stay Healthy group at Garret Lane Helath Centre with the help of the owners of the building.”
“NH, from wlalthamstow, a single mum, is determined to use her business acumen and succeed…Shortly after joining Street Cred she lost her part-time job as the administrator of a local crèche. But that was not going to stop her: instead she has used her experience to set up her own mobile crèche. As the coordinator, NH employs two qualified crèche-workers but often helps out herself. Her first contract came from Ilford Sure Start, to become permanent after a trial period. NH recently took out a loan, which she has used to purchase toys and mats for the crèche. She is also benefiting from Street Cred’s advice on issues such as bookkeeping. An advisor from the Inland Revenue’s Business Support Team recently visited her group to do a short workshop. Not only is NH making a success of her mobile crèche, but she has just taken over the running of a dry cleaner’s in Bethnal Green, using her past experience in this sector to turn around a previously unsuccessful business. In addition to this, she runs an Asian women’s support group in Waltham Forest, on a voluntary basis. NH has been helping the other women in her group by displaying their business cards and flyers in her shop. She has in return been helped by NY, who has printed business cards for her from her home computer.”
“MK Forest Gate imports educational wooden toys from her country of origin, the Slovak Republic. She has organised a stall at the EXCEL centre in Newham. Banks have expressed an interest in the idea, however she needs to prove that the business is more developed and so she has turned to Street Cred to start with. MK has done market research at local parent and toddler groups and has had a positive response.”
“MH had a business idea to set up her own mobile library at a community centre. The purpose of the loan was to help her buy books, video, audio cassettes DVD's etc. Her profit was to generate from materials people hired at a low cost. The idea was to provide a service to the local community especially women. MH has since encouraged four other women to be part of a group circle. They were all afraid of taking any risks and were not confident enough to manage complex situations. The micro credit training with advice, training, support has motivated them all to be entrepreneurs. “
“MJ, a single mother of four young children on benefits had a vague buisness idea of running a beauty parlour because she was a qualified beautician. She needed support finding suitable premises at low cost and decided to use her spare room to save costs on rents. She is also well known in the area so that will save her advertising costs as well. The loan helped her decorate her room and buy all necessary materials. This was very challenging for her as she did not have much confidence to take risks but the group supported her in market research, publicity and finance.”
Lessons from the Project
The EEMC’s approach to finance and business advice rests on three main assumptions:
1) A group structure provide social collateral that make them a much safer credit risk; 2) A group structure provides important mutual-support functions between peers that can make all the difference to whether a business succeeds or fails; 3) ‘Professional’ support should come from facilitators who understand enterprise and can mentor rather than technical business advisors.
Group collateral can replace the need for financial collateral. This is the secret to reducing the need for personal savings, collateral, professional guarantor or track record. The loan is made on the back of the group being formed, the facilitator being present, a simple business plan having been prepared and the group agreeing to put it forward. The emphasis is on character-based lending for smaller loans, with simple cash-flow and project appraisal for larger and longer term loans.
Group loans create group bonds that create good mentoring. People mentor best if they are meeting and working together on a common aim. The loan, the mutual guarantee and the sense of common purpose creates this bond and supportive structures. We know that mentoring groups work well, but we also know that access to funds is one of the best ways to incentivise a group to form, bond and work together regularly.
Mixed groups are best. The group system links people at different stages of business development. This gives the group direct access to people with different commercial experiences allows them to see the step-by-step process of building a business up. The groups work together to motivate and help each other out.
Group mentoring is different from business advising. The project staff combine several roles. They are: outreach workers, going out and recruiting clients; facilitators, working with the groups to overcome issues and create consensus and business mentors, providing support and general advice.
EEMC also believe that advice should be given in a mentoring context. Mentoring advice is not technical input. It is specific and practical, and can be given on a range of issues, but most importantly it is supportive, personal and encourages people to seek their own answers and therefore become more self-reliant. It gets people over the worst moments and gives them confidence.
Choose staff with a track record in enterprise. The project workers in the EEMC were chosen particularly with these skills in mind and, most importantly, with a proven track record of having attempted to start-up or run a business. Rahman explains:
“We take the view that most business advice is rubbish. While traditional advisors might be important for technical issues, only people who have actually been through the process of starting their own business can give the kind of support that new entrepreneurs need.”
Work closely with other organisations. The close consortia approach allows individual borrowers to link in with other initiatives such as Business Clubs and Enterprise Networks. This offers the borrowers & group members a chance to link in to wider experiences.
Keep the model flexible. While each group facilitator has a copy of an Operational Manual which lays out the basics of how the peer groups should operate, what they can expect and how they can satisfy the conditions of the loan, Rahman advises keeping the model flexible and adaptable:
“The project allows groups to come up with ways of working that feel right to them rather than fitting them into one-size-fits-all. This flexible, organic approach reflects the way EEMC was formed, rather on the hoof, as the funding and partners were identified. It also makes the structure efficient because we can piggy-back any structure that’s already there, in a rather opportunistic way. For instance, Account3 was running a programme to train up women driving instructors. They were already organising them into groups of five for mentoring support. We have been able to provide all of them with loans as well. The £500 put the deposit down for their first car.”
Other Group lending models – WEETU Full Circle Fund WEETU (Women’s Employment, Enterprise and Training Unit) was set up in 1987 in response to the marginalisation of women in the economy of the Norwich area. As well as having a lobbying role, the group aims to help women adapt to economic change by participating in local economic planning and working with training providers to ensure women’s needs are reflected. The aim of the Full Circle Fund is to provide a range of support to women wishing to set up their own microbusinesses via training and group guaranteed loans.
In comparison to the EEMC model the WEETU is a little more formalised and rigid. This is no bad thing and it certainly makes it robust when being transferred. It has a whole range of patented templates and training materials. The franchise to deliver the model with these tools can be bought for £15,000. www.weetu.org/fullcircle
Keep the model simple and common sense. Rahman believes that most communities could replicate what EEMC have done. He says:
There’s nothing in the model that couldn’t be worked out yourself. A franchise system, like at WEETU, might work, but perhaps a book or manual is all that is needed. It would be good to develop a trainee / apprenticeship programme which gives people hands on experience, and also gives us some extra hands as well!
Work out which bits can be transferred as they are, and which bits need adapting. The operational side of the model is likely to need adapting to a new environment: How to find a group, how to assemble it, manage it, what peer group repayment structure and schedule to use, when and where to meet, etc. Other parts of the model are probably best kept as they are because international experience has shown they work well. These include the 4-6 in a group, the staging and staggering of loan offers and repayments, and the £500-£2000 range for first loans. Other parts, particularly the financial administrative systems, are totally transferable. These include a loan tracking database which can take changeable repayments, plus systems that simplify reconciliation with banks that hold the loan fund.
Not everyone wants to get into enterprise. The East End has a highly enterprising culture. There is a lot of support available and a history of migrants who are enterprising in their own right. Don’t assume that everyone wants to get into enterprise. The culture of enterprise will affect the transferability of the model.
• Be sure of the market. Work out what level to pitch it at, how to structure it, why are doing what you are doing, • Debt and personal finance issues may be more important for people than getting into business, especially if there aren’t many business opportunities or people are more interested in getting a job. • Look around as there may be someone doing something quite similar already, • Formalise any consortia relationship earlier, • Establish documents and templates earlier, to keep consistency, lessen confusion. Get contracts sorted early too, and pay a lawyer to look at them, • Make sure your clients take out insurance, and up to speed with basic book-keeping.
Annex 1 Additional Caselets
NH, Walthamstow (Mirage)
NH, a single mum, is determined to use her business acumen and succeed… Shortly after joining Street Cred, she lost her part-time job as the administrator of a local crèche. But that was not going to stop her: instead, she has used her experience to set up her own mobile crèche. As the coordinator, NH employs two qualified crèche-workers, but often helps out herself. Her first contract came from Ilford Sure Start, to become permanent after a trial period. Her Street Cred worker provided her with a contact from Higham Hill Sure Start, which has led to another long-term contract, and another from the Leyton Family Service Unit. The users are delighted by the quality of care and the competitive prices.
NH recently took out a loan, which she has used to purchase toys and mats for the crèche. She is also benefiting from Street Cred’s advice on issues such as bookkeeping. An advisor from the Inland Revenue’s Business Support Team recently visited her group to do a short workshop.
Not only is NH making a success of her mobile crèche, but she has just taken over the running of a dry cleaner’s in Bethnal Green, using her past experience in this sector to turn around a previously unsuccessful business. In addition to this, she runs an Asian women’s support group in Waltham Forest, on a voluntary basis.
NH has been helping the other women in her group by displaying their business cards and flyers in her shop. She has in return been helped by NY (see below), who has printed business cards for her from her home computer.
MK Forest Gate (Stratford Sycamores)
MK imports educational wooden toys from her country of origin, the Slovak Republic. MK has contacts in this country as she has contacts and family members in this type of work. She has organised a stall at the EXCEL centre in Newham. You can find the details for this toy fair at the website address:- http://www.britishtoyfair.co.uk/ .
Banks have expressed an interest in the idea, however she needs to prove that the business is more developed and so she has turned to Street Cred to start with. MK has done market research at local parent and toddler groups and has had a positive response.
MK has participated in a lot of training through Street Cred and other local agencies such as East London Small Business Centre. MK is confident that the event at EXCEL during the week of the 20th January will be a kick start for her business.
Annex 2 Source material for case study
Quarterly returns Scrap book Enhanced Quarterly Return 2003 Final Return 2004
Itinerary of the Visit / Interviews 19th – 23rd January 2004
Wednesday 26th November 2003
Telephone interview with Faisel Rahman, Environment Trust
Monday 19th January 2004
11.00-12.30 Meeting with Faisel Rahman, Environment Trust
Thursday 22nd January 2004
1.00-2.00 Meeting with Lending Circle in West Ham: Dorothy Mubiana (dress making), Jacqueline Onumah (catering) and Karrien Stevens (child care) and Myriam Bartu (their group facilitator). • 2.00-3.00 Meeting with Myriam Bartu, Project Worker, StreetCred, QSA
Friday 23rd January 2004
11.00-12.00 Meeting with Toni Meredew, Services Manager, Account 3, and Alea Khatun and Wahida Khatun (project officers) 12.00 – 1.00 Meeting with two clients of lending circle: Very Garcia (jewellery making) and Milli (dress making)