Italian microfinance legislation: enabling scaling up or contributing to mission drift?

In Europe, social enterprises and microfinance institutions (SEs and MFIs hereafter) represent complementary or, in some cases, corresponding ways to tackle social problems such as unemployment and social exclusion (EMN,... [ view full abstract ]

In Europe, social enterprises and microfinance institutions (SEs and MFIs hereafter) represent complementary or, in some cases, corresponding ways to tackle social problems such as unemployment and social exclusion (EMN, 2014). In specific contexts, this synergic interdependence is also characterised by conceptual and operational overlaps between SEs and MFIs. For instance, configurations of SE and MFI are not mutually exclusive in Italy. The legal definition and inclusive theoretical institutionalisation of Italian SE as non-profit distributive, cross-sector, collective and autonomous organisation (Borzaga and Galera, 2016) have led some MFIs to define themselves, or be recognised, as SEs. However, Italian MFIs went through a period of radical change due to the new microcredit and financial regulation (2014-2016). To fully operate in the microcredit sector, most of the associations, charities, and non-profit organisations engaged in microfinance before 2014 were required to adequate their capital, legal status (e.g. Plc, Ltd, Cooperative limited-liability company), products (provide at least 51% of the microloans to micro-enterprises), services (two compulsory credit-plus services), target and interest rate limits (MEF, 2014). Furthermore, small-scale socially-oriented financial intermediaries operating as MFIs were also required to adequate their Risk-Weighted Assets (6%) and capital and therefore to operate under the supervision of the Bank of Italy (2016). As such, most of the microcredit providers had to find their ways to adapt their social and financial objectives to the new legal framework.

Although theories and models of practice regarding the social and financial sustainability of European MFIs are well developed (Pedrini et al., 2016), they have not been widely examined through a public policy lens or in relation to the role of SEs as microfinance operators. This study addresses this gap by exploring the impact of state intervention through specific regulation on the relationship between social and financial objectives of Italian SE-MFIs. Theoretically located within the academic debate on microfinance double bottom line and its link to the theory of microfinance regulation and supervision (Cozarenco and Szafarz, 2013), this research explores the ways in which a group of SE-MFIs operating in North Italy (Emilia Romagna) have managed their double bottom line and how the new regulation may have impacted on their operations. Data were generated through qualitative in-depth semi-structured interviews with three SEs specialised in microfinance, two members of the Italian government, and one expert in the field of microcredit, all purposively sampled according to maximum variation (Given, 2008). Additionally, secondary data about the organisations’ portfolio characteristics and the general trends in the Italian microfinance sector were employed to compare and contrast different dimensions of social and financial sustainability of the SE-MFIs and to reach saturation (Carter et al., 2014).

Thematic analysis of the interviews and triangulation of the emergent themes with the secondary data showed that SE-MFIs implemented different models of partnership to adapt their dual objective. However, secondary data analysis of the organisations’ portfolio characteristics and the general trends in the microfinance sector in Emilia Romagna revealed potential trade-offs between social and commercial objectives of these partnerships. Furthermore, by discussing and analysing the new regulatory framework with respondents and in relation the emergent partnership models, it emerged that regulation may accentuate the already existing trade-offs in the SE-MFIs’ double bottom line. Although perceived to be an attempt of market correction, regulation actually undermined the ways in which these organisations can reach the most excluded and make use of Central Government’s Microcredit Guarantees Schemes for poor entrepreneurs, therefore suggesting that this regulation contributed to mission drift. 

These emergent findings suggest particular questions for academics and policy makers, and lay the groundwork for further research assessments aiming at: 

1.  expanding the knowledge of the sectors and sectorial regulation in which SEs operate, especially with regard to the prospects of the new implementation of the Italian legislation on the third sector and SE approved in 2016; 

2.  overcoming differences at country level, especially in terms of regulatory environment, to better implement the European Code of Conduct for microcredit provision and source of funding for SEs. 

References

Bank of Italy, 2016. Intermediari: http://www.bancaditalia.it/com... 

Borzaga, C. and Galera, G., 2016. Innovating the provision of welfare services through collective action: the case of Italian social cooperatives. International Review of Sociology, 26 (1), pp. 31-47. 

Carter, N., Bryant-Lukosius, D., DiCenso, A., Blythe, J. and Neville, A.J., 2014. The use of triangulation in qualitative research. Oncology nursing forum, 41 (5), pp. 545-547. 

Cozarenco, A. and Szafarz, A., 2013. Microcredit in Developed Countries: Unexpected Con-sequences of Loan Ceilings. Manuscript: http://ssrn.com/abstract=22690... 

EMN (European Microfinance Network), 2014. Microfinance and Social Entrepreneurship: http://www.cosv.org/wpcontent/... 

Given, L., 2008. The SAGE Encyclopaedia of Qualitative Research Methods. Thousand Oaks: SAGE. 

MEF (Ministero dell’Econonomia e delle Finanze), 2014. Disciplina del microcredito: http://www.gazzettaufficiale.i... 

Pedrini, M., Bramanti, V., Minciullo, M. and Ferri, M.L., 2016. Rethinking microfinance for developed countries. Journal of International Development, 28 (2), pp. 281-302.