Imagine you travel hundreds, maybe thousands, of miles to a city in a foreign country. You don’t speak the language, you have a limited social network and you only have taken a few assets with you. Now imagine you need to start a business in order to survive – immediately, and without any startup capital.
Sound challenging? Add to this your status as a refugee, and the often traumatic circumstances that led you to flee, and you begin to get a sense of the situation that over 60 percent of the world’s 21.3 million refugees face as they strive to build lives in new places.
In contrast to refugees living in camps, most refugees in cities – known as urban refugees – do not receive any material assistance (such as food or shelter) from the U.N.’s refugee agency, the UNHCR, or NGOs. Instead, they are required to become self-reliant and live independently from aid. For refugees living in countries in the global south with high unemployment rates and few avenues to formal employment, creating small businesses in the informal market is their main route to an income.
But there’s a catch: although financial capital is as indispensable as seed funding is to startups, very often refugees do not have access to the loan and saving facilities of formal bank and credit institutions. Many are not inclined to take on refugees as clients since they are perceived as a “high-risk” group that may simply return to their own country without repaying loans. Even if access is not denied, opening a bank account requires a residential address and often a national identity card. Most refugees lack this kind of documentation.
In the last decade and a half, an increasing number of agencies have recognized these barriers and attempted microfinance programs for refugees – revealing the challenges involved in the process. Although successful programs exist, many have failed. The lessons derived from the varied experiences of aid agencies yield important knowledge and best practices. Although microfinance has been widely employed as a development tool and has a successful track record in poverty reduction with nationals, the unique dynamics of refugee situations pose particular issues and even preclude many of the approaches that are proven effective with national populations.
Our research has found that microfinance can work with refugee populations if special consideration is taken for the specific needs, skillsets and contexts of refugees. Clarity is also needed on their objectives and intended beneficiaries.
It’s something of a cliche that microfinance is not for everyone. Much research highlights the fact that microcredit should be provided only to stable, economically active refugees who possess entrepreneurial experience and or demonstrate their own initiative in starting a business. Good candidates for microcredit might also include refugees with prior microcredit experience, or experience with formal credit institutions like banks. Many studies present evidence that those who are the poorest or the most vulnerable are usually not the most effective beneficiaries, as they are often forced to use capital for non-business purposes, such as family emergencies.
These findings demonstrate a conflict between often competing objectives: to serve the most vulnerable and impoverished groups as well as ensure program sustainability and success. Many microcredit interventions with a business-like approach are at odds with the philosophy of humanitarian organizations that are mainly concerned with assisting the most vulnerable.
In the early 2000s, for example, the International Rescue Committee (IRC) failed to run an effective microfinance program in the Kakuma refugee camp in Kenya. Given their humanitarian mandate, IRC’s target beneficiaries were the poorest of the poor, including female-headed households and the disabled. This specific focus resulted in higher loan delinquency and damaged the program’s financial sustainability, eventually forcing it to close.
Recent endeavors have sought to learn from earlier initiatives. Best practices include creating tailored programs based on an awareness of the needs of the target community (such as whether microgrants or microloans are more appropriate), the geographical context of microfinance (urban, periurban or rural), and the market and social conditions of the target community.
Furthermore, providing financial support based on different stages of refugees’ financial stability and entrepreneurial capacity has proved crucial to the success of different savings and loan products for refugees. This model is known as the Graduation Approach, which supports clients in attaining assets through a series of stages, starting with gaining financial literacy and managing savings before “graduating” to skills (livelihoods) training, microgrants (in some instances) and, finally, microloans. This model presents microfinance as a multi-tiered process that necessitates financial tools, livelihoods skills and savings experience in order to most successfully repay credit.
The Graduation Approach has only recently been promoted formally for refugees by the UNHCR. Working with BRAC, an international development organization based in Bangladesh, it has piloted programs first in Cairo, Egypt, in 2013, and then in Costa Rica. The approach aims to reach refugees in the urban poor who earn less than $1.25 a day in order to create livelihoods and foster self-reliance, not only through savings and credit, but skills training and mentorship.
In Cairo, the project has expanded to include 1,000 Syrians. “Along with receiving cash assistance to cover daily life needs,” the UNHCR states, “participants will be given fixed-amount monthly food vouchers (300 Egyptian pounds/$33.89) as well as training and coaching that will enable them to choose one of two pathways away from cash assistance: self-employment or wage employment.” The pilots are meant to enable the UNHCR to develop its own Graduation Approach.
There is remarkably little knowledge on the initiatives refugees themselves create to assist each other financially. According to a recent report, a considerable number of urban refugee communities in Uganda have developed their own finance systems, including microsavings and lending groups in their own communities. This research illustrates that refugees themselves adapt and find solutions to the everyday challenges created by exile, including finding innovative sources to secure funding and pursue independent economic activities.
The very successful community cohesion of these groups means that loan default – an ongoing challenge for formal micro-finance program – is rare. This in turn suggests that refugee-led initiatives could be an important source of collaboration for formalized microfinance programs seeking to either identify refugee “clients” or create stronger accountability structures. Further research, though, is essential.
Microfinance is not a panacea to the economic challenges facing millions of refugees. Yet if designed and implemented well, it can be a useful instrument. One that increases the self-reliance and economic capacity of certain types of refugee populations. Given the pressing need to promote refugees’ economic capacities, there is good reason to support the introduction of more ambitious and community-led finance. It can help even those who never imagined becoming a refugee would also entail becoming an entrepreneur.